Karman Holdings Inc. ($KRMN)

Good afternoon. I'm Louie DiPalma. I cover aerospace and defense and satellites on William Blair's equity research team. This is the third day of the 46th Annual William Blair Growth Stock Conference and the last day in what's been an amazing week. We're pleased to be hosting a presentation and discussion with the CEO from Karman Space & Defense. So joining me today is CEO, Jon Rambeau, and in the audience is VP of Investor Relations, Steve Gitlin. I'm required to inform the audience that a complete list of disclosures and potential conflicts of interest are available on our website. Jon will provide an overview, and then we will jump into Q&A. Jon -- I also wanted to mention he was appointed CEO in late March and previously, he was at L3Harris and Lockheed Martin, so he has extensive defense industry experience. And with that, take it away, Jon.

All right. Well, thanks, Louie. And look, I really appreciate so much interest here in the audience. As Louie said, I've been with the company now for just over 60 days and it's just been a really exciting transition for me to join Karman. I was excited before I took the job, and I'm even more excited now than I was when I stepped in, just in having gotten to get out to know the people, the technology, customers and to talk to so many of our investors and analysts that cover the company and to just hear what's on your mind. So I appreciate you all being here. I'm going to go through a few presentation slides, and I guess we're going to have a little bit of Q&A here, and I really look forward to answering some of the prepared questions and then anything that might be on your minds today. So with that, I think we've got our forward-looking statements. You're all fairly familiar with these, so I won't go through them in any detail, but they're here for the record. And this is my first slide on the company just to really give you a sense of Karman and why we really are -- we say we're a new kind of space and defense company. And when I joined Karman, I thought this is really a unique company. It's a company that has a unique value proposition and the reasons why are on this slide. If you look at the pyramid on the right, first off, you can see this relatively differentiated position that we occupy in the supply chain that sits just below the prime level where we provide them the service of bringing together multiple components, pieces, parts, building those into integrated systems and subsystems and providing them to the prime level in a way that provides them more value than if they were to make the investment in building the capabilities themselves and having to go out and source all those individual components. We also have -- and I highlighted some words in green here that I wanted to make sure I touched on, IP-enabled capabilities. About 40% of Karman's revenue today are for capabilities where we have design authority. So a lot of technical depth in the company. We do have full spectrum end-to-end capability from concept design. We can take a sketch on a cocktail napkin and take that all the way through to full rate production. So it's a relatively unique capability for a company in the position that we occupy. Rapid system development as I go out and talk to customers, they're really impressed with the speed, the agility, the capabilities of the team. We have everything from aerodynamic experts, material scientists to work on advanced composites. We design our own custom propellants for energetic systems. So we really do have a depth of technical expertise in the company that's rare at this part of the supply chain. I talked about the customer satisfaction. I have not yet come across a customer in my travels that is unhappy with Karman, which is rare. And in fact, as I talk to my former colleagues at the primes, they go and talk to their employees before the meetings, and they typically come in and say, you know my team really likes working with your people. You're a really good partner. We see you as somebody we'd like to do more work with. We don't see you as somebody who's a threat that's trying to take our business and become a prime, we see you as a committed partner who wants to do more work that's similar to what you're doing as a support contractor to us at this level, and we see value in that, and we see a good partnership in that. So I think that as we continue to expand those customer conversations and elevate them higher in our customer organizations. That's going to lead to more good business to follow the work that we're doing today. A little bit more about the company if you're not already familiar. We operate in 4 end markets. Those are hypersonics and strategic missile defense, tactical missiles and integrated defense systems, the integrated defense systems piece principally supports unmanned systems and loitering munitions. We have a maritime defense business, which is largely the business that we acquired earlier this year, Seemann Composites and MSC, although there are some legacy Karman businesses that were folded into -- I should say, programs that were folded into that end market after the acquisition that are now part of that maritime defense piece of the business. And then finally, Space and Launch, which has actually been our fastest-growing end market quarter 1 of '25 to quarter 1 of '26 at just under 30% year-over-year growth. Just a couple of things to highlight. I talked a little bit about the work we're doing unmanned systems. If you look at that first green square here, launchers and solid rocket motors. We make small solid rocket motors and energetic systems that are folded into these launching systems for putting these relatively smaller loitering munitions and unmanned systems into the air. We work on propulsor ducts for submarines. I highlight this because I worked in the industry world for about 7 years, and I love this stuff. And one of the most sensitive parts of a submarine is the propulsor. It's the part of the submarine that actually allows it to push a lot of water rearward very quickly without creating cavitation in the water, right, bubbles, which is noise. And when you're submarine, you don't want noise. So we're actually doing some work on those most sensitive parts of the submarine as well as the very large complex bow