Karman Holdings Inc. (KRMN) Earnings Call Transcript & Summary

Thanks for joining us. I'm Brian Gesuale, Senior Analyst covering Space and Defense at Raymond James. Appreciate you joining us. This is one of the best positioned stories in the defense and space markets that we cover. We're really excited to have them at our conference for the first time. This is Karman Space and Defense. We have the company's Chief Executive Officer, Tony Koblinski, here to take us through the story. Story has been great since you came public, great before that. Geopolitical events continue to keep you really busy. So love to hear about that. We're going to do this in a hybrid fashion. So he's going to give a 15- or 20-minute presentation, and then we'll take some questions from me and the audience. So if you have questions, please raise your hand, and we'll get to you. Thank you.

Appreciate it, Brian. Can you hear me okay? Everyone in the back? Good. And joining me is Steve Gitlin as well here in the room with me, our Head of Investor Relations and Corporate Comm. So happy to be with you, Brian. I appreciate the opportunity to talk. Thank you all for your interest. Some faces I recognize, others new. And so we thought it would be good to take you through a bit of an overview presentation, make sure you understand the story, our business model, why it's working, why it will continue to work as we move forward. And so with that, I'll go ahead. I do look forward to the questions at the end, typically the most fun part. I know you've read this, and so we have a forward-looking statement policy. And so I'm not planning to give any new guidance. We talked to you all in January, gave you a look at our outlook for both the fourth quarter and the year ahead. We'll reconfirm that when we meet with you at the end of this month. So we look forward to that. Karman, both new, if you will, in terms of how long have we existed, but a new kind of company. So formed really PE-backed 5 years ago, acquisitions of 4 what we'll call cornerstone companies that make up the fundamental Karman and 6 acquisitions since then. If you look at the diagram on the right, we love our position, right? It was purposeful. It was recognizing a need in the defense industry supply chain just below the primes. Fragmented supply base, lots of small providers of really important technology for our nation's safety and that of our allies. And so we positioned ourselves and have built prime-like capability but right below the prime. We're a merchant supply. We are, in fact, agnostic as to who wins or loses. We're not picking winners and losers. We've got over 80 customers, 130 programs. We'll talk about why we think that's a winning formula. Highly engineered IP at the center of everything we do. We'll get into that more deeply, but we like the tough stuff. That's where we can prove our worth and continue to earn the margins that we do. Vertically integrated capabilities, and that's really from design, give us a napkin sketch. We don't like when folks give us drawings to make. We do a little of that, but very little. We like when they give us concepts. Here's what our product needs to do. Here's the environments in which it's going to live. How would you go about doing it? And that way, we can think about the design, think about the engineering, think about our vertical manufacturing capability designed for their cost targets, do the iteration, test internally and get them to full rate production quickly as we've demonstrated many times. And so a wide breadth of fundamental capabilities. I'll show that in a later slide, but really designed to improve supply chain inefficiencies. Own the nodes that cause the problems. We've made investments in a number of things that allow us to promise. If you partner with us, we can get you there faster, cheaper, higher quality. And that's through owning the supply chain efficiencies. And we've got a history of success. This is not just a PowerPoint. The companies that make up Karman have been serving this industry in some cases, 30, 40 years. And so we've got a ton of flight-proven hardware, which makes us the go-to solution provider. A couple of stats just to get us started. Significant revenue growth. We've built a momentum that's been demonstrated and we'll have a mix of charts here because we haven't given fourth quarter official or full year. You see some historic charts, 24% year-over-year CAGR on the revenue, but looking at about $428 million of trailing 12 as of the end of third quarter. I'll put that in context in a later slide. Good diversity of revenue, 130 programs, as I talked about, no single program greater than 10% of our revenue. And so it's not our job to pick which programs will ultimately succeed, which ones will be funded by the DOW or others. We provide them all. And we've already demonstrated both for the existing primes and the new emerging players. We have not declared we're the next prime player. We don't want to play that role. So as we look at the emerging players who are getting space within this industry, we serve them well as a partner to their success. Good margins, 30% plus as we look at it, and you see what we did last year. We can talk about that a little bit in terms of the