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

Thank you. Good morning, everybody, and thank you for joining this call at short notice. Today, EOS is announcing a capital raise to support growth, and we have launched this morning an ASX announcement and the presentation that goes through that material. The material is being presented on the screen, and we're going to step through that material, and we are going to take questions at the end. A couple of opening remarks from me and then Andreas will take over. So on Friday last week, we announced the acquisition of MARSS. The acquisition has been updated since it was announced in January. And the context for the changed arrangements on Friday is a significant change in the circumstances of the MARSS business, mainly due to the war in the Middle East. What we have seen since we cut that deal in January is the outbreak of war in the Middle East has led to MARSS product being used again and again to defeat drones of customer -- attacking customer countries in a number of locations in the Middle East. The outcome of that is that the leadership of several countries in the Middle East has seen firsthand the MARSS NiDAR command and control system to defeat drones that are incoming to places like Royal residencies where the leaders are. And as you can imagine, that's a very credible demonstration of the MARSS product. The outcome of that is that inquiry levels and demand for the MARSS product have gone up a lot. And in particular, we announced on Friday that the MARSS business had secured a new customer with a country in the Middle East. We also announced on Friday the order book of the MARSS business is over AUD 200 million. And in short, as I said, the value of the MARSS business has increased since we announced the acquisition originally back in January. In discussion with the vendors, we decided and we agreed to increase the consideration to the MARSS business. We did not change the upfront price, and we did not change the ratio in the earn-out, but we did, as we announced on Friday, increase the cap on the earn-out. Specifically, we increased the cap from a EUR 100 million earn-out on EUR 500 million of orders to a EUR 140 million earn-out on EUR 700 million of orders. So that's an increase in the cap. So we're seeing a very strong growth in the MARSS business over the last 3 months. We are also seeing a very significant growth in the opportunity pipeline of the MARSS business, and we're going to talk about that just a little bit more on this call. In the base EOS business, we are also seeing, as we've announced, strong market tailwinds that are helping us grow the order book. We recently announced an increase in the order book during the first quarter to over $500 million. So today, we are seeking to raise equity to support growth opportunities in the business, and that's to give us the flexibility to make the most of a number of opportunities that we see in front of the MARSS business, but also the wider EOS business. So I'm going to hand over to Andreas now, who's going to talk a little bit more about the MARSS business and some of these...

