StandardAero, Inc.

Greetings, and welcome to the Standard Arrow Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. We ask you please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Alex Trapp. Alex, please go ahead.

Thank you and good afternoon, everyone. Welcome to the Standard Arrow Third Quarter 2024 Earnings Call. I'm joined today by Russell Ford, our Chairman and Chief Executive Officer, and Dan Satterfield, our Chief Financial Officer. Alongside today's call, You can find our earnings release as well as some presentation materials on our website at 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, 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 the prospectus from our initial public offering dated October 1, 2024. 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, and net debt to adjusted EBITDA leverage ratio. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings release, in our 8 filed with the SEC and in the appendix to the 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.

Thank you, Alex. Thank you to everyone for joining our first earnings call as a publicly traded company following our IPO in October. I'd like to express my deep gratitude to our internal team, all of our advisors, and to our new investors who participated in the transaction and contributed to its success. I would also like to thank the research analysts who invested their time to participate in the process, and we look forward to continuing to build our relationship with each of you. We're very excited about Standard Aero's future, and we look forward to partnering with our stockholders as we focus on continuing to grow the business and creating value in the years to come. As this is our first earnings call as a public company, and since many of you may be new to our story, I'd like to start a little differently than we typically will during future calls by providing some highlights about our company and what we believe makes us unique. We believe Standard Aero is the world's largest independent pure play provider of aerospace engine aftermarket services for fixed and rotary wing aircraft. Well, we provide a comprehensive suite of aftermarket solutions, including engine maintenance, repair and overhaul, as well as engine component repairs. We have a pure play focus on the aerospace engine aftermarket, which we believe is the largest, most attractive, profitable, and fastest growing vertical of the aerospace market, which itself is a highly attractive market that has historically achieved long-term growth above GDP. We are also fully independent and OEM aligned, which allows us to serve as a key and preferred partner to both the engine OEMs and aircraft operators. Within the engine services aftermarket, we're a market leader and hold the number one or number two positions globally on many of the major engine platforms that fly today's and tomorrow's most prevalent aircraft. with these top positions representing approximately 80% of our engine services revenues in 2023. We have a scaled global footprint, differentiated positions on critical growth platforms, a rapidly growing engine component repair franchise, and a proven playbook for investing to expand our capabilities, capturing new engine platforms and executing on accretive, highly synergistic acquisitions. These factors result in an attractive financial profile with over three-quarters of our revenue tied to long-term contractual agreements, a long track record of strong double-digit growth, and resilience to outperform the broader aerospace market during downturns, coupled with the ability to quickly recover if there is a downturn. Turning to page four of the presentation, this page lays out our two business segments. Engine Services, our full engine repair, overhaul, and other value-added services business, as well as Component Repair Services, which focuses on synergistic repairs of the components in and around the engine and which we've grown into one of the largest independent engine component repair businesses worldwide. It also shows our diversification across end markets and platforms in commercial aerospace, military, helicopter, and business aviation. Within each end market, we're positioned as a leader, having close relationships with blue chip customers and differentiated positions on many of the most prevalent engine platforms in service. such as the CFM56, which is currently the largest installed base of any engine platform, and the LEAP 1A and 1B, which is expected to quickly become the industry's largest engine platform in the world, and where we have a strong position as the only independent holder in the Americas of a CBSA license. This license officially designates Standard Aero as a premier MRO provider for LEAP engines and significantly differentiates us in the market. Across end markets, we're seeing secular industry tailwinds driven by demand growth, outpacing capacity, an aging global fleet, increased MRO work, and increasing global defense spending needs, which we believe positions us in the early innings of an aerospace aftermarket super cycle that is expected to drive attractive growth for our business. So we're clearly excited about the positioning and outlook for our business and the aftermarket in general. Hopefully that gives a good flavor for who we are and the core tenets of our forward strategy. Now turning to page five, I'd like to describe the progress of the business over the last few months and update you on some of our recent strategic milestones. Starting on the left side of the page, we're making great progress on our key organic initiatives. The