dome assemblies that cover the acoustic array on the front of the submarine. We're doing work with energetic systems that separate stages on launch vehicles. So those little blasts that you see when the first stage of a launch vehicle is separated from the second stage before it ignites, we do those separation systems for a number of different launch vehicles. And finally, the submarine bow domes, which I think I touched on, just a very, very large complex piece of hardware that covers the acoustic array on the front of a submarine and some really differentiated process IP here, which is having formulated a process to cure the 6-inch thick composite dome outside of an autoclave without baking in an oven, which is typically how you cure a composite component. So being able to do that outside of an autoclave is a game changer, and we're not aware of anyone else who's doing that in the world today. Process took years to develop. So just a few examples of some of the things that we're doing. Strong financial results. I think you all probably have seen the numbers to date. So generally, looking at a year-over-year CAGR about 30% on revenue, that's about 10% -- think about 5% to 10% organic, maybe about 25%, 20% to 25% annual revenue growth on an organic basis. And I'll talk a little bit more about that on the next slide. And again, about 30% margins -- pretty consistently EBITDA margins on an annualized basis. This is a chart that we put forth recently to address more questions about where is the growth going to come from looking forward? Is there organic growth that's going to continue to follow what we've seen historically? And I'll just walk you left to right on the slide. If you start with the origins of growth, it all starts with the new business pipeline. And this is really just think the addressable market that we are actively pursuing to convert to contracts. And we saw a relatively unprecedented increase year-over-year from quarter 1 of '25 to quarter 1 of this year from about $1 billion in the pipeline to $3 billion in our new business pipeline this year. We also saw quarter-over-quarter 2025 Q1 to '26 Q1, a 4x increase in our bid volume measured by dollars. So the dollar value of the proposals that left Karman in the first quarter this year was about 4x what it was a year ago. And that's really driven by 2 things. First off, the framework agreements that were established as part of the munitions acceleration activity that the U.S. government is pursuing and so think about a lot more annual volume as long -- as well as longer-term contracts that are expected to be coming out of these framework agreements up to 7 years is the current expectation. And so that's driving an increase in the pipeline. And then also a pretty significant increase in the Space and Launch pipeline. So that's really the 2 -- those are the 2 key drivers of that substantial growth in the new business pipeline. As you take that pipeline and you start to separate it into end market and you look at the significant deals that are expected to span multiple years, we started to break those out by end market. And no surprise as you look at the top 2 categories here, the strategic missile defense, the tactical missiles and integrated defense systems, a lot of the volume and opportunity is there, but you can also see Space and Launch pretty significant. Now the maritime defense piece right now is represented by this much smaller number here. I anticipate that, that number is going to grow as we continue to integrate the Seemann Composites team into our business development organization and more fully unpack what's in the maritime budget year-by-year and start to roll those opportunities into the pipeline into our pursuit plans. And then finally, we wanted to give just a little bit of a sense of what's happening with the business now, what happened in the first quarter of this year that provides some evidence that the pipeline is converting. So just four examples we pulled out here to share. The bottom two are contracts we've already signed. One is a program to qualify a system for a recovery of torpedoes. A lot of torpedoes are used for training in the submarine training ranges and the Navy likes to recover this. We've developed a system, a unique system that allows them to bring the -- I'm sorry, the torpedo to the surface after it's used for a training mission. And so we qualified -- sorry, we signed a contract to qualify that system to get that into production. And that actually is a program that predates the Seemann acquisition. There were some questions about whether everything in maritime and defense was inorganic. And the answer is no. We did have some organic maritime defense business that folded into that end market after the acquisition. We also signed a $20 million follow-on launching system contract for unmanned air systems. So that just tends to come in, in quarter-by-quarter purchase orders. So we signed another one of those follow-on contracts in Q1. We were selected -- this is a relatively rare instance where we were asked to take the prime role on developing a munition. We had started with a technology demonstration program through one of the government labs that has now turned into a more comprehensive missile development program. And we were asked to take the lead with one of the missile primes as a teammate. It's expected if we get this through qualification that at some point, we would then switch roles and the prime would take the lead on production, and we would provide the warhead, which is a pretty significant deal for us if that goes through to production. And then finally, we have a Space and Launch long-term agreement that we're in the process of negotiating that I think we'll close on in the next couple of weeks, and that's worth about $0.25 billion over the next 4 to 5 years. So just some examples of things that are pulling through from that pipeline and starting to fall into the backlog, which -- backlog, I think, at the end of Q1 is just a little bit north of $1 billion. So making some good progress across the board here on driving the growth story and continuing to deliver that 25%-ish annual organic growth going forward. So with that, I think we have some financial statements here that I will not go through, and we can convert over to some Q&A.

