Electro Optic Systems Holdings Limited (EOS.AX) Earnings Call Transcript & Summary

Good morning, everyone, and warm welcome to today's conference, the Drone Conference in cooperation with Dr. Reuter Investor Relations. It's a pleasure to have you all here today for this special roundtable. The session is dedicated to EOS, and we are delighted to have the chance to hear from their leadership team, CEO, Andreas Schwer. Andreas, I hand over to you. The stage is yours.

Thank you very much for your kind introduction. My name is Andreas Schwer, Managing Director and CEO of Electro Optic Systems. Electro Optic Systems, or EOS, is an Australian stock-listed company, but with operations around the world. We have large operations in the U.S. in Huntsville, Alabama, in Abu Dhabi in UAE, in Singapore and pretty soon also in Europe. Europe means U.K., the Netherlands, France and Germany. The company -- maybe some little bit on the background. The company was, in the 1970s, a research institute owned by the Australian government such as Max Planck in Germany. It was privatized in the 1980s and then went to the stock market in the early 2000s. The company was always driven from its first days by scientific excellence, by a huge innovation potential and a huge backlog of IPs. The company has had last year a revenue base of more than EUR 200 million. We have then divested a business, EM Solutions, which was doing satellite communication, which doesn't play a role in our overall company strategy. That's reason why the revenue is expected to be lower this year. Next year, our expectations are significantly higher, much, much higher. So we should hopefully have next year record numbers in terms of revenue. I will come back on some other fiscal figures like order intake in a minute from now. So we are acting globally and maybe some other words to what we have done in the past. In our early days in the 1980s, we started a business with what you can see in this slide, what we call space awareness, space intelligence, space control or even space warfare. We have been in the 1980s, partner of the U.S. government in a program which was called SDI, Strategic Defense Initiative, or Star Wars. During that program, we have been the partner of the U.S. industry, Lockheed Martin and Northrop Grumman to develop systems to engage against missiles and satellites from ground, but also from within space. That is a program which was very beneficial to EOS. So we have learned a lot in terms of laser technology, of highest accuracy tracking. And since that we are the world market leader outside U.S. in all those domains. We can track today any object in space down to a coin, down to a EUR 1 coin from ground over 10,000s of kilometers. That's the reason why for us it's also easy to track any object in aerospace, whether it's a drone, an aircraft or something else over large distance that is comparably easy if you compare this with our tracking capability against space assets and objects. Please move on. The company EOS is active in 3 business domains. One is our remote weapon systems business, so remote weapon stations, something like small turrets. We've invented this kind of product class in the 1980s, and EOS became the first contractor of this type of weapon systems to the U.S. Army in the 1980s. And since that, we are the world market leader. We are unbeaten in terms of accuracy and performance. We have never lost any competitive trial with those type of weapon systems, and we are at least 30% better in accuracy than the next best in class. And if you ask me why, the reason is, as I was just mentioning, our tracking capability, which goes back to our space activity. This is our backbone business today. We make about $120 million, $150 million of revenue with this business. It is profitable. It's 15% to 20% EBITDA. And we believe that we can, over the next 3 to 5 years, triple this kind of revenue, thanks to the market, which is extremely bullishing, and I'll come back in a second to that subject. So the remote weapon systems business, which is a success story for the company, it's complemented obviously by what I told you before, by our space intelligence and space control business. Here on the right side of this chart. This kind of business, we are doing the following. We are tracking any object in space. We sell intelligence data to NATO clients, to NATO partners, satellite information, information about military satellites, killer satellites from any hostile party. We can move space debris, we can track space debris, those kind of services we are selling. And we are now in the process of converting this business into what is called space warfare business by implementing our high-energy laser weapon technology into the optical chain of those telescopes, allowing us to put high-energy laser weapon impact on satellites. So by that, we can, in the first step, blind any satellite in space from ground. We can stop satellites taking pictures from ground. And in the second step, we can manage to disable satellites to destroy satellites from ground. That is groundbreaking. That is new and there's nobody other than EOS outside the United States of