industrialization of our LEAP program that began with our landmark CBSA license win last year remains on track. This quarter, our flagship 810,000 square foot facility in San Antonio, Texas, completed correlation of its first test cell for both the LEAP 1A and 1B engines, achieving another major milestone as we introduced LEAP 1A and 1B MRO capabilities. The San Antonio facility is now able to undertake full functional and performance engine testing in support of both Boeing 737 MAX and Airbus A320 NEO customers. Our LEAP pipeline continues to expand, and during the quarter, we announced our first LEAP customer agreements, including a five-year agreement with Avianca. These customers joined a growing list of operators who rely on Standard Aero as their LEAP engine support partners. During the quarter, we also achieved important milestones on two other major organic investment initiatives. First, at our new Greenfield CFM 56 Center of Excellence building at Dallas-Fort Worth, we recently held our ribbon cutting to open the building. Also, we celebrated Standard Aero's 1,000th CFM 56 shop visit during the quarter. Second, we broke ground on an 80,000 square foot expansion of our Augusta Business Aviation Facility that will allow us to support additional super midsize and large cabin aircraft for airframe and avionics, while also significantly expanding our engine shop to further support many of those aircraft. Additionally, we received two significant prime contract awards with the U.S. Navy, First, we were selected for a five-year, $1.2 billion IDIQ contract for the Navy's P-8 Poseidon fleet, where we'll perform MRO on the fleet's CFM-56 engines. Second, we were also selected to perform engine services for the Navy's T-56-427A engines that power its E-2D advanced Hawkeye aircraft. Moving to the middle of the page, we'll hit on another major strategic pillar of our value creation strategy through M&A. During the quarter, we acquired Aeroturbine, which provides engine component repair and other value-added engine aftermarket services for the U.S. military and other international customers. This acquisition continues to accelerate the expansion of our component repair segment and provides new repairs and differentiated military SAR expertise that we intend to utilize to drive third-party sales growth and increasing insourcing of component repairs on its engine services work. Aeroturbine also brings new positions on military platforms and an attractive mix of work with approximately 90% of its revenues from prime sole source contracts, and it enhances our position to capture future growth military programs in the market. The total potential purchase price for the acquisition was $141 million, of which $120 million was paid upfront and $21 million is contingent on hitting certain earnings metrics. We expect ATI to contribute $25 million of EBITDA in 2025. I believe this deal is a great example of Standard Aero's ability to identify and execute on value-accreed M&A. This was a carefully executed acquisition where we had unique knowledge of their platforms, a relationship with the seller, and the ability to generate synergies, all of which enabled us to acquire this business at an attractive valuation. Then, on the right, Dan will get further into the details, but of course we completed our IPO in early October, which coupled with the refinancing of our debt that we completed a couple weeks ago, significantly reduces our leverage, improves our ratings profile, and will result in over $130 million of annual interest savings. This should further bolster our net income and strong cash flow profile as we move forward. Moving on to the next page, I'll touch on a few market and financial highlights from the quarter before Dan discusses our results in more detail. We continue to generate double-digit revenue growth at 13% year-over-year with good performance across both our engine services and component repair services segments. we're continuing to see strong demand in the commercial aerospace aftermarket, particularly in the regional jet market as it recovers from the pilot shortages last year, which along with good performance at our turboprop business drove 19% year-over-year sales growth in that end market. Sales to the business aviation end market grew 15% with continued strong customer demand, particularly on our HTF 7000 program, where we are the exclusive independent provider of heavy engine overhauls. This quarter did see an offsetting decline in our military business, where revenues were 3% below Q3 of last year, which was primarily driven by reduced volumes on the Rolls-Royce AE1107 platform that powers the V22 Osprey tilt rotor, which was grounded temporarily earlier this year. That platform is now back in full operation, which should drive volume recovery in military, which is seeing steady demand on most other platforms. Moving now to earnings. Adjusted EBITDA increased 26%, approximately double the rate of revenue, reflecting strong growth in both segments, leverage on our fixed costs, a favorable mix, particularly in our engine services segment where we saw lighter material content work scopes that led to lower revenues on those engines but stronger margins. Adjusted EBITDA margin expanded by a very healthy 137 basis points, versus the same period last year. To wrap up, I'm pleased with our strong performance in the quarter, which represents a great start as a public company and sets us up to close out a successful 2024. With that, I'd like to turn the call over to Dan Satterfield to walk through the financials in further detail. Thank you, Russ.