Thank you very much, Clive. My name is Andreas Schwer. I'm Managing Director and Chief Executive Officer of Electro-Optic Systems. When we announced and signed the MARSS deal at the beginning of this year, we obviously are all driven by the fact that MARSS is one of the very few fully integrated UAS command and control system providers worldwide with a very specific custom-made C2 capability. At that time, it was clear for us this will be a game changer for EOS, and we signed a deal under the terms Clive was mentioning. And since that, in the Middle East has happened a conflict, a war, which is still ongoing, which was changing this picture in a dramatic way on the positive side. When we started this and when we expected that a cap of EUR 500 million will be more a theoretical value, which will never be achieved, that has changed so much that meanwhile, with the $700 million -- EUR 700 million cap, we believe in a quite realistic way that we can achieve that kind of cap within the next 12 months in terms of order intake for the MARSS-related products. And that's going to happen very likely because of the war in the Middle East, a war where we could demonstrate the effectiveness of the MARSS NiDAR-based command control system by defeating hundreds of Shahed drones, defeating dozens of missiles and rockets flying on to the critical infrastructure, which is currently being protected by a MARSS system. MARSS has dozens of installations active in the Middle East in various countries to protect critical infrastructure. Those infrastructure comprises palaces of kings of crown princes, it comprises military installations and it comprises industrial installations such as Saudi Aramco type of platforms. This kind of defense was so effective that almost any country in the Middle East has raised the interest have approached us and have entered into discussions and negotiations with Mars. That is giving us the confidence that we will be able to sign a significant number of contracts over the next 12 months, and that's again triggering the increase of the cap to EUR 700 million. So the MARSS system is one of the very few systems, which is custom-made against the drone warfare. In the Middle East, there are a couple of installations of higher value complex C2 systems serving the operation of very expensive missile defense systems such as patriot. You all know that. But as everybody has experienced in this war, it is from a commercial perspective, unaffordable even for very rich countries like Middle Eastern countries to continue this type of warfare. Instead, everybody is now looking to tailor custom-made counter U.S. systems such as the one of MARSS. Again, MARSS is one of the very, very few players having such kind of solutions available and probably the only specialized solution, which is now called battle-proven in the Middle East. That is an asset which has a huge value for EOS We cannot only close the gap to be a turnkey solution provider in this domain. This kind of event in the Middle East and the fact that we are now closing the acquisition of MARSS will be in the lead position worldwide. This is a kind of reference ticket supported by key political stakeholders such as the Saudi King, for example, the Saudi Crown Prince. We will be in a position to lock in market the system also into NATO countries, countries where MARSS has not been active so far, countries which already have significant interest in this type of technology. And under the wings of EOS, we will be now in a position to offer those kind of turnkey solutions also for European clients. Overall, and to summarize this part, we are very confident that this is a very significant game changer for U.S. And if you look to the commercials, most of those contracts which will be signed will have very short turnover time. The contract which we have signed or which MARSS has signed a couple of days ago with this one client in Middle East in the value of AUD 165 million has a turnover time of 12, 15 months or 70% of the budget and the remaining 30% is related to ILS maintenance work over the next 3, 4 years. The contracts to be signed over the next few months will have a similar type of characteristics, meaning that we have lots of delivery options in the next few weeks and months and a significant potential to increase revenue and earnings in the course of '26 and predominantly '27 and follow -- those kind of programs are not one-off programs. Those kind of programs are phased. We are talking now with the EUR 700 million of Phase 1 or Phase 2 of either existing installations or of new programs with further phases to follow later on. To give you one example, we are in negotiation with one Middle Eastern country, which is asking to install a nationwide commanding control system to protect the entire territory of this country. This is a new kind of challenge for industry. And this country has done a tender process in this tender process, MARSS was participating and was in a position to defeat and to win against two major multibillion-dollar heavy European prime contractors. That is also for MARSS itself a game changer was now MARSS in a position to play in this weak against the big primes and to be able to deliver to clients nationwide control and defense systems against drone attacks. This company now will go for -- we entered with us into detailed negotiations to conclude this contract. This contract will be of significant value. It is for the Phase 1 more than USD 300 million -- and as I was mentioning, several other phases to follow. We expect this program to be in the multibillion dollar range. And again, MARSS has been selected. We are the exclusive partner for the negotiation of this contract with the client. This is for us extremely important as we cannot only sell for those high-value integrated counter systems. Also our standard traditional business will benefit largely from those kind of contracts as we can sell into those systems, our effectors, most notably our Slinger and also our R800 counter UAS-based effectors, our high energy laser weapons, which will play a major role in this context in the future, but also our anti-drone interceptor business, which we recently acquired, which is U.K. based. All of those type of effector businesses will benefit a lot from all those -- we are also negotiating with another country, a Phase 2 also in Middle East of an existing installation base also this contract has a value of more than USD 100 million. We expect that this contract will be the next one to be signed ahead of the one which was mentioned before with a country who wants to have a nationwide coverage. Overall, we are very optimistic that all those programs again will fill up the order book quickly. We expect to reach this cap over the next 6 to 12 months, and we expect to be able to deliver as there's not too much of scaling efforts required on our side. Why not? Because our systems are predominantly based on software. In each in any case, we need to adapt the software. So we need to recruit some software engineers. But it's not a question of investing lots of CapEx into the buildup of production facilities. Again, we're talking about software here and all required hardware is coming either from third parties like radar or sensor equipment provider or from ourselves, providing effectors into the range. We have our facility in Singapore, a laser production facility, which is able to produce up to 20 systems per year. And we have a capacity in our based air defense business unit to produce more than 300 shift, even 600 RWS in Australia and a similar amount also to our Hub facility in the U.S. So we have no capacity limits in order to fulfill those kind of needs. That is giving us lots of optimism to execute those contracts as per plan. And with the capital we are asking not to be, we will be in a position to execute this growth and not to be limited by flexibility which in capital. I would like to hand over to Clive now to go more into the financials.