America being able to do those kind of things. And this is obviously hitting the absolute strategic core of the European strategy in military context. Billions over billions will be spent over the next 10 years to enable Europe to defend themselves against satellites and other space objects. So that is one avenue where we expect huge growth. Coming back to the middle, high-energy laser weapons, we are a world market leader in high-energy laser weapons, in particular, in the area of counter U.S., the anti-drone business. We have obviously based this technology on what we have done in the 1980s during this Star Wars program, but we have further developed that one. We have used also in-house funds to develop counter U.S. solutions, so a specific laser, which is able to engage against drones. I come back also in a minute on that one. If you please move on. The market in where we are acting with those 3 product lines is extremely bullishing. We expect huge upward trends, not only supported by the generic increase in defense budgets, and I don't need to explain you what it means in terms of NATO budget increase. You're all aware of the 5% target, and we are all on a good way to that to achieve those targets. It is predominantly driven by the appearance of a new threat scenario over the battlefield, which is -- please go to our next slide, which is the emergence of the drone warfare. In the Ukraine war, where, by the way, U.S. is very active, we have more than 250 of our remote weapon systems active in the field, defending high-value assets in Ukraine against incoming drone attacks. The Ukrainian warfare is a paradigm shift in warfare because it's not the classical ground-to-ground warfare anymore. There is meanwhile no more movement on the open ground. Everybody is hiding himself because of hundreds of loitering drones, of hovering drones being able to control the battlefield and being able to come down in a kind of kamikaze way to destroy any of -- any moving target on ground. This kind of threat scenario is characterizing any future context in any kind of conflict. And that's the reason why we need to develop weapon systems which are able to defend our infrastructure and our troops from being attacked by those kind of drones, and that is one of our core market. So EOS has 2 major objectives, 2 major strategic pillars. One pillar is to become the anti-drone company #1 worldwide. And the second objective is to become the space warfare company #1 outside the United States over time. I will give you further insight over the next few minutes. So when we talk about the anti-drone warfare, we are talking mainly about the drones belonging to the categories 1, 2 and sometimes 3. Why? Because 99% of all drone attacks are flown with this kind of low-end drones. We are not talking about the very large drones like the U.S. Reaper because they are not a threat on the field. The threat are really those Shahed type of drones, so drones of Class II mainly. Our effectors are made and customized to defeat in particular those type of drones. If you please move on. EOS has centered its capabilities around the anti-drone warfare. We have the broadest portfolio of effectors being able to engage against those drone attacks. We are active in what we call hard kill. Hard kill means we really shoot the object down by either kinetic kill, which means cannon-based air defense systems. With interceptor drones, so drones which will be launched from ground flying into the target and destroy the target. Third, by the high-energy laser weapons. And here, we have developed a family between 50- and 150-kilowatt output power. We are a world market leader in that domain. And also rocket systems which we can install in our weapon systems to fire against incoming targets. So we can see we can engage against any object in between 0 kilometer to up to 8, 9 kilometers. Obviously, we can also integrate missiles on our platforms, but from a cost perspective, that is the high-end solution. We do not concentrate on electronic warfare, on jamming. Why? Because that's a kind of commodity product which we can buy from dozens of suppliers on the market. And the Ukraine war as well as the Gaza conflict has shown that most of the militarized drones meanwhile are hardened against jamming or even are operated by fiber optic cables. Those fiber optic cables also disable any kind of jamming because there is no more signal which can be jammed. It's hardwired. So there is no way by jamming to defeat any drone in the future in the military context. And that's also the feedback which we receive and not only we, everybody from the Ukrainian war zone, all the generals are asking for hard kill options to get down all the drones as soft kill is becoming less and less effective. And that's the reason, again, why we are concentrating on the so-called hard kill options, and we have here a very broad portfolio of effectors. What you can see here is the entire value chain of the drone defense. We have most of the effectors in-house in our portfolio. All the blue boxes show you what we have in-house today. We are working very actively on the box in the middle, the so-called command