I'll start off with some housekeeping, given this is our first quarterly earnings call. As Russ mentioned, our business is organized into two reportable segments. Engine Services, which is focused on whole engine repair and overhaul, along with other value-added aftermarket services like test services, engineering, and asset management. Then Component Repair Services, which is focused on repairs specifically for engine part components and accessories. We report revenue and adjusted EBITDA for each of these segments. With that, I'll start with our revenue performance. For the third quarters into September 30th, 2024, Standard Aero generated revenue of $1.2 billion, as compared to $1.1 billion for the third quarter last year, representing a 13.2% growth, of which 12.4% was organic. We saw good growth at both our engine services and component repair services segments, which I will delve further into momentarily. Adjusted EBITDA increased to $168.4 million for the third quarter of 2024, compared to $133.6 million for the prior year period, representing 26% growth as a result of the revenue growth and higher margins from favorable engine shop visit and work scope mix, price escalations, productivity improvements, and continued growth in our higher margin component repair services segment. Net income was $16.4 million for the third quarter of 2024 as compared to a net loss of $17.9 million for the prior year period. As a reminder, we were significantly more levered prior to our IPO, which occurred right after quarter end. So our interest burden has come down significantly, which we believe will increase our profitability moving forward. Our earnings in Q3 were also burdened by one-time expenses related to our IPO, debt refinancing, and the aero turbine acquisition of $12.5 million, as well as startup costs associated with our LEAP program and CFM 56 Center of Excellence, billed out of $10.5 million. As a result, we view adjusted EBITDA as a better measure of our operating performance. Moving to the cash flow statement, CapEx was $25 million for the quarter and $70 million year-to-date, reflecting 2% and 1.8% of revenues, respectively. These figures also include CapEx of $15 million in Q3 and $40 million year-to-date related to the investments we've been making in our LEAP program and the CFM 56 Greenfield facility build-out. We continue to invest for growth while also maintaining our attractive CapEx Lite business model. While on cash flow, similar to net income, I would note that our operating cash flow this quarter was also impacted by the higher interest burden from our old capital structure versus what we would have today, along with the significant and non-recurring IPO acquisition and transformation costs that amounted to $25 million collectively in Q3 and $66 million year-to-date. Q3 was also impacted by timing on working capital, where we saw some expected unwind in the quarter after positive timing at the end of Q2, along with some impact of Hurricane Helene which held up shipments at the end of the quarter. And we saw the elevated CapEx levels associated with our growth investments. As a result, we don't believe our cash flows from operating and investing activities in the cash flow statement are a good indicator of the normalized go-forward cash generation of the business. I'll now move to talking about the performance across our two segments, starting with our engine services segment. Revenue increased $125 million, or 13%, to $1.1 billion for the third quarter of 2024 compared to the prior year period. Commercial aerospace and market revenue grew 20% compared to the prior year period on strong demand across both turbofans and turboprops. Business aviation and market revenue grew 15% compared to the prior year period from continued strength on the platforms that we serviced. Offsetting these gains was our military and helicopter end market revenue, which declined 7% compared to Q3 last year, primarily from lower reductions on the Rolls-Royce AE1107 engine, which was impacted by the temporary grounding of the V22 earlier in the year. Engine services adjusted EBITDA grew 20% year-over-year, driven by the strong revenue growth and favorable platform and work scope mix, where we saw lower pass-through material content, which together drove 83 basis points of margin expansion versus last year. Now to our component repair services segment. CRS revenue increased 15% compared to the prior year period to $154.3 million for the third quarter of 2024, or 9% organically. CRS commercial aero and market revenue grew 13% year-over-year, all of which was organic. Revenues in the military and other end markets grew 19%, primarily driven by the initial contribution of the aero turbine acquisition. Organic growth from military and other end markets was 3% up year over year. CRS adjusted EBITDA grew 21% over Q3 last year, which was driven by revenue growth and 128 basis points of margin expansion to 26.4% from operating leverage, productivity improvement, initiatives, and price. Now moving to slide 10. I'll talk about our capital structure and what things look like following our IPO. As you know, we completed our IPO on October 2nd and used our $1.2 billion of net proceeds from primary share sales to pay down debt. And more recently at the end of October, we completed a refinancing of our remaining debt, putting in place a new term loan facility with an interest rate of SOFR plus 2.25%, and a new $750 million revolving credit facility with a rate of SOFR plus 2%. These new rates represent a 125 basis point reduction in rate from our pre-IPO term loans. And we expect to save over $130 million of annual interest expense versus pre-IPO levels. We also are now significantly delivered. And as a result, we have received a multi-notch upgrade in our credit ratings from all three agencies. putting us solidly in the double B category, which hopefully will improve as we continue to deliver. Moving to the next page, I would also like to touch on our capital allocation priorities as a public company. We are in an attractive position where we have multiple avenues where we can allocate our capital to drive strong returns. And we will continue to focus on organic investments, winning and ramping new platform programs like we are doing with the LEAP, and accretive and synergistic acquisitions. Underpinning all of that is a disciplined approach focused on strategic benefit and return on investment that we use as a key criterion whenever deciding on a significant investment decision. Additionally, while we are comfortable with where we sit from a leverage perspective, we are also focused on continuing to delever the business through our growth and cash flow and are targeting long-term net leverage between two times and three times. We believe that level provides ample cushion and flexibility on our balance sheet to invest across our strategic priorities. So in summary, we're very pleased with the financial performance in Q3 and feel really good about the business and the market. We currently intend to provide annual guidance beginning in 2025 when we report our Q4 results. In the meantime, there is no change to our outlook for the business for the remainder of this year. and we continue to expect good growth and sequential improvement in Q4 in revenue, adjusted EBITDA, and operating cash flow as compared to Q3. That's all I have on the financials. I'll now turn it over to Russ for some closing remarks.

