Kraken Robotics Inc. (PNG) Earnings Call Transcript

Good morning everyone and welcome to the Kraken Robotics second quarter 2026 results conference call. As a reminder, all participants are in a listen-only mode. The conference is being recorded. My name is Jamie and I will be your operator today. Following prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star and then 1 on your telephone keypads. Should anyone need assistance during the conference call, they may reach an operator by pressing star and zero. I would now like to turn the floor over to Sean Madian, Director of Capital Markets.

Good morning, everyone, and thank you for joining Kraken Robotics' earnings call. The three and six months ended June 30th, 2026. Before we begin, I want to remind everyone that certain statements in this call may be forward-looking in nature. Matters discussed, including management estimates, statements involving known and unknown risks, uncertainties and other factors, could cause actual results to differ materially from those expressed or implied in our forward-looking statements, which reflect the company's judgment based on information available at the time of this call. I'd also like to refer you to the forward-looking statements, risk factors, and additional detail on non-IFRS financial measures we have provided in our AAF, release MD&A and presentation, which are either available on CEDARplus or our website. Otherwise stated, all dollar amounts mentioned during this call are denominated in Canadian dollars. Joining today's call from Kraken Robotics is Greg Reed, Chief Executive Officer and Joe McKay, Chief Financial Officer. I'll now pass the call over to Greg for his opening remarks. Greg?.

Good morning, Sean, and good morning, everyone. During today's call, we'll start off with some key highlights during the year, a quick review of our second quarter results, followed by an update of our business post the closing of our transformative acquisition of Covalu Group, which we close on June 1st. July 2nd this year, so just after the quarter ended. Some recent highlights, looking back at our results during the second quarter in the first half of 2026, we continue to focus on building the business for long-term growth. In addition to closing our Cobelli acquisition, these growth initiatives were supported by five key points. First, our enhanced organizational structure, which includes several new additions to our senior leadership team. 355 million of product orders to date in 2026 for both Kraken and Covilia, including over 27 million incremental product orders since our last corporate update in July. An expanding customer base with new customer relationships, including a recent long-term master supply agreement with an international manufacturer of extra large UUVs, or what's known as XL UUVs, and increase manufacturing capacity, including our new facility in Nova Scotia, Canada, alongside our new building at our campus in the UK, which we take possession of in Q3. Lastly, our ongoing discipline to maintain a strong balance sheet. Through our Covalia acquisition, we have significantly increased our technological capabilities, total addressable market in the overall ocean economy, and our ability to provide both products and services to a range of customers with our dual-use technologies. We are in the early stages of what we believe will be a significant growth cycle. This growth is expected to be driven by the defense industry due to geopolitical drivers and industry upgrade cycle and the changing nature of warfare towards autonomous and hybrid fleets. For commercial sectors such as offshore energy, companies are continuing to transform to automation and robotics to deliver long-term reliable energy in a safe and cost-effective matter. This cycle is already occurring with applications of our technology already in various end markets, such as mine countermeasures, intruder detection, critical underwater infrastructure inspection, anti-submarine warfare, and intelligence surveillance and reconnaissance, among others. On a similar note, our commercial applications include projects relating to asset integrity for key infrastructure, marine construction, offshore oil and gas, offshore wind, cable installations, subsea mining, carbon capture and storage, and maritime shipping, in addition to ocean science and environmental research. As a trusted engineering group to the challenging maritime industry, we continue to work with our customers on such projects and help to develop new solutions that will require our systems and technology. Before I pass things over to Joe to review our Q2 results, I want to expand on a new organizational structure, which we created as part of the integration plan with Cobellia, alongside some of the key appointments we have made to the team. Our new structure consists of crack and group, led by myself as CEO, and several executives focused on the financial governance corporate development, legal, enterprise systems and security, and human resource related aspects of the overall business. Reporting into the Kraken Group is a clearly delineated Kraken Robotics operating business that is led by Bernard Mills, who was recently promoted to president from his previous role as executive vice president of Kraken's defense business. Bernard brings a wealth of experience from running large global organizations and previously served as CEO and managing director of a subsidiary of the Airbus Group. Prior to that, he was president of Ultra Sonar Systems, a division of Ultramaritime, who are a leader in anti-submarine warfare solutions, required by Lockheed Martin. As illustrated on slide 8, the operating side of the business will include teams led by various members from Covalia and Kraken, alongside a new recruit, Joanne Roberts. Based in the UK, Joanne starts in October and brings relevant experience from defence companies such as Drum Range, Ultra and Calus. This structure allows us to integrate Covelia alongside its various subsidiaries in an efficient manner with clear leadership and accountability, structure go to market and ensuring we develop the connective tissue between our previously independent organizations. With this new organizational structure, our integration efforts are well underway, including identified revenue enhancement opportunities and execution against our targeted cost synergies. With that, I'll now pass the call over to Joe to review our.