and control system. That is the kind of brain behind any integrated counter UAS system. So we have in-house solution but we also pursuing market surveys to see whether we can acquire a company being already fielded with a system to enable us to offer our clients a turnkey solution, to offer a one-stop shop solution, not only able to have the entire brain, the network behind, but also to have the broadest range of effectors and some sensors coming with it. So that would push us absolutely in the leadership position, undisputably being able to offer to military clients as well as to homeland security or commercial clients like civil airport operators, an end-to-end solution. So if you go to our first class of effectors, the remote weapon systems, obviously those are systems which were designed in the past to go against ground-to-ground targets. So they are used in the kind of traditional war scenario. We have, by far, the broadest range from very small, the R150 to very heavy R800 comparable with a fully fledged medium caliber turret system. Our systems are much lighter than anybody else, allowing you to put very heavy weapons, very powerful weapons on very, very small platform. That is what the clients want to see. And as the trend goes to more -- towards robotic vehicles, remote weapon systems, we become the option of choice to equip those systems with a strong weapon system. And you can put any kind of weapon on those platforms, whether it's machine guns, whether it's medium caliber cannons, whether it's rocket systems, whether it is laser dazzle up or missile, or any kind of effector you can put on those stations. There are multipurpose carrier platforms. And now what is coming into play is the anti-drone warfare. I mean, in the past, it was all ground to ground or sometimes naval applications. We are also active in the naval domain. Now with the Ukrainian drone warfare, we have derived very specific versions of our systems to be able to engage against drones. We have equipped them with specific radars. We have optimized the software. We did some other modifications to allow us to be most efficient against drone attacks. And I can tell you that we have participated to many trials, live firing trials this year in the U.S., in other countries, and we have always won and succeeded in all those tests. They were always comparative. So we were always shooting against our competitor systems, and we have never lost a single of those -- single one of those competitive trials. The most important one was one operated by the U.S. Army this year in cooperation with Northrop Grumman in the U.S. During that test, also here, we have succeeded. We have shut down 100% of the drones. Nobody else could manage that. And in consequence, the U.S. Army has decided to use this system, which we call the Slinger product as their baseline for one of their most important type of fighting vehicles. And we are in a position to announce in the very next few days a very important order intake to become the sole supplier for this particular fighting platform for the U.S. Army. That's a breakthrough for EOS because over the last 10, 15 years, the U.S. Army was kind of close market for us, and that's now the entry point, back again into the largest client base. So this is the Slinger. We also have been down selected by the British Army. The British Army was also participating to this trial, and they were so enthusiastic about our performance that they said, we want this to be produced in England for England. And they have requested our U.K. competitor, MSI, to become a partner of EOS and to get a production license for this product in the U.K. This is what we have done. So in the future, we will produce through our partner MSI in England for the British Army. Also, the French government has indicated that they want to select in the future, not a French weapon station, but this EOS weapon station for the same reason, for the reason of accuracy. And we are in cooperation talks with the French supplier, KNDS, to become also their partner for the future French demand. So we see step by step, we are growing into those markets. And I need to explain you a little bit the background. In the past, U.S. was not very active in key markets -- in strategic markets. U.S. was concentrating its business on a few countries, not driven by commercial success, only driven by scientific excellence and perfectionism. That has changed now. We are reaching out to all those key markets, like the ones I was just mentioning, Germany, U.K., France and so on. And we do this usually in a partnership mode. So we select local champions as our partner to minimize our CapEx exposure and to minimize our time to market. I've given you some examples on U.K. and France. And in Germany, our partner is the company Diehl, the missile company. So we will produce those weapon stations in the facilities of Diehl in Germany and by that have much less effort in terms of time and money to acquire the German market. So that's our weapon station business. It is -- again, it is highly profitable, and we are becoming the kind of quasi standard in our domain worldwide with those type of