SRT Marine Systems plc (SRT) Earnings Call Transcript & Summary

Welcome to a stormy Somerset and another webcast for me, Simon Tucker, CEO of SRT Marine Systems. I think I'll start as usual with the ground rules. I'm not going to meet anybody inside. I can't meet anybody inside. And I think it's a good point to discuss how we communicate with the media. Everything that we say publicly, and this is a public statement, has to be verified by both our lawyers and our NOMAD as being factually based. So anything I'm saying today, whilst I can't show some of the documents perhaps that I'm privy to internally, which would make my life a lot easier in communicating some confidence to you, have been viewed by our advisers, and therefore, I'm authorized to say these things. So nothing that I say is some kind of interpretation of a fact, everything has to be appropriately verified. The second thing I'd like to touch on is the rules around our communications. The webcasts are primarily designed to give people an insight into the ongoing day-to-day operation of the business. It is not generally linked to any particular news. The AIM rules around news are very clear and governed by our NOMAD. If we are in possession of any good, materially good or materially bad news, i.e., that would change forecast to the market expectations in the market, we must issue an RNS immediately. If it's not the same day, it's 7:00 a.m. the following day. There's no management of stuff that coincide with my webcast and all that sort of business. That is just not something that is done. The way we communicate formally with shareholders is via RNS through the stock market. That is the route that all AIM companies must do. But of course, we have a business and a bunch of customers that -- and potential customers want to hear about what the business is doing. And we have an e-mail list where we issue press releases. For example, most recently, we signed a contract with Panama Canal. It's not massively material to the business financially, therefore, doesn't warrant an RNS. But it is actually material to our operations business because that particular customer is seen as a pretty demanding customer in our world of maritime tracking and surveillance, and therefore, we issued that press release. So you, as investors, you will see -- because of the way the media works today, you will see that press release go out, but it won't necessarily be financially material and, therefore, via an RNS. So quite simply, everything that goes out from us has to be verified, whether it's a communication to our target customer market or to our investors. But formal notifications, et cetera, will go via the stock market system as is appropriate and, of course, appears on our website. So on to giving you an update, what's been going on in the last few months. I'll start with our transceivers business. We've been busy in the last year developing a new product, which is called the B900 series. And basically, that replaces a whole raft of AIS Class B transponders that we -- that have been in production for 6 or 7 years and brings that together into a single product ID. There are 8 models in the B900 series, ranging from the B921 right the way through to the B954. The concept behind the 900 series is to produce the very best AIS data. There's an awful lot of gimmicks around in the marine industry and things. The reality is they don't sell. They look cool and they get lots of media, and all the rest of it, they don't sell. What the mariner wants, what the boater wants is a product to do what it says on the tin and do what it says on the tin very well. In the case of AIS, they want a transponder that produces the best AIS data. SRT technology is known for that around the world. Every AIS message is processed and outputted without error. It just works really well, and that's a credit to our engineering team. So inside every B900 series is our best core AIS technology. That gives the boat owner the best data. Now that you've got the data, what are you going to do with it? So again, there's a whole raft of gimmicks and applications and all the rest of it out there. Most mariners are using professional maritime navigation applications that sit on their mobile devices, their phones, their tablets, also on the PC, and they have professional chartplotters. All of these applications have a huge range of functionality, which enables them to fuse AIS with their radar, with their cameras. They have mega sophisticated anchor watch functionalities. They have sophisticated analytics functionalities, all sorts of stuff. What they want is good quality AIS data. So the B900 series has WiFi, Bluetooth inside it. What does that mean? With the Bluetooth, you can connect simultaneously to 8 separate devices, all sharing that data plus, by WiFi, several further devices and also using NMEA 0183 and 2000 directly to professional chartplotters. So from this one device, you can share the AIS data amongst everybody. And so the B900 series is all about the best data, connectivity and then, of course, our quality. It's ruggedized. It has vibration damping. It's shockproof. You can put it on a boat and leave it through the winter with damp and all this sort of stuff, and it will just keep on working. And finally, a new bracket system that gets rid of that hassle of putting these things on to the boat, the bracket clips on to the boat very easily and the transponder itself then clips securely to the bracket. So whilst it doesn't seem like a great sort of innovation, just looks like another product, we're very proud of the B900 series. It has now been launched and started shipping, and we're very pleased with the orders. Commensurate with that, em-trak has relaunched its website. Up until recently, we've had a pretty basic website. The new website is aimed at providing a much better experience when people look at it. They can very quickly go to any one of our 800, 900 dealers