Thank you, Andreas. I would firstly just like to highlight, as you can see on the screen, the significant development in the order book of the combined business, which now stands at AUD 726 million. We expect the acquisition of MARSS to be complete over the next few days as funds are received internationally with the different vendors, including some in the Middle East. We are on Page 19, we have an update on the trading outlook for the combined business. As we have said there, there is significant momentum in the business, including contract wins in 2026. Previously, we have announced in March '26, counter drone order for our Slinger Kinetic defense system for $60 million. And on Friday, we announced also the MARSS contracts have been won since we announced the acquisition, and that includes $170 million of new orders, which is the first country that Andreas mentioned a minute ago. As a result, the unconditional order book effectively combining both businesses together is $726 million. As indicated, we are guiding today that approximately 60% to 80% of that [ 700 million ] order book is expected to flow into revenue in the remainder of 2026 and in 2027. On top of the secured order book, as Andreas has indicated, we see a very strong and evolving pipeline of opportunities. Andreas has mentioned two specific opportunities that are both countries in the Middle East. We believe that these have the opportunity to be signed prior to the end of the earn-out period, which is 31 May 2027. As always, the timing of new orders in our industry can vary, and we believe that these orders can be signed in the next 6 to 12 months. It could be earlier than that, and it could be later than that. I may also now just say a few words about the use of proceeds, which is on Page 21 in the deck. Today, we are announcing that we are raising AUD 150 million. This will be used as we've noted, together with our term loan facility that we previously secured to grow EOS. We see very significant opportunities to accelerate the growth profile of this company over the next 12 to 18 months. Our aim, particularly with MARSS, is to get through and at the end of the next 18 months, have a number of established customer sites in the Middle East with MARSS that are excellent reference points for us to continue to show customers and prospects from Europe and from Asia that the MARSS system is an excellent system that truly shoots down drones with the compelling evidence that some customers have already seen in the Middle East. So with that in mind, we want to make the most of the opportunities in front of us and the use of proceeds together with the term loan includes the acquisition price of MARSS, which is the $50 million upfront that we've mentioned. And also a number of growth opportunities across the business. I'll just give a brief example. One of the countries that MARSS has already signed a contract for the one Andreas mentioned for the contract of AUD 160 million. The initial discussions with that customer involved the customer looking for a bank guarantee of AUD 100 million to for 2 years. Our capital discipline is very important to us at EOS and the capital intensity of that project is unacceptably high. So we -- along with the MARSS management, we were able to renegotiate that contract so that there was no bank guarantee requirement at all. So removing the AUD 100 million 2-year commitment and instead replacing it with a short-term requirement that essentially amounts to $40 million of working capital over the first 1, 2 and 3 months of that contract, that contract is a 4-year contract. As Andreas said, 70% of the revenue is on the setup and comes up in the first 2 years. Actually, the second half of that contract is my favorite part, it's 30%, and that creates a very sticky customer base as we provide maintenance and software support for the customer over the life of that 4-year contract. And of course, that makes the customer very sticky and develops deep customer intimacy. So -- that kind of contract is what we are facing into with the two examples that Andreas gave. They are substantial. The first and the opportunity is over USD 100 million, and that's with an established customer. The second opportunity is over USD 300 million, and that's with a new potential customer country. And what we want to do is have the flexibility to trade terms with these customers as we negotiate over the coming weeks and months. And we believe that flexibility will give us the best outcomes. In addition, I would add that the balance sheet strength, we would be aiming to use that with funding providers to secure lower collateralization levels on bank guarantees as we develop relationships with funding providers over the coming months. In addition, we see some opportunities in laser weapons and space control brief I'll just touch on them and then hand back to Andreas. On laser weapons, I would like to highlight that there are two significant updates on laser weapons in the presentation. The first one is that the launch customer for the laser weapon is progressing very well, and we have announced today in the deck that this is significantly ahead of schedule. The launch customer is the Netherlands, and we are very pleased that we are now 6 months ahead of schedule on that launch customer following some detailed review work and approvals of milestones that were conducted last week in Singapore. So as usual, some things go well. Other things sometimes take a bit longer, and we are including in this announcement a note that the Korean opportunity that we have reviewed previously is now more likely to occur in 2027 than 2026, and that's been highlighted in this presentation that we've made. We are looking to invest some of the proceeds of this raise in market development, and we're evaluating whether to invest $10 million or $20 million in laser weapon demonstrators. And we're also looking at investing $10 million, $20 million or $30 million in space control demonstrators. And Andreas is going to say a little bit more about the outlook in both of these areas.