Thank you, Dan. In conclusion, I'm pleased with our performance in the quarter and proud of the work that our team did to support our customers while advancing our strategic initiatives and completing our IPO. As we look forward, I'm truly excited about the opportunity for Standard Aero, and we'll leave you this quarter with a few key takeaways. We believe our pure play focus on the engine aftermarket ideally positions us in the most attractive segment of the market that's also benefiting from enduring secular tailwinds, including robust travel demand, an aging fleet, increasing global defense spend, and an accelerating trend of OEM outsourcing, which are expected to drive aftermarket growth in the years to come. Within this strong market backdrop, we are the industry leader with differentiated scale, capabilities, and customer relationships, and we believe we are well positioned to grow faster than the overall market as we harvest major recent strategic investments and new platform wins. In addition, we have the opportunity to continue to create additional value through our proven playbook for investing organically, capturing new programs, and executing on accretive M&A targets. All of this provides us with an attractive and resilient financial profile, which coupled with our experienced and motivated team, shapes our roadmap of achieving our objective of continued double-digit earnings growth and compounding shareholder returns. Thank you again for joining us today. And with that, operator, we're now ready to move to Q&A.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. And as a reminder, we ask you to ask one question, one follow-up, then return to the queue. If you'd like to remove your question from the queue, please press star two. Once again, that's star one to be placed in the question queue, and we ask that you please ask one question, one follow-up, then return to the queue. Our first question today is coming from Seth Seifman from J.P. Morgan. Your line is now live.

Thanks very much, and good afternoon. So I wanted to start off talking a little bit about the new CFM programs and maybe kind of outline what you expect from them over the next couple of years for LEAP and CFM56, kind of what the contracting environment is like. And one of the questions that I've gotten from folks is they see additional investment from GE and Safran in the MRO network, and how to think about that with regard to the work share on the LEAP engines.

