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Good day, ladies and gentlemen, and welcome to the GE Aerospace Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh.
As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed.
Thanks, Liz. Welcome to GE Aerospace's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Chairman and CEO Larry Culp and CFO Rahul Ghai.
Thanks, Blaire, and good morning, everyone. I'd like to begin with our purpose. We invent the future of flight, lift people up, and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing, connecting people and goods worldwide.
We play a vital role in powering the warfighters who defend freedom. While we work to deliver for our customers today, we're also inventing technology that will propel the industry forward tomorrow. Our purpose is our call to action. I could not be prouder of what our team achieved in 2025, but also how we got there—with our culture of respect for people, being customer-driven, and continuous improvement.
Turning to our results on slide four, 2025 was an outstanding year for GE Aerospace. We made operational progress, delivered on our financial commitments, and continued to invest in our future. The fourth quarter was a strong finish to the year. Orders were up 74%, reflecting continued robust demand for our services and equipment.
Revenue increased 20% with double-digit growth in both segments. EPS was up 19% to $1.57 and free cash flow grew 15%. For the full year, we drove substantial improvement across all key metrics. Orders were up 32%, Revenue increased 21%, operating profit grew $1.8 billion, and free cash flow was up $1.5 billion.
In CES, orders were up 35% and revenue grew 24%, including services orders up 27% and revenue up 26%. This supported our profit growing 26% to $8.9 billion. In DPT, orders increased 19% and revenue was up 11% with increased deliveries in defense. Profit increased 22% to $1.3 billion.
Our performance reflects the impact of flight debt, driving incremental gains that compounded into meaningful improvements. This enables us to accelerate output to deliver on our roughly $190 billion backlog, which is up nearly $20 billion over the last year. We are also investing to improve time on wing and reduce the cost of ownership to deliver value to our customers, supporting growth today, tomorrow, and into the future. I want to thank the entire GE Aerospace team, our suppliers, and our customers who put their trust in us.
Looking to 2026, we're poised for another year of substantial revenue, EPS, and cash growth. Demand remains robust with 2025 orders up 32% and continued backlog growth, supporting our expectation for revenue to be up low double digits including commercial services up mid-teens. We expect operating profit of $9.85 billion to $10.25 billion, up a billion dollars at the midpoint. This translates to EPS of $7.10 to $7.40, up nearly 15% at the midpoint.
And we expect to generate $8 billion to $8.4 billion of free cash flow with conversion remaining well above 100%. This outlook builds on the progress we made in '24 and '25. We expect to deliver mid-teens revenue growth between '24 and '26 compounded and $10 billion of profit in '26 two years earlier than our outlook has been. We continue to convert this into cash, expecting to generate more than $20 billion of cash between '24 and '26 to reinvest in our future, including in US manufacturing to support both our commercial and defense customers. GE Aerospace is an exceptional franchise, servicing and growing the industry's most extensive installed base of 80,000 engines.
As we further embed flight deck, we'll unlock greater value for our customers and shareholders. Turning to Slide six, in their first year, our technology and operations, or T&O, team made a meaningful impact. We partnered more effectively with our suppliers, resulting in material input from our priority suppliers growing over 40% year over year in 2025 and up double digits sequentially in the fourth quarter, both translating to higher outputs. While we're making progress, we know our customers need more from us.
To further accelerate our progress in 2026, we're expanding CES to include T&O, now led by Mohammad Ali. Integrating our product line, engineering, and supply chain teams will improve our end-to-end engine life cycle management. We're also elevating our customer-facing teams, led by Jason Tonich, now reporting directly to me, aligned with our customer-driven approach. These changes will enable greater cross-functional problem-solving, agility, and alignment to deliver for our customers.
I also want to take a moment to thank Russell Stokes, who announced he'll retire from GE Aerospace in July after 29 years of service. His continuous improvement mindset and passion for developing leaders helped build this world-class business. Russell was one of the first leaders I met here at GE. He's been a critical partner over the last seven years.
We wish him nothing but success in his next chapter. These changes, along with flight deck, will further support growth in deliveries in '26. Across our MRO network, we're removing waste to improve shop visit output and turnaround times. For example, we're converting from batch to flow production, which supported LEAP, CFM56, and GE90 turnaround times, improving over 10% year over year in the fourth quarter. Additionally, at our Wales facility, CFM56 turnaround time improved by 20%, and at Selma, we sustained turnaround times below 80 days.