Yes. Thanks, Clive. Let's start first with the EOS laser with our Dutch clients. So as Clive was rightly mentioning, we have concluded a critical design review with our client in Singapore over the last few days. The client is extremely happy with the technical progress. We can accelerate the delivery of the first unit over 6 months. So we expect the delivery to happen in 2027. That is very good news because the Dutch system will be the first one worldwide to be fielded and being fully in operation before the end of the next year. More important than that is the fact that the Dutch client has indicated to be ready to place the order for the first serial lot ahead of the delivery of the first system, which is giving us a significant upside potential with the first client. So we could sign it within the first half of next year or even earlier, which obviously would give us a huge push in terms of order book. Also, our negotiations in the Middle East are progressing on high-volume laser weapon procurement programs. Various clients have asked for the immediate delivery of laser weapons, which obviously nobody can do because there's the kind of stock of key produced systems available. But we are very optimistic to sign contracts also in the Middle East for larger volumes of 100-kilowatt laser weapons. And as you could follow in the press and media, competition is rising. Some competitors have offered support in the Middle East by installing prototype systems, demonstrator systems, and that's the reason why we also want to invest into the buildup of maybe additional 100-kilowatt laser weapon demonstrator to be in a position. We have one permanently installed in Middle East as a demonstrator unit for the various clients in this area. So again, the laser weapon business is picking up. Demand is coming more intense than we thought before, and we are very optimistic to sign contracts in this domain before end of this year. Same with Slinger, our counter-UAS-based gun air defense system, we are also in intense negotiations with various clients in the Middle East. And also here, we expect in a similar time frame as the other MARSS contracts will come in to be able to sign significant contracts with various clients in Middle East. So our traditional business will grow at more or less the same speed as the mass business will grow in the future. It goes hand in hand. Coming now to space control. You can see on one of the slides in the left a system which will become, and it's Slide #16. This system is currently under development and production. We want to invest into one or two of those systems. Those systems will be the worldwide first mobile ground-based anti-satellite weapon systems. With those systems, our client will be in a position to interact with satellites to blind and to their sensors, but also to disable the entire satellite. This is something which is coming now under severe demand, significant demand. We've had recently the German Minister of Defense visiting our facilities in Australia, not only for counter U.S.-based laser activities, but also have shown strong interest in those type of anti-satellite [indiscernible] systems. This goes also in line with American Gold and Drone program, whereas the European clients, and those are the clients we concentrate on, we focus on the disabling of satellites not miss. And obviously, our clients, they want to have mobile solutions to be less affected and threatened by missile attack on any potential [indiscernible]. So this is something which we want to work on very intensely. One or two of those prototypes we are going to build and the idea is to unveil this formally to the market to show the fully integrated system in the course of the first half of next year to European clients. We expect and plan to have system prototype going on a roadshow across Europe to be showcased to all the various clients within the Western NATO domain. This is something which is forming up our second boost phase of the growth of the company. You might remember, we always say that our baseline business has a significant growth potential, and we will execute that. Our first stage of significant growth on top of that will be the laser [indiscernible] business. And the second stage, as we always mention, will be space control or space warfare. The second stage, which we forecast only to happen by around 2030 and beyond will happen now earlier than we expected. And again, this is underlined by even very recent visits to Australia, not only by the German minister, not only by the German command of the Space Force, but also by the command of the space forces of primary other European clients, Tier 1 clients. So that gives us lots of confidence even more in the domain of space warfare. Those type of systems like the ones you see on Page 16 are unique worldwide. Nobody has any kind of weapon system like this in its portfolio -- and we expect that we can play a kind of monopoly across the non-U.S. market over the next years to come. So it's a very, very compelling and promising outlook. Okay. This concludes my part. I would like to hand over back to you.