weapon systems. Let's go to the next one, the high-energy laser weapon business. High-energy laser weapons, there are only very few companies around the world being active in this domain. And why is this laser weapon business becoming so important in the future? It's not only but predominantly because of the anti-drone warfare as well. The laser weapon has the following key advantages over any other weapon system. You do not need any ammunition. No problems with ammunition supply, no problems with ammunition cost because you're just using energy, you're just firing light. So the cost per shot is the cost to generate this energy, which is an average about $1 to $4 per shot. So $1 to $4 compared to a missile attack with $400,000, $500,000, $600,000 or an attack by a rocket system, $20,000 or an attack by a cannon. A cannon shot, depending on the mission, is between $50 and about $2,000. So this here is extremely affordable, extremely high value for money because it's only $1 to $4 per engagement. That is the key -- one of the key advantages. Another advantage is that we can kill up to 30 drones per minute. The reason is that an engagement to kill a drone is only about 1 second and to slew over from one drone to another one takes us less than 1 second. That's the reason why we can kill 30 drones per minute. If you do the comparison to cannons or to rockets, missiles or any other thing, they can only cope with 4 to 5 kills or engagements per minute. So the laser weapon is much more agile. And by that, he can kill, or he can defeat and protect critical infrastructure against the attack by large quantities of drones by so-called swarm attacks. The future in defending critical infrastructure, it's all about to kill as many drones as possible in the shortest time possible. Those kind of attacks we are seeing now every day in Ukraine, but also the Ukrainians, as you might remember, have attacked Russian airports far in the backyard of the Russian territory. And they have launched from a container sitting next to an airport, hundreds of drones. How do you want to protect your airport against those type of attacks? You have to have defensive systems capable of shooting down 100 drones per minute. So that can be only achieved in a clever combination of those laser weapons with interceptors and some cannons. Without laser weapons, it's close to impossible to shoot down 100 drones within a minute. So the laser weapon is extremely agile, but it also allows you to shoot into the vertical. No other weapon system can shoot vertical for technical reasons. The problem those days is that many attacks in Ukraine are flown by kamikaze drones. Those drones, they fly down at a 90-degree angle, and you can only defeat them by using laser weapons because any other weapon system has a maximum elevation angle of 70 to 80 degrees. So all those aspects are clear advantage of the laser weapons. The laser weapon has one disadvantage. It is susceptive of weather conditions. That means if it is extremely humid, if there's heavy rain or even if it's extremely high temperature like a desert type of degrees, 40, 50 degrees, that the power level or -- sorry, the efficiency goes down. How do we compensate for that? We compensate for that by just increasing the power level. That's the reason why we are offering laser weapons in the power domain of 100 to 150 kilowatt, whereas you only would need 50 kilowatt at good weather conditions to kill a drone. So if we just double the power level, we can still compensate for those kind of humidity effects and still being extremely effective. So EOS has been the first company worldwide being able to sell a 100-kilowatt laser weapon to an international client. We have managed to sell to the Dutch government in August the first laser weapon for a price of EUR 71 million. That price includes lots of so-called nonrecurring, so onetime efforts such as the local development of a cooling and a power system, the integration into a multilayered air defense system which was already in existence and lots of spare parts, training and other activities. The normal kind of recurring price for 100-kilowatt laser weapon is between EUR 40 million and EUR 45 million in low quantities. And if you order larger quantities, a larger quantity means 50 pieces and above, then the price will go down to EUR 20 million to EUR 25 million. So it is very affordable, and the price then is lower than the price you have to pay for one main battle tank. So those systems are delivered in a containerized solution. Those containers can stay on the truck. They can move around, but they can also be dismounted. And whenever we protect critical infrastructure such as an airport, most of the clients want to have them somewhere sitting down and connected to the local power grid. If you don't have this kind of option to be connected to a power grid, you operate by your onboard batteries and your onboard power generator. We have stout energy to allow up to 300 kills without being forced to recharge the batteries. And only after you have killed 300 drones, you need to recharge the batteries. That gives you lots of operational flexibility. So please move on.