guidance we've given and a pure-play exposure to all of the high-growth markets, including now maritime, the fourth that we entered, and we'll talk about our Seemann acquisition and what that does for us in terms of our market penetration. And then 10, we've got a playbook that works in terms of the acquisitions, 10 in total. We'll talk a bit about that. So where do we play? Across all of the domains now within space and defense. We think of the market this way. We report out as one segment. We've got some rudimentary indications that all of these markets are growing, and I can talk to some of the fundamentals that are driving them. But there are tailwinds in each. And we have dedicated business development folks who are in the right meetings as we think about each of these 4 distinct markets. Certainly some overlap, but distinct in terms of hypersonics and strategic missile defense. We've talked about the fact that we are on and have been part of the development of virtually all the hypersonic programs. We'll be proud to be a supplier to perhaps the first fielded one with the Arrow system. We're on the Sentinel. We're on the next-generation interceptor. And so a number of the programs strategically important to the U.S. and our allies. Tactical missiles, think smaller diameter, if you will, and importantly, integrated defense, which includes unmanned. Unmanned drones, counter unmanned systems, think Switchblade, think Coyote, think others in that regard. Think about a missile, we're probably on it, right? The ones that are getting all the headlines these days, THAAD, PAC-3, Standard Missile 3 and 6, GMLRS, we've got content on each of those and have for decades literally. And then I'll skip for a bit. We'll go to launch, all things space and launch. Think about kind of the major 5, if you will, providers of launch capability today. Certainly, there's a dominant player and SpaceX will continue to dominate this space for a while. But we enjoy our partnership with them. And then think Blue Origin, ULA, Firefly, Rocket Lab. We've got content on all of those. So if it's going through the Karman line, I don't know if you don't -- that's the reference to Theodore van Karman -- or von Karman. He was the one who has been named for the definition of where does space begin. About 100 kilometers up, 60 miles, we run out of atmosphere. And so if it's going through the Karman line, we likely have components on it. Huge drivers in space as we think about both the space economy emerging exploration going to Mars, putting habitats as well as defense. It is a contested domain. There's no question about that and will continue to always be. And so more assets in space. It bodes well for us as well because we provide content for all the launch providers. And then most recent acquisitions, Seemann and MSC brings us the maritime exposure. They are proven experts in composite manufacturing. They provide large systems, including the bow domes for Columbia class, Virginia class. Seawolf been a terrific partner to the Navy and their suppliers for many years, have world-class capabilities. And like many of our acquisitions, MSC came along as just a real bonus, materials experts. Seemann had bought MSC some years ago. They have scientists down to the molecular level, right, on how to choose and design the right composite material for the application. We weave our own fabric to make certain that we get that right and keep proprietary. So whatever the application is in the area of composites, whether it needs to withstand 3,000 degrees or down on the ocean floor and be acoustically transparent, we have the capability to make those selections and make the material. So a lot going on, obviously, in all 4 of those, and we can talk about that. We talk somewhat about tip to tail, using a missile or a rocket, of course, we do other things. We're assembling a Lunar Lander that will be on the dark side of the moon in a couple of years. We were trusted with that and built a clean room for that purpose. But as you think about missiles and rockets, tip to tail, shrouds, payload protection. We don't do the payloads, but it's our job to get the payload where it needs to be in the condition it should be and get it deployed properly, sometimes at hypersonic speeds. And so not a lot of folks can do that. And you think about the tail, all things propulsion. We don't do large-diameter solid rocket motors. I think 12 inches and up from there, but we make the nozzles, the exit cones, the motor cases, safe and arm devices, igniters. So all the important components that go in. And then smaller-diameter solid rocket motors, we manufacture the whole thing. Think Stinger, Javelin size, think launchers for UAVs and flight motors. So we do a lot of that. And now bow to stern as we think about the same thing, everywhere from the acoustically transparent bow dome, 30 feet in diameter, 45 feet deep, to the propeller of these submarines, and that's 30 years of backlog, right? The Columbia class just being introduced, right, 1 a year, urging to go to 1.5, if not 2, Virginia, same thing. There's a complete refurbishment of the fleet. And so we've got built-in visibility there for many years to come. And you see some of the products that we do and the