Fantastic. Thanks, Jon. So coming from Lockheed and L3, what attracted you to Karman in that at those prior defense primes, Karman was a supplier to you. And so you were able to see them up close. So what was the main motivation?

Karman wasn't -- I wasn't off looking for an opportunity. I've worked for 2 great primes and had great career, a lot of challenges in those roles and a lot of good colleagues that I've stayed in touch with. However, I got this call and I was asked to look at this company and I said, well, anything. I'll take a look and see what it is. And the more I looked at the company, I thought this really is something I haven't seen in my 30 years in this industry.

But were you already aware of Karman? Did you ever ...

I was not particular -- no, I didn't have a lot of interaction. If you think about the size of the company and how quickly it was put together, the company was founded about 5 years ago and has grown rapidly. And so I had not been tracking what was happening in the munitions and space side of the business. I was more in the Mission Systems, a lot of airborne work. So I wasn't working with -- now as I started to become attuned to the company, I found very quickly to my colleague, Ken Bedingfield, is very aware of Karman in tracking the business and working with Karman as a major subcontractor. So it's not that at the prime level, they were not executives tracking the company. I personally wasn't. And as I started to study it more, I thought this is something really interesting and really exciting and something that I think will be a lot of fun to be a part of. And so a long conversation with my wife about moving across the country and doing something that probably came with a little bit more risk, a little bit more reward in the long term and made the decision to give it a try. And I have to say I haven't looked back and I'm really excited.

And I assume since you mentioned you conferred with Ken Bedingfield and I'm sure many of your other executives and relationships across the industry, and you did your own due diligence that you have the view that Karman cannot easily be displaced than they have this secret sauce because if you did have that view, you probably wouldn't have come?

I studied that very carefully. And I looked at the -- I talked about the 40% of the revenue where we have design IP, where 50% of the remaining 60%, we have some process IP and also some patented materials that go into some of those products, my thought was, a, it's -- we have a pretty strong competitive moat around the company; b, though, the commitment to scale and capacity to meet this generational surge in demand was really exciting. I thought here is a company who's got it right because one thing I was very acutely aware of as a prime was this incredible pressure to expand capacity for missiles, munitions, Space and Launch. And so I thought, boy, this is right in the heart of where all of the action is going to be in defense for the next decade. So that was another thing that's really exciting to me that the growth was going to be there, and here was a company that had the vision to get ahead of that.

Definitely. And some have described that expected explosion in production as a super cycle. And on your slides, you referenced how your pipeline has dramatically increased. How should investors think about that pipeline converting into backlog and then that backlog converting into revenue? What's the time frame?

Yes. I mean when you think about our -- we don't advertise our book-to-bill on a quarterly basis. It tends to be lumpy. But generally speaking, on an annualized basis, we'd like to see a book-to-bill north of 1.3. So that 30% year-by-year increase in backlog would lead to support that, call it, 25% annual organic growth, which is important for us. We think that trajectory is going to sustain at least through the end of the decade is what we see right now. I would say, yes, super cycle. Certainly, what we're seeing right now is unprecedented in the 30 years I've been in defense. And what's exciting also is there's -- as we see this real resurgence of the space economy, and we see this generational increase in demand for certain capabilities in defense, there's a lot of outside capital that's flowing into defense as well. And I think that's providing even more energy, even more investment in scaling capacity and capability. So it's an exciting time to be in this business.