Thank you so much, Andreas, for the insightful presentation. We have a couple more minutes or for you to present, but then we would need to move forward to the Q&A.

Okay. Good. So EOS has recently acquired an interceptor business. This interceptor is unique on the market. It is coming from a very low production price. We can sell it for less than EUR 10,000 per piece. It is unique in its speed. It flies directly into the object, and we can launch in dozens, in even hundreds at the same time, allowing us to defend drone swarm attacks. Please move on. So this is our latest product, we should not go into the weapon station business. We have discussed it already. We can also go on. So we've tripled the order book from about 130 million last year to about 400 million now, and we still expect some further orders to come in before year-end. So in terms of order book, we have done a really successful year. Next year, that's our forecast will be another record year in terms of order intake, thanks to laser weapons, we expect some further laser orders coming into the company. And as each laser weapon is selling at much higher price than a weapon station, we expect the revenue to go up drastically. And our expectation is for the mid and long term to make a quantum leap in terms of revenue expectation. So every country has on their plan to procure hundreds of laser weapons, and you can make your own calculation. There's only one competitor in the market for 100-kilowatt systems which is an Israeli consortium. There's nobody else on the world market active on 100-kilowatt laser weapons. And European competitor is lagging still behind. The best one is the U.K. consortium working on a 50-kilowatt solution ready by 2028. The Germans are still at 20 kilowatt and the French at 5 kilowatts, so there's almost no competition other than the Israeli consortia and ourselves for 100 kilowatt. That gives us lots of confidence to drastically increase our revenue and earning base over the next few years to come, starting with next year. Maybe we can leave it with that. Maybe one last sense on space warfare. We will put those lasers into our kind of space warfare type of platforms. Also here, we have stationary platforms, but we are working also on a mobile solution called Atlas. The mobile solution allows you to kill any satellite from ground wherever you are on this planet, which allows our allied forces to defeat any, for example, Russian and Chinese satellite whenever they want. That is a key war decisive capability which is coming now into the focus of most of the governments. The German government has reserved EUR 40 billion of budget for those type of weapon systems over the next 10 years, just to give you an illustration, that's the reason why we have decided to build up operations in Germany, predominantly for high-energy laser weapons and for space warfare type of product development and production. I would like to leave it with that, and let's go to the questions, please.