our Q2 results. Joe? Thanks, Greg. As a reminder, our second quarter results do not include any contribution from the conveyor acquisition, which closed subsequent to the quarter. Q3 ended September 30th will be the first quarter of the combined financial results. We expect to report our Q3 results on November 24th. Consolidated revenue for Q2 totaled $27 million, including product revenue approximately $17 million and service revenue of over $10 million. Product revenue during the quarter continued to reflect strong demand for Kraken SAS and sub-sea battery products, and included the delivery of a spare catfish tow body that will be used by a European Navy customer for its mine hunting program. Product revenue during the second quarter was negatively impacted by $1.5 million due to a change in scope associated with an integration project that is nearing completion. Excluding this impact, consolidated revenue during the quarter increased approximately 10%. On a product revenue basis, year-over-year growth would have equated to 11% during the quarter and 25% for the first half of the year. Service revenue grew 6% in the quarter on a year-over-year basis, or 9% for the first half of the year. Quarterly revenues in year-over-year comparisons in this segment of the business can fluctuate significantly due to the timing of products and seasonality in the offshore energy business. Gross profit during Q2 increased to over 16 million, while gross profit margin remained strong at 59%, up slightly over the prior year. Adjusted EBITDA in the quarter increased slightly to 5 million, resulting in adjusted EBITDA of a margin of 18% in line with the prior period. Excluding the impact from the change in scope mentioned earlier on the integration project, adjusted EBITDA margins in the quarter would have equated to 20% with adjusted EBITDA growth of 26%. Capital expenditures and tangible assets purchased during the quarter totaled just over $9 million compared to $6 million in the prior year. These expenditures were for new marine assets to support revenue growth and additional tools and equipment related to Krakow's new subsea power manufacturing facility in Halifax. Our balance sheet remains strong at the end of the quarter, with cash transition of just over $91 million and working capital of $152 million. Long-term debt and obligations and lease liabilities were approximately $40 million, and Kraken continues to maintain a strong balance sheet subsequent to the closing of the Covea transaction with minimal debt. Minimal net debt, I should add. On July 2nd, upon the closing of the CAVEA transaction, we issued 2026 guidance to reflect approximately six months of contribution from CAVEA. This guidance remains unchanged. For 2026, we expect annual revenues of $209 million to $320 million, adjusted EBITDA between $65 and $60 million. 75 million, and capital expenditures in the range of 27 million to 33 million. In terms of revenues, over 75% is expected to be comprised of product revenue with the balance coming from our service business.