crossover between both Seemann and what was then the core Karman up till that point, solid rocket motors, nozzles, launchers, thermal protection systems, igniters. That's just a really small sampling of what we do, stage separation systems, Stage 1 to Stage 2 and on and on. So lots of capability now across all those domains. As we think about our value add, it's really because of our capabilities across this whole spectrum. A lot of IP, a lot of patents. Again, 40 years of legacy of flight-proven hardware allows us to quickly draw on that and for the next solution, whatever it is. Design capability, we've got modeling. We've got a lot of technology there where don't give us a print, tell us what you need. We'll do the math in terms of what we need to design to give you the safety factors and margins that you're looking for. Development, testing and qual, all in-house. Vast testing capability, both for hot fire as well as up in our north of Seattle facility there. We can deploy shrouds real time. We've got terrific test capabilities. And what that allows us to do is iterate that design quickly, right? Design it, build it, test it, break it, go back and fix it again. And we can do that within weeks, not months, given that we do it all under our own roof. And having the knowledge of vertical integrated manufacturing, one, we control the supply chain and the important nodes, but two, we can design for what we know how to make. And so that allows us to say, what's your cost target, and then we can go to work for our customers to say, knowing what we do about manufacturing of all kinds, we are not beholden to we're a composite shop, let's do it in composite or we're a metal banger. We got to do it in metal. We can choose the right solution that meets the need and get it to their cost targets. On the acquisition side, organic growth has been our story and will continue to be. You saw a 25% CAGR on that, but inorganic will be part of the story moving forward as well. We've got a playbook. We've rehearsed it a few times now, 4 acquisitions since the IPO in February of last year. And each one brings both a reason for being, whether that be in Seemann, a brand-new market segment plus the MSC. Five Axis was similar, brought us great manufacturing capability in spin forming and additive, but also brought us exposure to liquid propulsion engines. Up to that point, most of our content went on solid rocket motors, but now we have access and entry into the liquid propulsion business, specifically on, in this case, the BE series of engines there important to the future. And ISP brought us the propulsion and MTI brought us more metal capability. So like composites, we are experts in what's the right metal, what temperature does it need to see, what corrosion, what strength, how do we optimize for weight and cost and make the right selections. So we are truly materials experts and then can design from there. Proprietary products, as you look at what we're looking for on the left, niche manufacturing, smaller deals. Seemann was the largest, but that doesn't signal that they're always going to be ever increasing in size. It needs to have IP embedded, and there are still quite a number of opportunities of small players, first and second-generation owners who have built a great business around IP that's critical to our nation's defense, and we think make great tuck-ins as we move forward. And so we'll continue to have and have a pipeline of acquisitions. We signaled a while ago 1 to 2 a year. We're clearly ahead of that pace a little, and I don't want that to be a signal that we're going to continue at the pace we've been. But organic growth plus inorganic growth to fuel what we've got ahead of us. It's a growing footprint. I mentioned we're in 8 states now. We started out on the West Coast, a lot of California and some Washington, but have added Oregon, Utah, Mississippi, Alabama now, South Carolina, Pennsylvania. So 11 different sites within that and a fully integrated system. We agreed on day 1, we were not going to be a collection of interesting companies. We're not a holding company. We're an integrated enterprise. And from day 1 of an acquisition, they're wearing the Karman hats. They're plugged into our communication system so that we can easily talk to them on our Microsoft and Teams environment. We have a Karman operating system that's been defined with systems to support each business process. 6 to 12 months kind of nominally is our target for full integration depending upon their starting point. But you see some of the unique manufacturing capabilities. I've been in manufacturing my whole career. I mean my fifth decade of that, and we have amassed some of the best manufacturing capabilities that exist. We bought the right equipment. We've got the right people operating it. We can do things that others cannot. Strong financial results. Again, it's a little mixed bag. We've got -- because we haven't reported yet full year '25, we go from showing you the last several years to a 2, 3 trailing 12 months. And we guided -- let's see, do I have to pull out my crib. We guided -- maybe I will here. I want to make sure I don't give new guidance here. As we think about what we said, I'm sure I'd be consent.