Thank you, Seth. Taking those questions first, let's start with CFM56. What we see is CFM56 is expected to have strong growth over the next few years, and our expectations are in line with that of the OEM, where they expect to see a continuing higher level of maintenance after the ramp that we're going to see in the next couple of years. So a very robust outlook there, and that's why we made the investment in the additional capacity at our Dallas-Fort Worth facility. Along the same lines, talking about LEAP, the investment that we see, which has been made by both GE and Saffron and the LEAP program, is entirely consistent with the OEM plans that we were part of building the CBSA network license partnership. Both GE and Saffron, they're doing their part to support the contracts that they've underwritten, and we are doing the same. We actually view this as a positive indicator for the long-term maintenance requirements for the LEAP platform, and the pipeline of demand for slots looks very healthy as we expect it.

Great. Great. Thanks. And then maybe as a follow-up, Dan, if you could talk a little bit about the cash flow expectation for the fourth quarter.

Yeah, sure. I mean, we expect cash flow to improve sequentially quarter over quarter, as well as revenue and earnings. You know, this quarter had a lot of one-time costs, including our IPO expenses, you know, fees for the acquisition of ATI, some debt fees, and, of course, you know, our LEAP and CFM losses. You know, that was kind of a headwind for us. You know, some of the LEAP and CFM, you know, industrialization costs will continue, but, you know, a lot of these one-time items will not repeat. So we'll expect sequential growth in cash flow quarter over quarter.

Thank you very much. Thank you for the question, Seth. Thank you. Next question is coming from Sheila Kaigulu from Jeffrey. Your line is now live.

Hi, and congratulations, guys, on your first call. Russ, maybe this one's for you, just to follow up on Seth's comments. If we could talk about the 19% commercial aerospace organic growth in the quarter, how do we think about early leap work contributing to that?

You know, thank you, Sheila. LEAP is really just getting started. We're getting our facility newly opened and industrialized. Our test cells are now correlated. We inducted our first engine in July, so it's very early. And while we industrialized the program, LEAP is not going to be a significant revenue driver this year, but we are seeing quite a lot of demand. Our pipeline, in fact, is filling out even better than we expected a year ago when we entered into the agreement. So we are very bullish about the ramp of the program, the long-term maintenance requirements, and the investments we made there are clearly going to be very accretive for the business over the long run.

Okay, that's super helpful. And then maybe as a follow-up to that, just given Steve's commentary about their shop visits down 1% in the quarter, How do we think about your overall LEAP capacity as it ramps and obviously your CFM 56 capacity? What's your total capacity for that? And how does the Dallas Center of Excellence contribute?

We are following the OEM's guidance as well as the market reception that we've seen on both of those programs. We believe that we have laid in the appropriate capacity, both test cell as well as assembly facilities, to meet the needs that we're going to see through the balance of this decade. We will be adding the appropriate personnel and resources as the ramp continues, and we'll be adding the appropriate working capital as dictated by the slots that we are opening up. No changes to what we had planned.

Great. Thank you.

Thanks, Sheila. Thank you. Next question is coming from Ronald Epstein from Bank of America. Your line is now live.

Yeah, hey, good afternoon, Guy. Just maybe a quick one. Can you give us a little bit more detail on the trend in shop-visit mix like the share of heavy visits that continue to grow and how much of that breaks down across the major engine platforms?

Yeah, you know, if you think about, you know, heavy visits versus shop visits, you know, or lighter visits, it kind of reflected in our earnings profile this quarter, right? We had pretty good earnings, which really reflected a lower, lighter work scopes with lower material burden on those. And as you know, when you have those work scopes that have less material, you have a little bit higher margins. So that's what we expected. That's what we saw in Q3.

Can you give detail across the platforms that you guys actually served, however?

Yeah, I mean, we can talk about that maybe in a follow-up call. We really don't give platform details here.

Okay, great. And then, great, that's fine. All right, cool. Thank you.

Thank you. Next question is coming from Ken Herbert from RBC Capital Markets. Your line is now live. Ken, please join the queue, if anything. Your next question is coming from Gavin Parsons from UBS. Your line is now live.

Thanks, guys. Good afternoon.