This enabled us to deliver our highest LEAP shop visit output of the year. With the LEAP installed base expected to roughly triple between '24 and '30, we're expanding capacity across our global MRO network to support aftermarket demand. In 2025, we added MTU Dallas as our sixth premier MRO partner supporting third-party shop visit growth, now representing around 15% of total LEAP shop visits. We're dedicating approximately $500 million of our more than $1 billion of investment in MRO to LEAP.
This includes expanding several MRO sites, including Malaysia, Selma, and Dallas, and a new on-wing support facility in Dubai. We expect these investments will roughly double LEAP's internal capacity. Taken together, these actions drove meaningful progress in services and equipment output in 2025. CES services revenue increased 26% with internal shop visit revenue up 24%, including LEAP internal shop visit volume up 27%. Spare parts revenue grew more than 25%.
Deliveries across commercial and defense increased 26% for the year, including a strong finish with 8% sequential growth in the fourth quarter. Commercial units increased 25%, including LEAP up 28%, exceeding 1,800 units, a record output for the program. And defense engine deliveries increased 30%. While 2025 marked a year of progress, we know there's more to do to meet customer demand.
And I'm confident we'll deliver. Turning to slide seven, one of the behaviors that guides us is to be customer-driven in all that we do. We're leveraging over 2.3 billion flight hours and nearly $3 billion in annual R&D to drive meaningful improvement for our customers. Our focus remains on delivering mature levels of time on wing and lowering costs of ownership.
In November, the GE NX fleet leader, equipped with the upgraded HBT blade, which has improved time on wing over two and a half times in hot and harsh environments, achieved a new milestone surpassing 4,000 cycles. Informed by our progress with the GE NX, the LEAP 1A durability kit will improve time on wing by more than two times, matching our industry-leading CFM56 performance. This is now incorporated in all LEAP 1A new engine deliveries and shop visits, with nearly 1,500 kits shipped since certification. In addition to improved durability, we're also expanding our LEAP repair catalog, which will lower costs of ownership and improve turnaround times.
In '25, LEAP parts certified for repair increased 20%, and we expect continued growth in '26. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP. At the same time, utilization of our mature engines remains robust. CFM56 is the most widely owned and operated engine in commercial aviation. With retirements in '25 consistent with '24 levels, the third-party MRO ecosystem provides customers with optionality for servicing their fleets, supporting higher asset values, and lowering costs of ownership.
We continue to strengthen MRO access to OEM materials to support further CFM56 longevity. Last quarter, for example, we reached a materials agreement with EFTIA Aviation to support the service of its growing fleet of CFM56 engines. We're also progressing the next generation of engines. We recently completed a ground test campaign demonstrating our first hybrid-electric narrow-body engine architecture.
This first-of-its-kind propulsion milestone demonstrates systems integration, advancing the technology from concept to practical, scalable application. As we deliver greater customer value and advanced breakthrough technologies, we're growing our backlog. At the Dubai Air Show, we recorded over 500 engine wins across narrow bodies and wide bodies. Including Riyadh Air's commitment for 120 LEAP 1A engines and fly Dubai's selection of 60 GE NX engines.
Additionally, Pegasus Airlines committed to up to 300 LEAP 1B engines to power its future Boeing 737-10 fleet. And we're honored that Delta, a new GE NX customer, selected us to power and service their new fleet of 30 Boeing 787s. In defense, Indestin Aeronautics ordered 113 F404 engines for the Tejas fighter jets. Demonstrating our position as a trusted partner for allied fighter programs.
Overall, we're driving progress, improving field performance, turnaround times, and advancing future propulsion technologies. We're well-positioned to strengthen our leadership across both the commercial and defense sectors in 2026. Rahul, over to you.
Larry, thank you, and good morning, everyone. We closed out 2025 with another strong quarter. Fourth quarter orders were up 74%, with CES up 76% and DPT up 61%. Revenue was up 20%, led by CES Services, up 31%.
Operating profit was $2.3 billion, up 14%. Service volume, productivity, and price were partially offset by the impact of lower spare engine ratio, OE growth, including 9x shipments and investments. Margins, as per prior guidance, were down 90 basis points to 19.2%. EPS was $1.57, up 19% from increased operating profit, a lower tax rate, and a reduced share count.