Definitely. And related to what we described earlier, as part of this munition super cycle, and this is also taking place during the discussion and implementation of Golden Dome, there are many of these marquee missile platforms like the PAC-3 interceptor and the THAAD interceptor, your supplier on GMLRS. There's the Stinger missile, service to air system. And so there's -- these 15 systems, and you traditionally have been a supplier, do you see any risk you being able to scale capacity fast enough to meet your customers' expectations? How should we think about?

Right now, I don't see any reason why we won't be able to scale. I think the company has committed substantial resources to -- in a prudent way, right? I mean, it's not over commitment, but we've committed 5% of revenue this year to CapEx. And the majority of that is going into either expansion of capabilities in existing facilities or we also committed ourselves to a pretty large investment in a new Salt Lake City facility, which is going to be a couple of hundred thousand square feet almost exclusively manufacturing to support the unmanned systems part of the business as well as the tactical missile part of the business. So yes, I think we're going to be where we need to be. We had a -- what gives me some confidence too that the overall ramp is going to happen. I was worried about, are there going to be 3 small suppliers that just can't get there and it holds everything back because ultimately, the primes will be able to move as fast as their slowest supplier in the grand scheme of things. And so what's giving me confidence is the Department of War has had a contractor that's been out studying all of the suppliers and looking at the details of their investment plans, their CapEx investments and identifying risk areas and helping to identify sources of capital to get the smaller companies the resources they need. And so we had a visit in our Huntington Beach facility where we do some subsystem -- I'm sorry, production for tactical missiles. And after 1.5 days of going through spreadsheets and numbers, the conclusion was we're very happy with where Karman is. You're exactly where we want you to be. You've leaned in on the investments, you're going to meet the aggressive ramp and you're going to get a green scorecard. So that felt good.

And so for the primes to move forward on the super cycle. Do you expect them to wait for the congressional funding to come in, in that -- like one of the big themes in the industry has been like companies such as Anduril or Crossbow or others using their own internal R&D, their IRAD to like develop these manufacturing facilities and the way you described it in your prior earnings call, it was like contingent funding. And is that the main like barrier here in terms of Congress approving it? Or do you expect the primes to continue to move forward with these investments even if the funding is not 100% locked in.

There's a spectrum. You have companies that are oriented more toward the Karman end of the spectrum that are leaning in and making investments. In many cases, they're non-traditionals. But if you look at L3Harris and you listened to some of Chris' public remarks just in the past week, I mean there's a business that is leaning in and investing. They know the demand is going to be there. I was a member of the leadership team, and I can vouch for that, huge commitment to making those investments with the absolute understanding that the contracts will follow and that the contracts will provide. The theme I've seen also lately in the prime's remarks publicly is that there is an expectation that if contracts are for some reason, terminated, and there's a huge CapEx build that can't be liquidated. There would be some recovery, possibility there at the prime level. So obviously, all those things will look to work into our agreements as well. But the big -- the contingent is when we get our contracts, you'll get yours. And that feels good to me. I feel confident the contracts are going to happen at the prime level. And we seem to be hearing by the end of the year, that is the time frame for those contracts.

Great. And yes, thus far, we've been focusing on munitions, but there's also been tremendous excitement in the space industry. And your name has traditionally been Karman space and defense. And so what products are you providing the different space launch providers or satellite infrastructure providers?

A lot of the work we're doing in space is not all that different than what we're doing in the munitions area. We support the subsystems for the propulsion portion of the launch vehicles. We're doing some of the core stage components for a couple of our key launch customers. We have some areas where we've done design of subcomponents of launch vehicles from just a list of requirements all the way through to a complete integrated assembly that can go right on to a launch vehicle. And we're also -- one of the most exciting projects is we're building a lunar lander in our Seattle facility for the NASA CLPS program for one of the primes and the actual full integration of that lunar lander is going to happen in our facility, which is a pretty big deal because a lot of times we'll build a subsystem, and we'll ship that to somebody who puts that into the end item and in this particular case, we're working with the prime to build and integrate the entire lunar lander in our facility. So that's pretty exciting.