Hey, Gavin.

I wanted to talk about just kind of the cash flow ramp up to normalized. You know, what is a normalized cash conversion level? I think you've invested already to build out the leap and CFM 56 footprint. But what kind of working capital needs do you have over the next few years? And when do you think you get to kind of a more normal cash conversion level? Thanks.

Yeah, that's a great question. You know, we talked about, and I've got to hit all this, right? We had all these one-time fees and expenses that impacted cash flow in Q3 of about $25 million. In addition, we had, you know, the CapEx for LEAP and CFM were $15 million in the quarter, $40 million year-to-date. So the one-time expenses, you know, won't repeat. The capex relief in CFM will bleed a little bit into next year, but the big bulk of that will be behind us. I've already spent $40 million on that year to date. It's important to point out that our working capital as a percent of revenue actually declined quarter over quarter, even though we grew significantly in revenue. Our net working capital as a percent of revenue declined 160 basis points last year over year. So that's pretty good. So as we get into next year, you know, cash flow, you know, will be positive, will be strong. Now, listen, I will invest in working capital to get the LEAP and CFM programs, you know, initially provisioned. And, you know, we're proud to do that. That's not a problem. But, you know, you're going to see sequential improvement in cash flow, especially versus Q3 and Q4. And then next year, again, you know, we'll have lower capex. than we did this year, especially on those programs. And then I will have some initial provisioning on the other programs. But as you've seen, especially this quarter, we're able to reduce working capital as a percent of revenue with a lot of initiatives there across the board. Okay, great. And that's op cash or free cash? Free cash. Okay. Don't forget, right? I mean, we've post-IPO, and I've paid down my debt significantly, and we've also had the major refinancing. We're going to save about $130 million of interest year over year as a result of the IPO and the refinancing. So that's going to play also a significant role. Thank you.

Thanks, Gavin. Thank you. Next question is coming from Doug Hartnett from Burns Senior Line is now live.

Good afternoon. Thank you. One of the issues we've seen with engine MRO lately has been real issues in the supply chain and with parts shortages. Has this been at all a bottleneck for you trying to ramp work up? And if so, in which platform areas?

Yeah, thanks, Doug. Supply chain has always been constrained in the aerospace industry since the Bright Brothers, and that is particularly pronounced in the engine segment because we're dealing with generally very unique materials that can operate at 3,000 degrees Fahrenheit. And so there's always going to be limited supply of those types of materials. There's no question that in recent years, those disruptions have been exacerbated to some degree by the pandemic. You know, we're largely through that. And I would say we've taken a more long-term consistent approach to this. There's always daily micromanaging of various parts allocations, but we have enough diversification and enough capacity that we have the ability to continue to move things through our shops at a pretty consistent rate. And where we've chosen to focus our investment is in two areas. to help build additional detours around the occasional supply shortage. The first is in locating and returning to service used serviceable materials. So these are actual OEM parts that many times require only an inspection. Perhaps they require a coating or some type of a repair. And then they can be returned to full service. The second thing we've done is we've invested pretty heavily in repair development through both the addition of engineers as well as acquisitions to add to our list of OE-approved repair processes on these parts so that we can return them to service again and work around a lot of the supply disruptions. There are always going to be supply disruptions. Predominantly, they are focused on sole-sourced materials, not broadly across the industry. And that's why things like repair development give us the ability to work around those conditions.

And then somewhat related to that, you know, you've talked about an 80-20 split, in a sense, between material costs passed through and your labor. And so you said you actually this time around had – less material pass-through and you had 83 basis points better margin. Is that a one-time situation? And can you comment on if there's any trend here we should think about in the portion that materials take up of your cost structure?

Yeah, great question. So, yeah, our pass-through revenue programs actually decline quarter over quarter in terms of revenue. Is that a trend? Not necessarily, right? It did have an impact on our margins. You know, you do have to look at this business, you know, by the type of work scopes that we have and by the material content. You know, these are all growing programs for the large part, you know, the ones where I did have a decline in revenue quarter over quarter that impacted my margin. But, you know, I don't expect that to be a trend. It just was, you know, if you look at some of these, you know, shipments, Some of our engine shipments can be up to $15 million for a single engine. So any shift in that over a few days at the end of the quarter can have an impact like that. But a good point that did contribute to margin improvement in the quarter, we call it the pass-through, which is almost zero margin, and the lighter work scopes combined had that positive impact.