Free cash flow was $1.8 billion, up 15%, largely driven by higher earnings with over 100% conversion. For the year, our results exceeded the high end of our guidance on all key metrics. Orders were up 32%, with commercial services orders up 27% and total equipment up 48%. Revenue increased 21% from commercial services, which was up 26% and higher deliveries of both commercial and defense units.
Operating profit increased 25% to $9.1 billion, with margins expanding 70 basis points to 21.4% as commercial services volume and price offset OE growth and investments. EPS increased 38% to $6.37. Free cash flow grew 24% or $1.5 billion to $7.7 billion, with conversion over 110%, driven by earnings growth and continued contract asset favorability, which was partially offset by inventory growth to support continued output increases in 2026. Overall, very strong performance for GE Aerospace, positioning us well for 2026. Turning to our segments, starting with CES. In the fourth quarter, orders were up 76%, with services up 18% and equipment more than doubling.
Revenue increased 24%, with services up 31%. Internal shop visit revenue grew 30%, from higher volume and increased work scopes. Spare parts sales were up over 25% as improved material availability supported increased output. Equipment grew 7%, with engine deliveries up 40%, including LEAP up 49%.
This more than offset a decline in spare engine ratio due to the timing of back-end-loaded spare engine deliveries in 2024. For the year, spare engine ratio was lower than '24 as planned. Profit was $2.3 billion, up 5% from higher services volume with improved margins, price, and favorable mix. This was partially offset by the impact of lower spare engine ratio, higher installed shipments, including NINEX, and an increase in R&D. As expected, margins were down 420 basis points to 24%.
For the year, CES delivered outstanding results, with orders growing 35% and services revenue and engine output both up roughly 25%. This supported profit growing 26% to $8.9 billion, with margins expanding 40 basis points to 26.6% from services growth, productivity, and price. Moving to DPT, orders were up 61%, with defense book-to-bill above two. Revenue grew 13%, with defense and systems revenue up 2%.
Defense units were down 7% due to a difficult compare, which was more than offset by price and customer mix. Sequentially, this was the third consecutive quarter of strong defense engine shipments, with full-year deliveries up 30%. Propulsion and additive technologies grew 33%, led by higher commercial and military volume at Avio. Profit was up 5% from volume, favorable mix, and price, partially offset by investments and inflation.
Margins were down 70 basis points to 8.9%. DPT also had a solid year, with orders up 19% and defense book-to-bill at 1.5, with backlog now at $21 billion, up nearly $3 billion. Improved output reported revenue growing 11%, profit was $1.3 billion, with margins up 110 basis points to 12.3% from volume, mix, and price. Going deeper into the drivers of our 38% EPS growth for the year, growth in operating profit drove $1.32 or 75% of the improvement in EPS, with the increased profit in CES and DPT partially offset by higher corporate cost and eliminations.
Corporate cost was roughly $570 million, up about $170 million due to lower interest income. Eliminations were about $530 million, up approximately $70 million. Lower tax rate, a reduction in share count, and interest expense accounted for an additional 46¢ of EPS growth. Tax rate was down three points for the year, primarily from the benefits of long-term tax planning projects.
Share count reduced by $26 million. Turning to Slide 12, we're updating our segment reporting to reflect the organizational changes announced last week. Importantly, there is no change to total company metrics. Aero derivative engines, which were previously reported in CES, will be included with DPT to drive greater supply chain alignment with the marine and mobility business.
As a result, roughly $1.4 billion of revenue and a couple hundred million of profit will move from CES to DPT. With the expansion of CES to include T&O, we are also transitioning the cost of remaining sites and external engineering revenue to their respective businesses. This results in a small change to corporate cost and eliminations. The resegmentation impact is reflected in the 2025 segment financials on the left side of the page.
We've also included a preliminary bridge in the appendix and plan to provide recast segment financials for first-quarter earnings. Turning to guidance, starting with CES, we expect mid-teens revenue growth, including services up mid-teens. This includes internal shop visit revenue and spare parts revenue, both up mid-teens from low double-digit engine removals combined with higher work scopes and price. LEAP internal shop visits are expected to grow 25%.