Thank you so much, Andreas, for the insightful presentation. We move now forward with the Q&A session. [Operator Instructions] And I would like to start actually. So regarding the plans for Europe 2026, could you please explain this a little bit more to us?

So we've taken the decision to open up operations in Germany because the German defense market is by far the biggest one. So we will start with a local production of laser weapons in Germany and in the second step also to provide local production capability and assets for space warfare. Our remote weapon system business, we execute through our partnership with the company Diehl. Our partner in the laser weapon business is Helsing in Germany and for space warfare, it's OHB in Germany. There's always a country-by-country type of collaboration scheme in place. In France, we do the same. We've just created a company in the Nice area. And in U.K., our footprint will be defined by the acquisition of this interceptor business, which is close to Bristol. So yes, we will have operations and production in all those major countries. And obviously, the Netherlands will play a key focus as they've been the first clients for our laser weapon business. So also in the Netherlands, we will do production.

Thank you so much. We received another question from the chat. Given the increasingly hybrid nature of the conflict in Ukraine, what roles does EOS see itself playing with regards to protecting critical infrastructure well behind the front line?

You have seen that at the end, it's only hard kill who is protecting those kind of infrastructure. We have to discriminate between the military and the civil infrastructure. If it's a civil infrastructure, you cannot use missiles, cannons or rockets, you have to use things which don't create collateral damage or panic reaction by the people. So it's predominantly driven by laser weapons because you cannot see, and you cannot hear them and by those kind of interceptor drones. For commercial -- for military installations, this will be accompanied and complemented by hard kill effectors like cannons and missiles and rockets. But we can offer this kind of multilayered approach. So we believe we will play a very central role in the European program called drone wall and other kind of big programs coming up.

Thank you so much, Andreas. Then we received another question. What role does EOS see AI playing in conflicts in the future?

Excuse me, which role does?

What role does EOS see AI playing in conflicts in the future?

Okay. AI plays a very dominant role. Why? Because future drone attacks in swarms will be complemented by AI-driven swarm intelligence. That means swarms which a human being cannot understand within real-time considerations. So you need to have AI intelligence in your defense systems, being able to predict those kind of movement patterns and to be able to shoot down those drone swarms in a most efficient way. We are already preparing for that. We have AI algorithms in our systems, and we will further invest into AI by either organic growth or by an acquisition.

Thank you so much. And then received another question. What impact do you see of potential peace process in Ukraine?

This peace process has a little to no impact on us. Why? Because all the army depots, all the stocks are emptied in western world. It takes up to 7 -- minimum 7 up to 10 years to refill those kind of emptied stocks and to go even higher as everybody wants to have more and higher stocks than prior to the Ukraine war. So we are very confident that has no impact. Moreover, there's no cannon-based air defense anymore in existence or that has been stopped many decades ago. And because of the new drone threat, everybody has to reinstall those kind of cannon-based air defense systems. Also, this is something where everybody starts greenfield which will be a trend for the next 5 to 10 years at least. Plus, again, all the laser business which comes now into play. And here, we are quite unique on the marketplace.

Thank you. Another question. Could you please summarize what development work still needs to be done on the laser weapon before it is delivered to the Dutch Army?

There's no development work to be done. The product has been fully developed. We do know a Dutch kind of qualification and an integration into the air defense system. So it's a kind of normal production cycle.

Thank you so much. And this is also the last chance for you, the listeners, to post your question via the audio line or via the chat. And let's see, we received another question from [ Peter ]. For Land 156, how does the technical integration work between EOS, Slinger, hard kill and DroneShield's RF detection systems? Is there direct communication between the systems?

So first of all, we have won the Land 156 program which is a $1.3 billion program, together with our partner Leidos from America. This consortium does not include DroneShield. DroneShield was coming in with their own offer, and they have not been selected by the client. So the solution which is in the Land 156 is based on our hard kill plus a soft kill option which comes from a competitor of DroneShield. So we have not to integrate with DroneShield, but we can easily integrate with DroneShield, and we have already offered together in other applications and other programs successfully together. But in Land 156, they're not part of the picture.

Thank you so much, Andreas. As there are many more questions but we are running out of time. I kindly like to ask you to also contact EOS if you wish and should further questions arise, I'm sure that Andreas will answer them. Thank you so much from our side, Airtime. I hand over now to Andreas for some final remarks.

Yes. So I think that EOS is in a unique position. EOS has, from a portfolio perspective, the most critical assets in order to defeat drones in the future. We are well positioned. We are world market leader and the benchmark technology and performance-wise in all what we are doing with the laser weapons coming into play now and laser weapons you need to have in order to protect the infrastructure. Each country has a list of up to 500 assets to be protected. Each assets needs at least one weapon station, and there are only 2 competitors out in the field. That gives us a prominent chance to take at least 50% of the total market on laser weapons outside the U.S. And the same will happen in space warfare, maybe with 2 or 3 years of delay where today there is nobody other than EOS being able to deliver capacity to kill satellites from ground. That is giving us the next quantum leap of order intake and revenue and earnings growth, and we are very confident to turn this company into multibillion-dollar enterprise over the next 5 years. Thanks for your interest in EOS. And as it was mentioned before, we are ready to receive any kind of question by e-mail, phone or any other channel.