So thank you, Andreas. So as indicated on Page 22, the details of the capital raising are set out there. That includes the placement of approximately 19 million shares -- in addition, we will be taking a non-underwritten [ STT ] offer because we want to make sure that many of our retail shareholders get the opportunity to participate fully in the growth of EOS. With that, we are going to hand back to the host who is going to assist with the moderation of questions. And I'll hand back to you, Paul. Thank you.

[Operator Instructions] Your first question is from the line of Owen Humphries at Canaccord.

Well done on securing MARSS. It's a great acquisition and lots of opportunities here, particularly around that pipeline. Maybe a question that's undoubtedly going to get asked of me around the working capital of this. Like you say you signed that USD 300 million opportunity, call it, your capacity to fund that through a working capital perspective? And just maybe just to lead out how the kind of cash in and out happens on a per contract basis with MARSS.

Thanks Owen. Yes, so one contract has been signed that we've mentioned already for just over $160 million. And as you indicate, there are opportunities as big as USD 300 million and more. Maybe the first thing to add is that EOS will be very heavily involved in the negotiation of any customer contracts with MARSS. As we've indicated previously, Andreas and I review every customer contract before it's signed, and that includes a review of margins. It includes a review of cash flow and it includes things like bank guarantees, funding concerns and risk management. We've put a lot of discipline into EOS over the last 3 years. And of course, we intend to do the same with MARSS. Customer terms are often customer dependent, but there's always room for negotiation. So we will be aiming to make sure that bank guarantee requirements with customers are manageable. In particular, we have in the past and we will in the future be drawing on the support of national government agencies for bank guarantees. And in the past, that's included the Australian EFA agency for exports. And in the case of MARSS, we may be using Australian support, but we may also be using support of other countries that are involved in the export process like the British government, which has a substantial support program for exports. So we'll be managing the bank guarantee requirements quite carefully. We've looked at all of the contracts in the pipeline, and we are very satisfied that our ability to fund bank guarantees and working capital requirements is well within the capability of EOS post this raise. Of course, we don't want to stop the growth at what's in the pipeline, but we will only be taking on contracts that have appropriate working capital requirements, as I've mentioned and we will manage within our constraints. We see significant growth as outlined, the 60% to 80% order book conversion that we've guided to does not have any significant working capital requirement. Maybe the final comment to add is we have run this business on a target working capital requirement for customer contracts of 0%. And Investors may remember that at the end of March this year, we have increased the level of upfront payments on customer contracts to $70 million. That is customers have given us $70 million in advance on contracts. And that's because industry terms are moving in favor of producers because it's a high-growth market with many players sold out. So we're very comfortable on and you can rely on us to continue to focus on driving the results in the way that we've done in the past.

Good one. And it seems like a very comprehensive platform. Maybe to understand where they sit in the industry, like how many third-party systems are they integrating to the NiDAR platform?

So the question is how many installations or locations do we have in the NiDAR platform. Andreas has done quite a lot on this, so I'll pass to Andreas.