We expect equipment up mid- to high-teens, including LEAP deliveries up 15% with higher growth from wide-body programs. We expect $9.6 billion to $9.9 billion of profit, up about $1.2 billion at the midpoint. This reflects the benefit of services growth and price, which is partially offset by OE growth, including NINEX, a lower spare engine ratio, and continued investments. In DPT, we expect mid-to-high single-digit revenue growth and profit of $1.55 billion to $1.65 billion.
Higher deliveries will be partially offset by inflation, mix, and investments. Corporate costs and eliminations are up year over year to $1.2 billion to $1.3 billion from lower interest income, AI investments, and higher eliminations from internal BAT growth. In total, we expect low double-digit revenue growth for the company, with profit in the range of $9.85 billion to $10.25 billion, up $1 billion or more than 10% at the midpoint. Further unpacking the drivers of EPS and free cash flow growth, we expect EPS in the range of $7.10 to $7.40, up nearly 15% at the midpoint.
About 85% of the improvement will be from higher operating profit. The balance will be from a marginal improvement in the tax rate to below 17% and a reduction of 18 million shares from our previously completed and announced capital allocation actions. Interest expense is expected to be roughly $900 million. We expect to generate $8 billion to $8.4 billion of free cash flow, primarily from higher earnings.
Working capital and AD&A combined will be a source year-over-year from slower inventory growth. We continue to expect CapEx at roughly 3% of sales. Overall, we expect another year of conversion solidly above 100%. Taken together, GE Aerospace is poised for another year of solid growth ahead.
Rahul, thank you. 2025 was another outstanding year. Our sustained competitive advantages support our in our leadership positions across both commercial and defense. With the industry's largest fleet of 80,000 engines and growing, we've accumulated over 2.3 billion flight hours. This experience keeps us close to our customers through decade-long life cycles, building enduring relationships, and making us the partner of choice.
This field experience combined with our nearly $3 billion in annual R&D investments allows us to drive continuous improvement across our services and products, enhancing time on wing and lowering the cost of ownership. As a result, across our narrow body, wide body regional defense platforms, we offer the best performing products under wing. Our world-class engineering teams develop next-gen technology to improve durability, efficiency, and turnaround times, along with advanced defense capabilities. Through flight deck, we're turning strategy into results with a focus on safety, quality, delivery, and cost, always in that order.
Stepping back, the GE Aerospace team is focused and ready for what's ahead. In 2026, we're well positioned to deliver for our customers and shareholders, and I'm confident in our trajectory. With that, Blaire, let's go to questions.
Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so that we can get to as many as possible. Liz, can you please open the line?
Ladies and gentlemen, if you wish to ask a question, if you wish to withdraw your question or your question has already been answered, please press 11 again. Our first question comes from John Godden of Citigroup. Your line is now open.
I was hoping you could elaborate a bit on the commercial aftermarket backdrop. Obviously, it was a great services quarter with revenue growth accelerating versus the quarter, so I'm just curious to what extent this momentum has carried through to start the year. And if you could just unpack some of the assumptions underlying the mid-teen services growth guidance for 2026. Is there any room there to outperform if recent momentum continues?
Well, John, good morning. Thanks for getting us started. I would say we haven't seen anything here at the beginning of the year that gives us pause relative to the tailwinds, the momentum that you referenced continuing. We've all seen Delta and United out since last week, I think, talking confidently about 2026. So when you couple their outlook, the fact that we come into the year with a $190 billion backlog, we know our share of cycles with LEAP in particular in the narrow body segment being up and the opportunities to leverage that underlying unit volume in the aftermarket with both expanded workscopes in both narrow and wide body as well as price, we feel like we have another very strong commercial services year supporting the aftermarket.
Again, I think we've commented in the prepared remarks at a rate that should be up mid-teens. Will we be able to do better than that? We're certainly going to aim to do that. But as we talk through the course of 2025, we're not particularly concerned about the demand environment.
It's really all about our ability to move spare parts out to third parties to complete our own shop visits. While we were pleased with the sequential and the year-over-year numbers that we cited in the fourth quarter, there's much more to do here in 2026. It's a bit of what undergirds the organizational move that we announced. To the extent that we can continue to make progress, and we think we will, perhaps not in line with the 40% bump we saw from our prior suppliers last year on a full-year basis, I think we'll be able to satisfy that demand better than we did in 2025.