and buy through our dealers who are able to buy from stock and have overnight delivery from us. And at the same time, they can also transact very easily on our website and have next-day delivery of their product. And we expect to see that reflected in the sales over time, increasing in the value proportion of the market. The higher end part of the market, which is brand-driven, is where our OEM products are positioned. And we have a number of new products that are coming onstream. Those of you that have followed SRT for some time will know that NAIS transponder is a complicated radio product. One of our products will take perhaps 2 years to develop and bring to market. And as I think I said previously, at the end of this year, you'll start to see some further clever products coming on. And when we say clever, there's real technology integration, which plays to the technology development capability that we have in-house. So that is our transceivers business, and we are very happy with the way that is going. And it's all very exciting. So then let me turn to our systems business. So we've done a number of very big new releases in our GeoVS application. Our system business is built around this GeoVS application. Those of you that have been with us for some time remember we bought a small bit of software essentially with the company some years ago, and we've rearchitected that completely to be pretty much the only system in the world today that was designed from the ground up to be able to network up to 200 coast stations, each of those coast stations potentially having an AIS receiver, radar, surveillance camera, VHF communications and a few other sensors on there, linked through to up to 200 individual operators all in separate locations, all working together as a team in a hierarchical pattern. This is no mean achievement, and we built up our team in Cardiff who is now delivering that. We are now on release 9 of that. Within the GeoVS suite, there are 3 product pillars. The first is GeoVS HUB. That is the data center. You need that data center to fuse and coordinate all the data from all those coast stations and the operators so they all work together. We then have GeoVS VIEWER. GeoVS VIEWER is the viewing application that sits on the PC. That then connects to the data center and uses that data and presents that in a usable fashion to the operator. So functionalities such as graphic display in multiple modes, including 3D, as you'd expect, but also alert management, setting up alerts. It now includes fish catch reporting, fish catch auditing and traceability, aquatic modeling, weather, a whole manner of different things. And then for Coast Guards, we now have a logistics module, as we call that, which enables them when they get an alert to then send a command to an appropriate boat to then respond and then track that. That is where our mission is set up within the system. Finally, we then have the third pillar, which is called our CONNECT series, and our CONNECT series is basically the use of mobile platforms to feed further information into that. So that is then divided into a number of different sub-configurations of our -- of the CONNECT application. So for example, CONNECT Type 1 is an application configured for the use of fishermen on the boats. That then connects to the transponder and enables them to input the catch live as they're catching it out at sea, send it to the transponder, which transmits it to the coast station or the satellite, which then sends it seamlessly to the data center, which can then be accessed by the operators. We also have Type 2. Type 2 is where you have what's called observers and in-port auditors who are looking at the landings of the fishing catches. And then we have various other versions, so for example, an installer application. One of the big challenges of these projects and why, frankly, they take so long to reach fruition, is that they're so extensive. If you look at the first phase of the Philippines that we're doing at the moment, 5,000 boats spread across 6,500 islands operating across 2 million square kilometers will need to be fitted with a transponder. That transponder needs to be controlled such that it goes from the warehouse to that specific vessel and all the details are connected. So we have a version of our CONNECT application that sits on the mobile phone of the installer, and that enables them to collect all the details electronically. And there's a full audit path of where that transponder has gone. And the customer knows that, that transponder is then fitted onto the boat. So GeoVS is not just a sort of simple display. This is an all-encompassing solution for these sophisticated systems. We've also VMS-100, which is, again, the world's first specifically designed fisheries monitoring transceiver, which incorporates AIS as the base communication platform is now -- has been in volume production, is now being installed in a number of areas. We're pleased to report that's had Western Pacific Fishery's approval. This is something that is very significant because, for the first time, a fisheries transceiver that uses AIS has been certified professionally. It is delivering a tracking capability, which is far and away ahead of traditional VMS transponders. The VMS-100 is delivering once every 15 minutes. It transmits fully encrypted or unencrypted, if that's what the customer wants, but it's fully encrypted. And because it's AIS, it's completely agnostic as to which satellite system is used. There are a growing number of AIS satellite constellations out there. And the difference between receiving a transmission from an AIS transponder or not is not satellite, it's the transponder and the configuration. And we have a configuration called SAT-Trak, which is continually evolving, which is enabling better than once-every-15-minutes tracking, so anywhere kind of a fishing boat can be tracked once every 15 minutes as well as transmitting