KRMN earnings call transcript, November 5, 2026

Thanks for that.

The question, Peter, it's a, it's an important one. There's a fair amount to unpack here. You know, first off, we're, we're pleased with the progress on the long-term agreement negotiations. I think, as we predicted earlier this year, where those would take through the end of 2026 to, to negotiate. And we are on track. I think to that, to that expectation in terms of the ramp, it's a little steeper than I think we had originally forecast in the sense that the, uh, the, the rate of production is looking to go up pretty significantly on, on the, the, at least the missile types that have been defined for 2027 and. And, you know, sort of flatten, you know, over, over a period of time from there. So I would say we'll see the, the most steep acceleration in 2027 and then continue at an elevated rate after that. Uh, not, not growing quite as much year over year from that point forward. So in that sense, we like it because the ramp's a little bit steeper. Carmen has made the right investments and we're ready to capitalize on that. And we'll certainly take. that into account as we look to our 2027 planning with respect to the two remaining agreements. Those are a bit more complex in the sense that they will each span multiple missile types, some of which have had quantities finalized. And as those have been finalized, the agreements that we. We'll include part numbers, quantities, pricing by year, and those will be bookings in 2026. There are other missile types that will be, I'll say, framed out in the agreement in the sense that there'll be placeholders there for the final quantity.

And pricing by year to be added in. And I expect that to happen in the first and potentially even into the second quarter of 2027 until the full value of those bookings are realized. So you can expect to see a fairly substantial booking this year on each one of those agreements. And also. Some additional bookings in 27. That's great to hear. And just as a quick follow up, Chris, maybe you could just, you know, congrats on on cash generation and obviously moving that guidance up. Can you maybe just talk about working capital, the best way to kind of measure how you guys. And on your progress, you've talked a little bit about about that in your opening remarks, but just any more color there would be helpful. Thanks. Yeah, Peter, I think, you know, first and foremost, I am pleased to see our results in free cash flow in the quarter of 13 million dollars, right, while achieving the 25 percent organic growth. You know, that's given us increased confidence to hit the 20 million dollars plus in the second half that we talked about. You know, ultimately, a cash conversion is a function of growth and ultimately scale. But as we think about working capital and we think about the components of working capital, both contract assets lie. Abilities, inventory, accounts payable and receivable, those all represent opportunities for us to get marginally better over time. And we see those opportunities there in front of us, their priorities for us. And so that will ultimately drive our working capital down as a percentage of sales. Now, with our growth, we do expect.

Working capital to continue to be moving upward, however, lower as a percentage of sales. That should be a little bit of a tailwind for us from a working capital perspective and ultimately help us deliver increasingly growing free cash flow over time. Appreciate all the details.

Thanks, guys.

The deals we've signed so far, as well as the ones that are that are pending, will allow us to provide our customers a fair deal that gives them, I think, what they're looking for and also presents opportunity for Carmen in terms of long term visibility into production rates, the ability to optimize the factory, the ability to work with our. supply chain to receive more advantageous pricing. And so in total, I think it'll be a good deal for our customers and it'll be ample opportunity for Carmen to manage our cost profile and achieve the margins that that all have come to expect of us. That's great. It's good to hear that. And just changing gears quickly on international, leaning into international, John, I feel like is sort of one of the things that we've heard the last couple quarters. And, you know, as we gain more and more knowledge on the international opportunity for Carmen, maybe you can kind of share a bit of an update there on. Demand signals and the shape of that. Sure. You know, first off, we've had the opportunity to engage with the customers of Walker or as we've now named the business Carmen Europe. And the reaction to the acquisition has been favorable across the board. Customers are pleased with our having taken the time to personally. Engage and sit down with them and understand their priorities. So I think we'll continue to see strong support for the programs that the business has been engaged in. Historically, there are new opportunities that are being brought forth by those customers. And I can assure you I'm getting a weekly report on what those are and it's it's good opportunity.

to continue to expand the business. And we also have opportunities to support some of our current US customers by offering capacity and localized footprint within both the UK and the EU. And that's something that I think would be very attractive to you. US primes as they look to go, you know, further expand their presence in Europe when there's a lot of pressure to produce product locally and contribute back to the local economy. So I think from a number of different points of view, this is a positive acquisition for us and we're excited about the future. Appreciate the color. Thank you.