Yeah. Just a couple of things, John, welcome to our call here. Just as we said in our prepared remarks, we expect both shop visits and spare parts to be up kind of the same range as mid-teens as the overall services growth. On spare parts first, our delinquency when we ended 2025 was up 50% over where we ended 2024. So as Larry mentioned, strong demand environment.
As you think about the spare parts growth, it's gonna be primarily driven by narrow body. That's coming as the LEAP external channel continues to grow, and more than 15% of the LEAP shop visits are now performed by a third-party channel partner. CFM56 continues to be strong as well. Larry mentioned in his prepared remarks about how we ended 2025 retirements, which were similar to 2024. As we think about 2026, we expect retirements to be in the 2% range.
Our prior expectations were in the 2% to 3% range, so trending a little bit better, and that puts CFM shop visits in the 2,300 to 2,400 range between 2026 and 2028. External demand environment looks good. We're expecting double-digit removals this year from engines that have already flown. Plus, the work scope continues to increase a little bit of price. All of that leads to that 15% growth that we mentioned on shop visit.
Overall, we feel good about the services outlook for 2026.
The next question comes from Myles Walton with Wolfe Research. Your line is now open.
Good morning.
Good morning, Myles.
I was wondering about the LEAP breakeven or LEAP profitability on the original equipment side. Are we crossing the root count of profit or breakeven in '26 still? Larry, you must be feeling a lot better about the trajectory to get output on a LEAP to 2,500 by 2028. What, if anything, is required from investment within the supply chain, not the MRO network, but more the OE side of the supply chain still to get to where manufacturers want the production rates?
Well, Myles, from a NewMake perspective, and as you know, the supply chain supports new make and also the aftermarket. No one can really isolate the new make demand and invest for that without being mindful of the aftermarket demand as well. I think we have improved over the course of 2025 our visibility further out and deeper into the supply chain, further out timewise, and deeper into the supply chain with respect to readiness to satisfy our needs to serve both the airlines and the airframers. There will be capital investment in various places.
I'll let different suppliers and different commodity categories speak to their own plans. But I think we're confident that as we move forward here through the rest of the decade, we'll be able to satisfy what the airlines need in the aftermarket and what the airframers are looking to do for the airlines as well, right from a new delivery, from a modernization and expansion perspective. But there's work to do. Again, I don't think we're gonna be up 40% every year, not that we have to, but I feel very good that with the body of work we put in 2025, we're poised to step up again with the supply base, be it process improvement, be it capital expansion, and the like, to keep pace with these considerable tailwinds that we're all fortunately exposed to.
And, Myles, to answer your question on the LEAP profitability, yes, we expect LEAP OE to be profitable in 2026 as per our prior plans.
The next question comes from Douglas Harnett with Bernstein. Your line is now open.
Good morning. Thank you.
Good morning, Doug.
You talked about the improvement in turnaround times across the board, like LEAP, CFM56, GE90, by about 10%. For LEAP, I can see that, but CFM56 and GE90 are very mature engines. Is this turnaround time improvement for both internal and third-party shop visits? What levers enable you to do that?
How should we see that improvement reflected in financials since CFM56 is largely time and materials and GE90, you'd be on CSAs, I would assume.
Doug, it's an internally oriented number. We watch turnaround time closely at every one of our shops across platforms across the network. The way I think about turnaround time improvement, it's really driven by two things: one, material availability, and two, efficient execution of our standard work on the shop floor. We've talked a lot about supply chain.
You've written about it as well. To the extent that we are getting not only more from our suppliers but getting what we get in a more predictable way, the teams on the shop floor are better able to execute and bring down turnaround times. We talked about a 40% year-over-year improvement from our priority suppliers. Those suppliers delivering at a 90% plus level to their commitments takes a lot of noise out of the system.
That is an unlock for us. I think to take full advantage of the process improvements by way of flight deck that we've laid in the various shops. It's not equally spread across every shop, but those turnaround times that you see improve in the fourth quarter, for example, really is a combination of better input materials and better execution. How does that show up in the financials?
Well, we should be getting more shop visits completed in terms of the top line, but we also believe it's a considerable productivity unlock. If a team on the floor has to stop a shop visit, if they are idle waiting for a part delivery, that's obviously unproductive time. If they have everything they need from induction to certification, we will see and have seen early signs of real productivity bumps there as well.