It's okay. Business has been good.

Yes. As we talked to you last time, we said full year '25, we're guiding to kind of the midpoint, which would be $470 million. And this year, we guided to a 50% increase, right? So over $700 million, half of that organic, half of that inorganic in terms of the growth. And then that's initial as we talked about last time. And on the EBITDA, we guided for a full year '25 of $144 million and $205 million to $215 million for the year that we're in. Great pipeline, good backlog. The tailwinds are blowing. Again, I don't know what I missed today, but I'm assuming it's going to be helpful for our business. There's a lot going on in that regard. And space, again, important as well. We have been focusing on the defense side. Space is a contested domain, but there's a lot going on in the commercial and exploration, as we've talked about. Artemis program has a number of elements, CLPS being one, the Lunar Landers. We've entrusted with one of those working on another. We're involved in habitats. We're involved in waste stations. We do a lot of composite overwrap pressure vessels, which are necessary in space. And so each of our domains that we work on has good tailwinds coming in. I talked about this diversity, both by end market. We have to add a fourth. It will look similar. It isn't exact, but it's roughly 1/4, 1/4, 1/4 now, one more 1/4 in there to finish it out. And again, the program diversity, which is the most important. We're not beholden. There isn't a high risk of a program being funded or not funded. We have programs that are 30 years in production, and we don't have a program of all of these where we have a known sunset. We keep adding programs to the development cycle, as I mentioned, some of those that are in development now. And so again, a lot of growth drivers and a lot of resiliency, if you will, as demonstrated here with a really diverse revenue base. So summary, new, there isn't anybody just like us People are rolling up certain verticals, as we've talked about, people rolling up metal makers and machining, hoping to get a few points of synergy and efficiency in that. Some are rolling up composite manufacturers, right? But nobody has the breadth of engineering. We have over 300 engineers now. We truly have prime-like capability, but as a merchant supply. And so we think it's a real defensible business model that's difficult to replicate, and we're not aware of anybody that's even close at this point. We think we can continue to sustain outsized returns, a highly diverse portfolio, merchant supplier of mission-critical components. We don't want the commodity stuff. We want the stuff you haven't found somebody else to do that you used to do yourself, prime. But now because of the number of programs or degradation of your resources, a lot of retirements in this industry over the last decade or so. They come to us, full solution provider and proven inorganic growth process that we talked about there. So I think I'll pause there, and we'll see what kind of questions there might be.

Perfect. If we do have any questions from the audience, raise your hand, and we'll -- I'll call on you. But I have a couple that I'd like to start with.

Yes, good.

It seems like most of your customers are anywhere from 2 to 4x expected volume increases over the next few years. How are you from a capacity standpoint to accommodate that? And are there areas where you have more capacity versus less capacity expansion naturally embedded in the model?