Great. And one question from investors. A few weeks ago, Blue Origin experienced a significant mishap with their New Glenn platform. And you've previously discussed how they are among like many different space customers. Do you anticipate any significant impact from the New Glenn mishap on your business?

I don't at this time. I will tell you, like everyone else last week, I was really shocked and disappointed to see what had happened and concerned for where that would lead for Blue Origin. And some of the statements that NASA made immediately after the mishap were discouraging. However, coming out of the weekend, hearing some of the public comments that Blue Origin has made about getting back on track by the end of the year if they can recover the launch site and get it back to its full functionality by the end of the year, that's really encouraging. And I will say that in my interactions with Blue Origin and the interactions my team are having, it is business as usual, if not even perhaps a little bit more resolved and committed to continue their cadence of production. So everything I'm seeing right now is full steam ahead.

And how is your long-term view of the space industry in terms of how. There's Blue Origin. There's ULA with their Vulcan program. There's Rocket Lab with their Neutron development and their existing Electron. And I know many of these launch providers are customers of yours. Should you participate in the growth alongside their expectations to ramp the launch cadence?

One of the things that's really great about Karman is if you're thinking about missiles, munitions, Space and Launch, we're sort of like an index fund, we have participation on pretty much all of the platforms. We have representation on over 130 programs, over 80 individual prime customers that we support. And so across the spectrum of defense, Space and Launch, traditional, nontraditional new entrants, we're working with just about everybody in some capacity. So we will -- if you look at the macro trends and you look at the bend in the curve for launch cadence, it really is starting to get to a point. And I think Artemis II was a big shot in the arm for the entire space community. I went to the Space Symposium this year, and there was just a certain energy, whether it was the military space or the commercial space folks, there's just a real excitement that space is back in this country, and it seems to be manifesting itself in real progress here.

Great. And for -- you mentioned the organic growth of 25% or around 25% for this year. What is your visibility in terms of that growth? You've reported a strong backlog at the end of the March quarter and the fourth quarter. But what needs to happen in terms of contracts coming in? And how dependent is that organic growth on different budget items or funding items?

We are -- right now, we have greater than 90% visibility to the full year revenue and the remaining less than 10% now is going to be follow-on to current production programs. So we're in good shape for this year for top line, and we're starting to look towards what next year is going to look like. So good visibility.

Great. And one thing from your presentation that was interesting. You discussed how -- you discussed that really compelling Torpedo recovery contract and how you had existing, like, maritime programs that are being folded into your new Maritime segment in conjunction with the Seemann's acquisition. How large in terms of revenue was your existing Maritime business? And what's your long-term view in terms of what other areas into maritime can you expand into?

Yes. Historically, maritime was not a significant portion of the business. There are a few contracts that was -- so the Torpedo work was one of them. So we had a few, not a substantial piece. So you should say the large majority of the maritime defense business that we reported in Q1 was through Seemann and MSC. And there was a substantially smaller piece that came from -- we parked it elsewhere in the portfolio given the size. So that's where that shakes out. The second part of your question was around...

Your long-term view.

Long-term -- long-term view of maritime?

You have Seemann and -- are there other products that you're developing or areas of maritime.

We have some -- so a lot of work that we're doing with submarines. And that's a great business to be in. Once you have a trusted relationship there and you can perform and deliver, that will be a long-term relationship. So I'm excited about that. There's work we're doing on the Ship-to-Shore Connector, which is, I think, like a hovercraft sort of a vessel. A lot of advanced materials work there, some very advanced composites work and looking at what more we can do in unmanned. So we're doing some unmanned -- some subsystems on unmanned platforms for naval customers today for primes. And I'd like to see what more we can do in unmanned. It's a crowded space, and the Navy has historically moved, I'll just say, very deliberately and intentionally, but in a very methodical way, to evaluate unmanned systems. And finally, we're starting to see maybe some larger procurement of those capabilities. It's a crowded space. And if we expand our footprint there, it will be for something really differentiated. So we're still looking at that.

Excellent. Well, that is the time we have for the main session. We have many more questions, and we will resume this in the Adler room on the second floor. Thank you very much, Jon.

Thank you.