The next question comes from Scott Deuschle with Deutsche Bank.
Good morning. Rahul, can you quantify what the GE9X headwind ended up being in 2025? What is the incremental profit headwind from NINEX in 2026? If you could comment on the quarterly earnings cadence at CES in '26 as well, that would be helpful. The question is around 9x losses and earnings cadence. Thank you.
Scott, on 9x, our losses ended. We said a couple of hundred million dollars of losses in 2025, and we landed right about there, so right in line with our expectations. For '26, as we previously said, we are gonna ship more engines in '26, and the volume continues to grow. With that, our losses on the 9x programs will double year over year.
Our current guidance for '26 incorporates those losses getting to that level, so all consistent with what we said previously. On the first quarter, let me just elevate the question a little bit, Scott, and just kind of speak to the total company here, including CES. First, we expect a solid start to the year. Our output started out slow last year in the first quarter, so we expect our engine and shop visit output to grow substantially here in the first quarter.
That will drive our revenue growth, and we expect at the total company level high teens revenue growth for the company. Both CES and DPT expect above their respective full-year guides. For CES, we ended 2025 with 27% orders growth, so we're entering '26 with a strong backlog. About 85% of the spare parts that we need to ship in the first quarter are already in the backlog.
We had a CMR charge in the first quarter of last year that we're not expecting to repeat. It'll be a strong start for us in our services business, and commercial equipment output is expected to be strong. That'll drive revenue growth. First quarter last year was our strongest spare engine shipment quarter, so there'll be some year-over-year impact due to that.
Still, it'll be a strong revenue performance despite that. There will be 9x shipments here in the first quarter as well, which we did not have in '25, and DPT, they're on a good run here on sequential performance, and expect that to continue, driving revenue growth for the DPT segment. Switching to profit, expect that profit to be up year over year growth primarily from the services growth and absence of the CMR charge offsetting the higher deliveries and the 9x shipments. However, because of the lower spare engine ratio and 9x shipments, our total margins for the business will be kind of in line to slightly better or marginally better here versus where we ended 2025. Free cash flow, we expect certain payments here in the first quarter, will be down year over year, but overall, thinking about revenue and profit, we expect to get out of the gate strong.
The next question comes from Sheila Kahyaoglu with Jefferies. Good morning, Larry, Rahul.
Maybe, Rahu, since you were just speaking about CES profit guidance for '26, if you could walk through margins at the midpoint, it implies margins are flat. I know you gave a few pieces on the GE9X headwind, how are you thinking about shipments there? What are you seeing offset the goodness to help overcome some of the mix issues you're facing with equipment growth outpacing services, 9x headwind, as you mentioned, spares ratio, and LEAP growing double digits while CFM is flat? How do we think about that?
I think, Sheila, you kind of outlined some of the key drivers here in the math. The margin story at the CES level is exactly the way you said it. Strong services growth, with 3 and a half billion dollars expected in services revenue growth in '26 that drops through at a healthy clip despite LEAP being a bigger share of growth, still, expect strong drop through from services revenue improvement year over year. OEM shipments are increasing, spare engine ratio gradually comes down as we expect it to, as time passes on.
And then NINEX shipments and with R&D coming in as well. Those are the big drivers for CES margins here in 2026. The margins ended up better than expected during October guidance. Margins about 70 basis points better than what thought in October. So, despite that, expect margins to be flattish in 2026. Feel good about trajectory.
The next question comes from Seth Seifman with JPMorgan.
Hey, thanks very much, and good morning, everyone.
Morning, Seth.
Maybe just to continue along that line of questioning, as we think about the headwinds accumulating from a mix perspective in CES and then look out beyond '26, how should we think about margin trajectory there with LEAP OE becoming profitable, LEAP aftermarket continuing to become more profitable, but maybe OE aftermarket mix headwinds and more 9x? I'm getting to, like, a 26.6% in CES for '26. So, kind of where do we think about that going directionally in the years beyond?
I think you captured some of the headwinds we've talked about not only for '26 but for '28. It's important to recognize that when we spun, thought to be at a $10 billion operating profit level two years from here. We're able to hit that milestone, and will hit it at the midpoint here in 2026. There are many things outweighing the headwinds as we continue to grow the install base. With suppliers grow the installed base at a low to mid-single-digit level, and get the full benefit of utilization in term volume, work scopes, and price. The commercial services business is the engine that drives profit growth.