MARSS has installed more than 60 systems predominantly in the Middle East to various clients for different types of infrastructure to protect it. Most of those 60 installations are actively involved in the defense against Iranian and type of drones and...

The question was more around how many third-party effectors like radars or cameras or sensors or other inputs that go into your system, like how -- like there must be an integration process you have to third parties around the world. I guess how many systems kind of -- can you guys embed inside your -- inside the NiDAR system?

So the NiDAR system is a highly modular system. You can integrate almost an infinite number of sensors and effectors by sensor fusion with AI support. It is able to handle not only one, I would say, local installation, but even more, and that's the case for this first contract, which we are working now on to install a nationwide system where you have lots of local installations and the kind of layer-over where you integrate and control all those kind of locals or cells to enable a kind of countrywide seam protection system. That is possible. So we usually have one radar, [indiscernible] radar installed with each command and control system and at least one high-end optical system plus usually acoustic sensing and other types of sensors, which will all be integrated into one NiDAR [indiscernible]. In terms of availability, the critical element in this kind of procurement chain are the radar. The radar market is quite sold out. So MARSS could secure a certain number of those radars to be able to deliver to clients within a short period of notice. And we have also cases where clients have given up on their kind of additional radar supplier and are ready now to accept other radar products coming from other radar supplier just for the sake of a quick delivery time. That is happening right now. And as the MARSS system, the NiDAR system was already integrated with more than 160 different type of sensors. There's almost no effect or no sensor on the market, which has not been so far integrated. So the integration effort is very limited and that allows us to be very flexible in terms of offering to the clients. So we don't see a significant risk of supply chain delays stopping us from executing the contracts as outlined by...

[Operator Instructions] We have a question from Baxter Kirk at Bell Potter.

Can you provide a bit of color around the circumstances that led to the $100 million contract win for the C2 system? Were there competitors involved? And what are some of the factors that underpin your confidence of future contract wins?

So the first contract, which has been signed recently by MARSS was a follow-on contract because previously MARSS was already installed in this protecting all the [indiscernible], for example. So it was a natural evolution, and we expect that the stick to us will stick to us with any further insulation to -- what for us is more important than that is that we have won a contest against two European big primes. And when I say big primes, those companies are each $15 billion, $20 billion, $25 billion of annual revenue size companies. MARSS has won against those two big competitors and has been selected for a countrywide installation. That is giving us a lot of confidence because by that we know now that we can compete. I mean we as a small entity with all the lobbying power coming into this country, we have succeeded against those big companies which were present there for the last decade. So that means we have offered a very attractive price, and we offered obviously a highly innovative, better technical solution. That is giving us the confidence and even more the kind of fact that our system is probably the only one tailor-made antic system active in the Middle East which also can say with all pride, we are [indiscernible] Rubin should give us all confidence we need in order to make this a big success story across almost all countries, not only in the Middle East, but also across Europe and then Asian region. So we are extremely confident. So the war in the Middle East was for us, if I may say so kind of extremely lucky event, I'm ready to say that because it's always a bad thing to have war conflict. But from a pure commercial perspective for EOS and also from a timing perspective, it is really the optimum the best possible case. We signed this contract at the time when the war was not in effect, and now we are benefiting obviously from all its consequences.

And this does conclude our Q&A session for today. I would like to hand back to Andreas for closing remarks.

Thank you, ladies and gentlemen, for participating to this call. Thanks for your continued interest in Electro-Optic Systems. With the acquisition of MARSS, we have done, I think, the biggest step towards the fulfillment of our strategic objective, number one, to become the worldwide leader in counter UAS systems. We will be able now to boost our revenues with the acquisition of MARSS. We will be a turnkey solution provider. We will differentiate by that for most of the other competitors in this domain, and it will allow us to substantially increase our business volume over the next few months and years to come. Also space warfare and our laser business is getting an additional push for those kinds of activities, and we are extremely confident to exceed expectations and to make this company a great success story for our clients, but also for our investors.