I'll now pass the call back to Greg to discuss further updates on our look at our business. Thanks, Joe. Excuse me. Thanks, Joe. As we focus on the new track and moving forward, including Covalia, we're very excited about the opportunities ahead of us in both defense and commercial markets. We're now a global organization with a highly specialized workforce of approximately 1,200 employees, over 450,000 square feet of production capacity. and a strong portfolio of dual-use technologies covered by more than 110 active or pending patents. Our combined technology is integrated across a large number of major OEMs from crude systems, such as ships and submarines, alongside various uncrued systems, including AUVs, unmanned surface vessels, and ROVs. For those following along on our webcast, slide 12 is just a small subset of some of the various OEM platforms our technologies are integrated on. As each of these verticals expands, we have an opportunity for continued strong growth, including new customer relationships and cross-selling opportunities. After announcing our acquisition of Covelia, we've received positive feedback from many customers who are looking forward to working with our combined engineering teams. And we've already been discussing integrated subsidy technologies technology solutions and new applications with such clients. As defense spending and the adoption of autonomous vehicles continues to accelerate as part of maritime security, Kraken's well-positioned benefit through increased product and integrated system sales. This includes subsea batteries, various sonar solutions, navigation and positioning systems, and imaging payloads, amongst other technology within our portfolio. Our dual-use technology also supports offshore energy customers through various phases of their project lifecycle, including discovery, construction, pipe or cable installation, installation, inspection, repair, and maintenance, monitoring, as well as decommissioning. This exposure throughout the entire value chain places us in a strong position to benefit from our long-established customer base at a time when energy security is becoming increasingly important. Beyond crude or uncrewed vessel platforms, our acquisition of Covelia expanded our total addressable market into stationary sensors that sit on the ocean floor or are in the water column or on the ocean surface for monitoring and communication purposes. These sensors in effect act as satellites of the sea, providing various end market applications, such as intruder detection, anti-submarine warfare, offshore oil and gas seismic data, and monitoring carbon capture projects, along with monitoring subduction zones for ocean science. These types of monitoring applications provide us with various opportunities for both product sales and long-term service revenue. For example, our Sentinel intruder detection system automatically detects, classifies, and tracks subsea threats from divers and swimmer delivery vehicles to AUVs. At hundreds of critical infrastructure sites, such as power plants, liquid natural gas facilities, desalination plants, and other waterside properties. This product has been used significantly in recent years in the Baltic region, the Middle East, Asia Pacific, and other European countries, and continues to be in solid demand today. Another is our on-demand ocean bottom nose, or OD-OBN. This is a new breakthrough technology for the offshore oil and gas industry that our Sonar Dynastos Ciderary has been working on in Brazil with a major opportunity. operator in Brazil since 2018. This technology allows operators to conduct more frequent on-demand seismic surveys with higher fidelity data and at a fraction of the cost of conventional seismic survey methods. We expect this product to move into the commercial phase in 2027. On the defense side, the current situation in the Strait of Hormuz is only one example of various threats that have taken place on strategic choke points throughout the world and highlight the importance of maritime security to the overall economy. We continue to see a strong pipeline of opportunities and growing interest in unmanned underwater vehicle solutions for mine countermeasures and critical underwater infrastructure, which includes recent demand across North America, Europe, the Middle East, and Asia Pacific. We expect several new and upgrade programs to be awarded to industry starting in 2023. and have been permanently building our teams and inventory in anticipation of these potential awards. Before closing, I think it's worth touching on some recent industry consolidation that's been announced during the past quarter. The maritime domain is seeing increasing focus across defense and commercial budgets. The oceans are getting more connected, the undersea domain is getting more contested. Maritime security, whether it's for port and harbor security, the littoral waters, or the deep blue ocean is increasingly in focus, driven by geopolitics and energy security. As we've highlighted before, we operate in an industry that requires a highly specialized workforce with extensive experience in the subsea domain, given the physics and the harsh operating environments. This creates a high barrier to entry to establish proven technology. There are also challenges in displacing technology that's already integrated on established platforms. It's for these reasons that we aren't surprised to see consolidation, including sizable transaction and maritime defense companies, as well as defense companies with expertise in other domains such as land, aerospace, expanding through acquisition into the maritime domain. We believe this industry consolidation reaffirms our strategic direction to acquire Covalia to create a global supplier of mission-critical subsea intelligence solutions for maritime security and offshore energy. It also underscores the strategic value of our business and further narrows an already limited competitive landscape of mid-sized players. We retain a strong competitive position in the marketplace with mission-critical dual-use sensor and power technology, and the fact that we remain a platform-agnostic, independent supplier to the uncrewed underwater vehicle and the uncrewed surface vehicle market. Crack is well positioned in this growing market with long-standing customer relationships in both defense and offshore energy, strong product portfolio and applied integrated solutions, outstanding R&D capabilities for product innovation, and significant production capacity that's already in place. With Crack, we're able to provide a wide range of services, including a wide range that we'll wrap up our prepared remarks. I'd also point you to our website, crackinrobotics.com for more info and we update our website regularly including our financial filings and other updates and you can find our financial filings on CDAR+. I will now pass the call back to the operator.

Thank you. We will now begin the question and answer session with analysts. To join the question queue, you may press star and then 1 on your telephone keypads. You will hear a tone acknowledging your request. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our first question today comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead with your question.

Yes, good morning, Greg. Good morning, Joel, and congrats on the strong execution. Yes. Thanks, Ben. Yes, on the battery side, could you talk whether you're seeing any customers move their battery manufacturing process internally? Yes. Yes, I'll talk to that then.