LEAP is better as we go forward and will look to have NINE do the same. Despite progress in defense, with 11% top-line operating profit up over 20%, we have opportunity to deliver on the $11.5 billion operating profit targeted for 2028. Potentially do better. Serve airlines, ramp with airframers to help modernization and expansion. Support warfighters fully.
Seth, if add a couple of things, back in July when we gave 2028 guidance, expected around 21% margins in '28. We got there last year, jumping off higher point. Margin profile maintained into 2026. Spoke about CFM56 goodness, retirements trending low, shop visits expected in the 2,300 to 2,400 range, maybe better than previously thought. LEAP service profitability continues to improve, external channel repairs to grow, incremental shop visits drive productivity in LEAP services. Wide body program, especially GE90, no retirements expected.
All that looks toward 2028, improved margin profile.
The next question comes from Ron Epstein with Bank of America. Ron, are you there?
Hey. Can you hear me? Sorry about that.
No problem, Ron.
Good morning, guys.
Good morning.
So, yeah, a lot's been asked already, but back to prepared remarks, mentioned spending $3 billion a year on R&D, a big number. Can you elaborate on spending, investments being made?
Ryan, I'd say it's where anticipated it to be. Customer experience improvement on ramping engines, like LEAP, with improvements like the durability kit. Nine X coming under wing with the triple seven X. Programs EIS or ramping are the first order.
Additionally, investing in future flight. RISE program, technology development, not product development but spends big chunk of annual spend, coupled with some defense next-gen programs, contributing to meaningful portion of R&D. NEX with the 2.3 billion flight hour experience base positions us well to shape future of flight. Balance of 2026-28 rests on protecting and expanding R&D envelope, key for innovation and technology.
The next question comes from Gavin Parsons of UBS.
Thank you. Good morning.
Good morning, Gavin.
You guys talked about CFM56 retirements trending lower than expected, 2%, despite successful LEAP deliveries. Expecting that to pick up to 3% or 4%, what's changed, still expecting shop visit peak in '27? Thank you.
Gavin, it's really more of a demand function, keeping CFM56 powered planes in flight as airlines need them. Retirements in 2025 ended up at about 1.6%, in line with 2024, balance '26 a little better, expecting slightly better at 2% compared to two to 3% range given in July. From shop visit perspective, ranges 2,300 to 2,400 through 2028 sets better expectations. Expect no big decline come 2030. Floating better utilization with demand leading to subdued retirements, meaning CFM56 strong longer.
The next question comes from Noah Poponak with Goldman Sachs.
Hey, good morning, everybody.
Morning, Noah.
Could you elaborate on the agreement announced with Eptai? Rahu, on free cash flow, this year flirting with what provided for 2028. Anything abnormally high in '26, fade away, bridge 26 to 28?
On Eptai agreement, third-party aftermarket seen as a strength, want maximum optionality how fleets serviced, both supporting asset values and lowering cost of ownership—foundation for agreement.
On cash flow, Noah, nothing abnormal in 26. Last year inventory growth was a challenge, added a billion-dollar inventory. Supply chain improving, but not there entirely, so investment made to continually increase output. For '26 expect less contract asset favorability this is getting offset here with slower inventory growth. Total working capital AD&A last year was a half a billion net headwind, expect slightly less this year.
It's not a bad given low double-digit revenue growth. Really nothing abnormal coming into the cash number and more opportunity on inventory as we get out. Maybe less on contract assets, all in line with what was communicated before.
Liz, we have time for one last question.
This question comes from Gautam Khanna with TD Cowen.
Hey, thank you. Good morning. Congrats to Mohammad and Russell. Customer behavior in the aftermarket, any change anticipated on overhauls scope, on wide-body engines or CFM56, any pricing pushback, discontinuity compared to recent times?
Nothing stands out frankly. Demand environment post-pandemic robust, with airlines wanting maximum fleet support. Talked about supply chain and flight deck over last years. CFM56's stability, demand leading toward some expanded workscopes. Satisfaction without compromising safety and quality is the reasonable ask, one committed to delivering new year.
Larry, any final comments to wrap the call?
Blaire, thank you. The hour flew there. Thank you, everyone.