Yes. You've all been reading the headlines about this notion of doubling to quadrupling. And that's not across the board, but that's many missile programs and all of which that we have content on today. I think the good news for us and as an industry, and I'm not long term in this industry, but my view is, right, that it's being more transparent than it ever has from the signals from the Pentagon through the various tiers. So though the end game may be doubling of a certain, our customers are telling us, we can't be there next year, right? We'll be there year 3. And as long as we install capacity to stay ahead of them, they're going to be satisfied. So those are the discussions that are going on right now is what's the slope of the ramp as we move over the next 3 to 5 years to achieve the volumes that are being talked about. So it's not a 1-year thing. It's a multiyear approach to these volume increases. We've been installing capacity incrementally. It's really kind of theory of constraints, if you understand or part of that. It's really bottleneck management. We've got floor space we continue to add. We've got machines, we add labor and then we control our raw materials coming in. Because we're vertically integrated, there aren't that many raw material suppliers. And we're procuring for our needs next year right now. People ask what is your capacity utilization? It's impossible to give you one number, but I will. We say we got about 30% left, right? We've got shifting patterns that we can still utilize as the easiest way to add more capacity. So our role is we see this as a multiyear thing. We know that we have an obligation to the nation to stay out of the way of all of our customers' desire to ramp and that, that ramp is going to be years, not months.

Great. That makes a lot of sense. One of the other things I want to talk about. You mentioned the breadth of your programs and the diversity across the business lines. How often are you a sole source? You're solving really hard problems. So I imagine substitutability is difficult. So how often are you sole versus dual source? And what do you generally think of as a notional kind of share of wallet that you target?

Yes. On the sole source, it's the vast majority of what we do. It's just so expensive, time-consuming to qualify the systems that we're on. The bow domes as an example, that was an 8-year development program. To get a new nozzle, just to change the machine that you need is a year process, let alone change supplier. And so that provides great -- deep and wide moat stickiness in terms of what we have. About 90% of our revenue is single or sole sourced, very little is dual sourced. And the second part of the question was?

In those dual source cases, how do you generally think of your share of the wallet?

Well, we think we get our lion's share. We think that it's -- we get the most of it, frankly.

I agree. Let's maybe pull the thread on M&A a bit. You've been acquisitive. It sounds like you have, to use your napkin analogy, a lot of things drawn up and sketched out for where you want to go. How big is this pipeline of companies that would fit within the adjacencies of what you're trying to do?

The universe is -- of that is surprisingly large, right? It's one of the biggest surprises to me. I've been in a number of industries, and this one now for in my sixth year. But the number of small mom-and-pop, I'll call them with no disrespect intended in that first, second-generation owners who have key intellectual property, sometimes patented that is critical to the nation's defense, it's surprising to me. And so there are a number of them out there. And we think that, again, as we have a pipeline, some of the -- it just takes a while for both parties to get to where they need to. We've been talking to Seemann for -- off and on for 6 years. But ultimately, they felt this was the time and we were the company to trust what they had put their heart and soul into over the last 20, 30 years. And increasingly, given the reputation that we're trying to earn and protect, they're coming to us. We're getting owners saying, listen, I've been thinking about selling for a while. I don't want to sell to PE. I hear what you guys are doing, and we want to be part of the Karman story. And so we think there's plenty of them out there.

Great. I'll pause for any questions in the audience. Yes, please.

In terms of your very clear future growth potential of the business, it's very competitive. But what are the areas that you think are maybe key points of weakness in [indiscernible] end market growth, the policy side of things. What sort of keeps you up at night in terms of [indiscernible]

Yes. I don't know if you heard what -- it's a version of what keeps you up at night, what are the limiting factors? What are the weaknesses, both either in the model. We think the model is sound. And the last thing I want to do is come off naive, head in the sand or overconfident, but we think we got a good thing going here. Obviously, the macroeconomics environment is sound. There's a lot of demand being pulled. We control most of the elements. We've worked hard to make sure supply chain below us is not going to be a factor. And so really, it's for us to operate well. And I would tell you, we've got a deep and talented bench of folks. They're great operators. We plan well, we execute well. And so really, it's up to us to just execute the model. Visibility of the demand is there, and we're planning for it for the years ahead.

I think that's just about our time for today. So thanks, everyone, for joining us. Tony, appreciate you taking us through the story. We are going to the breakout room. So more questions downstairs, and we'll see you there. Thank you, Tony.

Thank you all.