OK, that's great.

we should see those qualifications come through and that's when we really see the benefit of the second source opportunity so we've got a number of others that we're continuing to work and hope to make the list longer by the time we talk to you again next quarter but right now those are the ones that were selected on and moving along through call pretty nicely great thanks john your next question comes from the line of amit darianani with evercore isi your line is open please go ahead um thanks a lot uh i have two

as well uh maybe just to start with the free cash flow generation that we saw in q3 which is fairly impressive despite the organic growth can you can you maybe spend a little bit of time talking about what initiatives are really enabling this you know uptick in free cash flow generation if it's one time in nature or something more structurally and so how do you think about your cash conversion cycle as you go forward assuming that organic growth isn't a 25% zip code yeah and thanks for the question so you know not not one singular driver in in the quarter and for us again it's it's driving improvement across all aspects of it of receipts and disbursements and and the timing and the terms that we're agreeing to with our suppliers and with our customers ultimately so it really is a mosaic overall we did see a slight uptick in advances in the quarter and that's good and we continue to push for that with our customers but not one singular driver like as I mentioned there will be some bumpiness to cash flow and we do expect there to be you know over time some lumpiness and seasonality as we as we look out further but we you know do expect it to be you know favorable positive going forward and feel good about the working capital improving as a percentage of sales fairly consistently. Super helpful and then if I just look at the backlog number you know 1.7 billion is up I think over 100% year over year can you just talk about like how much of that was perhaps driven by you know pad and the LTA versus everything else and

so as you look at this backlog today how much coverage do you have for 27 revenues at this point thank you very much yeah so when we think about sort of the back the backlog you know the fad is was 218 of that one seven right of that LTA so you know there's there's a couple big chunks from from those LTAs overall Emmett you know sitting here today as we look at the backlog and we look forward to 2027 we're in range in terms of that conversion and what we'd expect to see tied in I think you know from our point of view when we look at some of those LTAs you have to remember that the backlog will convert over years you know further years into the future than maybe our typical historic bookings would convert and so there's a little bit of a longer tail to that so you know as we get through the fourth quarter complete our long-range plan and our aop i think we'll be able to give you a little bit more insight in terms of that what that conversion looks like and how that how that backlog will convert into 2017 but for sure a billion seven backlog for us does does really give us conviction in terms of continue to hit our organic growth mark growth marks of 20 to 25 percent and the mixing composition of what that backlog looks like it does does reinforce our 30 percent adjusted EBITDA as well to hit or hopefully exceed your organic growth as you go forward but congrats

obviously getting capability and capacity online by 2028 is is our priority jonathan has uh i'll give him a compliment while he's here in the room with me he did a great job i think starting to dig in aggressively this year to look a couple years out on the horizon at what our expected demand signals were going to look like and making sure we're putting the plans in place to make those investments so that we're always staying just a little bit out ahead of demand not too far but far enough that we're ready to take on that additional workload when it comes available so i'm feeling more and more comfortable as the months tick off here that we've got a good solid plan in place for investment and how we can continue to drive that capacity expansion to support the growth that's understood thanks um my second question um pertains to you know obviously retaining the 20 to 25 percent annual organic growth outlook um how does walker potentially impact that once it annualizes and starts to feed in to the um organic growth outlook yeah I think I think walker's organic growth outlook is not that different than Carmen's I think as the base business has come into the portfolio it's perhaps just a bit below but still well in double digit territory we are in the process of working through a you know pipeline update for that business and our anticipation is coming out of that pipeline update when we sort of roll in the additional opportunities we think we can develop jointly between Carmen and the legacy walker team will be able to get the the base business to you know a steeper level of growth

be more in line with that full 25% that we're shooting for across Carmen so overall I like the opportunity and I think it's going to be very much in family with the rest of the company and maybe just for clarification for next year up until the end of the third quarter walker growth will be inorganic right as we close in the third quarter of this year so we'll see that you know pop into our organic numbers we get uh into the last month of the third quarter into the fourth quarter of 27. that's understood um thanks for answering my questions i'll drop i'll jump back in the line your next question comes from the line of anthony valentini

with barclays your line is open please go ahead hey guys thanks for uh taking the question here um so the guide for 2027 on the margins uh seems to be flat year over year um you know you guys are talking about 20 percent um plus growth you know going forward i guess i'm curious if you guys can just help bridge a little bit of you know what are the offsets to maybe some of the overhead absorption you know whether that's like giving pricing on some of these new missile deals or you know the tool sourcing or increased investment if you can just kind of help us bridge you know how we continue to be flat that would be helpful yeah this is John I'll start off and I'll probably let Chris add a couple of comments after the first thing I'd say is that our focus since I've joined the company has been to create financial flexibility and the way I think about that is you know opportunity to reinvest further in the business opportunity to offset any pricing pressure we might feel because we might have a strategic you know reason to want to want to take a slightly lower margin on a particular job and we also want to have the opportunity potentially to put more to the bottom line and his increased margin performance so our priority has been first off that financial flexibility looking at how we can continue to realize operating leverage as the company continues to grow and scale and also as we look across the breadth of Carmen's infrastructure it would come as no surprise that for a company that was put together as a