We can't talk about specific customers, but our battery customers, they rely on us for rechargeable pressure tolerant batteries. You can appreciate that our customers build products that also do not need rechargeable pressure-tolerant batteries for every product. and for just to give an example these batteries can be for aerial drones surface drones shallow water AUVs that don't need pressure tolerant batteries some of these shallow water AUVs are not intended to return to home base. And so, thus they don't require a rechargeable battery. So those are some areas of the battery ecosystem we don't play in. And I think, you know, comparison can be seen on the sensor and the sonar side of our business where we've been selling systems into the UUB, ADB space for several decades. Our customers who make these vehicles also have internal sensor and sonar expertise, just like they might have battery expertise, but that doesn't mean they're designing and building their own sensors and sonar. So a similar analogy applies to pressure tolerant batteries for underwater vehicles. So the short answer is no, we're not seeing our customers manufacture crack and equivalent batteries in-house. That would take away our demand. In fact, it's quite the opposite, Ben. Okay. and to a narrative that another analyst recently referenced. So a few more comments on that. As a company whose expertise on this dates back more than 15 years on the battery side, subsea batteries, our engineers are leaders in underwater battery expertise and we'll work closely with our customers performance and reliability that meets the requirements. And I think finally, to kind of wrap it up, As I mentioned in my prepared remarks earlier, we recently signed a long-term master supply agreement with an additional manufacturer of XL-UUVs for our batteries. We've also started to supply batteries to two other XL UUB OEMs. and obviously fielding inquiries and quoting several other OEMs who are developing or planning to develop both large diameter and extra large diameter UUVs. So overall, the past, call it 12, 18, 20 months or so, we've added almost 10 new UUV battery OEMs as customers. customers, and they're located in North America, Europe, and Asia. And so we expect our subsea battery business has long legs to it. We'll continue to see strong growth for that in the coming years.

That's very good. No, that's very good caller, Greg. And maybe specifically for the CAM program, what is the timeline on this and how Kraken is positioned with the potential contenders? I think we are up to four contenders right now. I believe there was one addition not too long ago.

Yes, again, given too much detail on customers, it implies too much detail on some of our customers. But yes, there's four so far, and we're on several of those platforms. one that we are not on. We've got discussions and we'll see where that goes if that becomes an opportunity. But you know it's kind of like both for our batteries and our navigation systems and our solar and our optical systems. We are the agnostic independent supplier and we've got great from our technology and so we will continue as the industry grows we expect to be on lots of these platforms.

Okay, and last one for me before I pass the line. You reiterated your guidance for 2026. Could you maybe provide some color about the cadence of revenue growth between Q3 and Q4, and maybe what's missing in terms of order activity in order to reach that? the bottom end of your guidance. Thank you. I think obviously the second half of the year, you know, the.

the majority of the growth is obviously going to come from the CAVEA transaction. We do also expect an uptick in service revenue just based on timing of certain oil and gas projects. And then obviously, you know, we have to probably win, you know, a certain catfish contract that we were expecting. But in terms of the second half, I would kind of guide you to wait it a bit more to Q4 over Q3.

Okay, that's great, caller. Thank you.

Thank you. Our next question comes from Kevin Krishnaratne from Scotiabank. Please go ahead with your question.

Hey there gentlemen, good morning. Just following up on the guidance question Ben will ask, on the seasonality Q3, Q4 stronger than Q3, do we also expect that on the services side, both on the services and the product side, that we would expect Q4 to be stronger than Q3?.

Yes, that would definitely be equivalent to both products and service. Q4 would be stronger.

Okay. And I just also on the catfish, did I hear you correctly that in this quarter, you won an order, but was that a spare unit? And was that within your expectations to land in Q2?.

Yes, we have a spare tow body that we shipped to a European Navy, so just the tow body, no ALRs, just a yellow.

stations, yes. Okay, got you. And then maybe for Greg, it's been some time since you gave us an update on the pipeline. I think it was maybe two billion, over two billion last April. So I'm wondering if you have any thoughts on where you stand today. I mean, you certainly had a lot of, you know, You talk about this new long-term MSA. You've got the 10x vendors in there. So I'm just wondering if there's a, you know, in Covalia as well. So any way you can give us sort of where you stand today in terms of the pipeline?.

Yes, so I think overall, Kevin, what we reported in the past as an independent company and now combined with Covalia, I think as we get later in the year and then when we start to give 27 guidance and then medium term guidance several years out, you'll get a lot more color on that. So I'm not going to state a specific pipeline number right now. we always have to say directionally it's obviously significantly higher than it would have been a year ago,.

both for Kraken and for Covelia as independent businesses. Okay, maybe just the last one then just to Joe, just on the revenue recognition reversal, one and a half million in the quarter, does any of, do we expect any more of that in the Q3 and Q4 that we need to be aware of? And then I'll pass the line.