Very good. Thank you.

Thanks, Doug. Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Miles Walton from Wolf Research. Your line is now live.

Thanks. Good evening. I wanted to follow up maybe on that same point, but a different tact, which is the intersegment disclosure you had for CRS. It looks like the intersegment sales are up about 70% year-on-year, an acceleration from the 40% year-to-date. How much of that is actually helping the 80 basis points plus margin expansion and engine services.

Yeah, it's a great question, right? You know, that is the insourcing initiative that we're driving, which has benefits across the business. And there's really two big ones to point out. First of all, component repair services, as you know, has higher margins, right? In Q3, 26.4% compared to engine services at 13.5%. So the faster that CRS grows at an enterprise level, of course, we benefit from that accretion. Now, on the engine services side, as we insource the repairs to engine services, we do that elimination of the revenue at engine services, so they'll see really increased margins from having those repairs done really at our internal costs. So, you know, on both sides, you're going to see an impact on higher growth for CRS, and then you're going to see better margins over at ES.

Dan, is there any forward look as to how I mean, 70% growth year on year in one quarter is great. I just don't know how quickly this is going in that direction. Is there a target or a benchmark you would want to set?

I can tell you that we've got our full attention on it, right? The whole company is working on this. You know, the great thing is that CRS, you know, over the course of its history has really built up a lot of capability that it didn't have before, which is enabling this big insourcing effort to happen now. Now that they have, you know, this whole suite of repairs and the continuing development of new repairs, that will continue to allow this insourcing to grow. So you're seeing, you know, the first impacts of it, you know, this year, next year it will be even more.

All right, thanks. Thank you, Miles. Thank you. Next question is coming from Krista Friesen from CIBC. Your line is now live.

Hi, thanks for taking my question, and congrats on the quarter. I was just wondering if you can comment on what you're seeing in terms of M&A and potentially small tuck-ins over the next while here.

Hi, Chris. We're not giving specifics on things in the works right now, but we're always in the market looking at potential deals where we're the right buyer for the business. There are a bunch of opportunities out there that we could potentially go after over the next couple of years, and M&A is certainly an important part of our value creation playbook, particularly in the component repair services area where there's often a pretty long list of opportunities. So we'll continue to look at those but not giving specifics.

Thanks. And maybe if you can just speak to how we should think about the military segment for Q4, just given the decline in year-over-year growth due to some one-time issues in Q3 here.

The military segment continues to be a very stable segment. There was a grounding of the B-22 Osprey that caused an air bubble in flight hours. The engine on that particular aircraft We see a lot of work that essentially got put on hold. It was not an engine problem, but that particular aircraft has now been returned to full operation, and we expect that we will progressively see flight hours resuming. And we'll begin to see some of that work kind of unwind itself as we go into 2025. You know, the platform is expected to remain in service for 40 plus years. So there's still a very long tail of revenue to be gained from that particular platform. One other item that we saw was during the quarter we finished the negotiation of a contract on the F-110 engine, which is the engine that goes on the F-16 aircraft. We got that sorted, and we're going to see increased volume from that going forward as well. Thanks, Chris.

Thank you. Next question is a follow-up from Gavin Parsons from UBS. Your line is now live.

Hey, thanks for taking the follow-up. I know you guys aren't guiding until next quarter, but just wanted to ask about your philosophy on guidance, just how you'll think about it.

Yeah, so we're not going to guide for Q4 specifically, but at the Q4 release of earnings, we will talk about 2025. Okay. and we'll give annual guidance.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Russell for any further closing comments.

Okay, thanks very much. That concludes the comments we have for this quarter. I want to thank everyone again for joining us today. We appreciate your continued interest in supporting Standard Arrow, and we look forward to speaking with you again next quarter. Good day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.