combination of a number of smaller businesses there are a number of opportunities for us to continue to capitalize on to become more efficient as we continue to integrate the company so those are the two ingredients there it's increased efficiency and operating leverage the outputs are those three pieces of you know call it optionality that we're looking for in the back end with the goal to certainly sustain a 30 margin rate and make sure any dividends that come out of that financial flexibility are reinvested in a way that creates the most value for shareholders so that's uh you know sort of top level view chris anything to add to that yeah and i think when we think about margin for us it really is that mix right of high value product mix and specialized moats that we have in so many places and then the operational scaling that's enabled by frankly the capex that we're doing today and the backlog and the pipe line and the growth that we have should enable us to drive those gross margins in a positive direction and then sgna right it's about overhead discipline sorry gna sgna discipline and leverage and you know making sure that as we are scaling that we're dropping through gna to the bottom line but also making sure that we're making the right investments internally to be able to develop the staffing capabilities here to operate as a larger company okay great that's super helpful and then maybe to just another one if I think you guys are mentioning that there's two like dual sourcing opportunities are there any on the opposite end of that

you know that are out there that you know of where you guys might you know you're on something today and it might get dual sourced this is John I'll comment on that piece Anthony the short answer is nothing of substance nothing of consequence at this point in time from a second source point of view you know having been a prime myself for 30 years and having talked to our customers who are primes the first priority for them is surety of supply and the dual source initiatives are generally starting with places where there are pressure points in the supply chain where there is questionable capacity to meet the overall demand for the for the integrated systems and because Carmen has leaned in and invested ahead of need. We are not generally the priority for second source initiatives we have had and I've talked about previously one customer who has a desire to establish an internal insurance. Policy in the event that for some reason Carmen would have a shortage and inability to deliver at a point in time. It's a very small percentage of the total annual demand. The net increase for Carmen is still substantial year over year as we look at the future ramp and we're working. Collaboratively with that customer to help them establish that internal call to insurance policy. Other than that, there's really been nothing else that we're aware of in terms of substantive second source initiatives and we intend to continue to earn that right.

to keep that work by by delivering by performing and being a good partner. So that's I think it's a good news story and we're much more bullish on the second source initiatives is more of an opportunity for us to grow as compared to a need to defend. Great.

Thanks John.

Hi, Louis.

Hey, John, you announced how.

You established the framework agreement for the TAD system. And on the earnings call, you mentioned how you're on over 150 programs, including 10 of the 14 max. So I was wondering what was so unique about TAD that resulted in the framework agreement for that program versus the other nine Mac programs that you're on or even. And like the other 140 plus programs that you're on in that, like, do you have would you say less visibility or like less confidence in your long term positioning for the other programs that didn't result in framework agreements or. Like, are you still negotiating framework agreements for the other MAP program?

Yeah, thanks for that, Louis. It's a very simple and very straightforward answer to a very, very good question. The reason we announced THAAD with Lockheed Martin is because that is a relatively rare instance when we are under contract directly to Lockheed Martin as the prime missile integrator. That long-term agreement was for the shroud that goes on the front end of the missile, and the large majority of what we do across the MAC programs is more at the back end of the missile as parts of the... ...solid rocket motor, typically the nozzle that goes on the back of those motors. And those agreements are being negotiated with the solid rocket motor providers, and I'm sure you know who those primary providers are. So for each of those companies, we have a number of... the number of missile types we support with similar products that go at the back end of the missile. And, you know, we're negotiating those as a bundle. That's why the Lockheed Martin Agreement came out first, because A, they had their prime contract before the solid rocket motor providers had theirs, and also because the other two contracts... ...are a bundling of a number of different part numbers across a number of different missiles, so those are naturally going to take a little bit longer. So very, very good question, and that's the reason why.

Thanks, John.

Shifting to the second source opportunities, what has the competitive environment looked like when you're pursuing those opportunities? Is it kind of a competitive process with multiple players or is it more so focused on having like proven capabilities that are necessary for the customer and qualifying those and, you know, price the big differentiator? Just any color you can provide on how that process looks would be very helpful. Yeah, yeah, sure. And it is a mix. First off, I would say that, you know, price is a is a discriminator, certainly to the extent that they don't want somebody to be more expensive. than what they're paying today. But but overall, not necessarily the driver. The price is not the driver. It's more about capacity and and the surety of supply. In some cases, we've gotten phone calls from customers who have said, you know, look, we've we've seen from Carmen previously. proposal for this capability. Is this something you can still provide? You know, how would you be able to provide that on what timeline? And so there were some where we got phone calls and were asked to bid because of prior work we had done with those customers and they knew about our capabilities. There were other cases. where we were asked to bid competitively on opportunities to establish a new source. And one of the cases that we were selected was exactly that. It was a competitive process. Again, price was a consideration, but it was more about confidence in Carmen's capabilities and ability to deliver.

To support the demand increase. So, you know, whether it's an instance of us going and talking to a customer to explain our capabilities and to look for opportunities or sometimes picking up the phone, it comes from multiple sort of avenues. And the processes vary, you know, each to the next. Great.

Yeah, this is John.