its catch reports using AIS. The benefit of that is cost, is substantially, substantially cheaper from a data standpoint. At the same time, patrol vessels can see them, et cetera. So I'm going to move on to the contracts because, obviously, everybody is terribly interested in that. And I'll say what I can say. I refer you to my earlier comment where there are documents which I wish that I would be able to show you at this time, but I can't. But again, I repeat, everything that I am saying has been verified and validated. So if we start with our existing contracts, IMEMS, which is our fisheries contract with BFAR in the Philippines. That's progressing well and is accelerating. Like with all projects, it takes time to get going. Finding sites, surveying sites are the wrong sites, you need different sites. Then the sites, you get there, they're not as they should be, et cetera, equipment delayed on shipping. But we are where we wanted to be on our plan. And during this half, we will have completed a number of milestones, which started at the -- sort of midway through last year. So we're very happy with that. The first monitoring center is in and active. And we're doing -- starting the training with the customer. So I think Philippines will become a poster boy as a result of this for Southeast Asia for integrated fisheries monitoring. They can track any of their fishing boats anywhere in their EEZ and beyond, monitor the catch, audit the catch landings, provide all the catch reports, contract modeling, whole nine yards, from their system. So we're very, very happy with that. There's still work to be done. The 5,000 transponders will start installation from next month. They're now in country and all the training of all the installers and stuff has all been progressed. I would comment at this point that our model of having a very strong local partner and a very strong relationship with that local partner has made this a success. We cannot pretend that a bunch of Westerners from here can fly over there and do all of that. You need to have the local partner. And as the Chinese say, it's like lips and teeth, you've got to work together on these projects. We, of course -- I'm really saying this because people picked up on the announcement that we made -- signed with the Panama Canal. That's a pretty high-profile customer in our world and so just adds further credibility. These people don't contract gimmicky, unprofessional systems and things. So whilst it's not financially significant to us anymore, it's important from a reference standpoint. So let's talk about new contracts that are coming up. So we have this concept of our validated sales pipeline. This is not a figment of my imagination. The purpose of that internally is because we get lots of inquiries all the time from different countries. I mean only this morning when I was driving here, some couple of inquiries from South America and Africa. We, with limited sales resources, need to limit our focus down on to those where they're serious about it. What does serious about it means? Well, we validated that political decision has been made to do this. If a political decision has not been made to do this, there is no way these systems will happen. The amount of regulation that sits behind them to require the boat owners to have one of these transponders, to acquire sites to put coast stations on, to have people employed, monitor them, all of that sort of stuff starts with the political decision-making. There needs to be a specific agency within that government that's then being given the task to get on with it. We need to know what the budget is. We need to have made proposals and be actively discussing with them their specification of the system that they want. There's always nuances for every single system. The great thing about GeoVS is we can just, in configuration, change that from fisheries to Coast Guard and within each of those 2 customer types exactly how they want it configured. So illegal fishing in Africa, the definition of that might be different in Asia, and that's just a set of configurations in the analytics. So within the VSP, we have a lot of serious opportunities that we are pursuing. Within that -- and I've spoken last year about 6, and I used the word imminent. I know that people interpret that differently. Those 6 are progressing. What do I mean by progressing? So specifically, there are 2 in the Middle East where we are waiting for the contract. We have very close knowledge of where that is. And so we're very relaxed about all of that. This is not sort of -- we've gone through all the purchasing processing and all that sort of stuff. So we are in the very final throes of that. I appreciate people find that frustrating. Believe me, so do we, so does our delivery team, so does our local partner who was all ready to go. It does give us an opportunity to do quite a lot of planning, so that -- and positioning of equipment and things. So we're ready to go. But this isn't done on a sort of a whim and know -- well, we hope this contract will come. We have a lot of knowledge and documentation and communication with the customer. They have their processes. One of the particular countries that we're dealing with, you've got to think they have a civil service of nearly 3 million people, they have their processes. They have hundreds of projects and stuff. We are one. So we're very comfortable with those. In the Middle East, out of those 3 that I mentioned, 2 are the ones that are extremely near. There is 1 that is perhaps a few weeks behind that. In Southeast Asia, there are 3 further opportunities within 1 country. Two of those 3 are with 1 customer within that country, but they're phasing that in 2 phases, hence, it becomes 2 separate projects. We're at the finalization of specification stage with the customer. They will do a tender, and you will see pretty publicly those tenders at some point this year, calendar year. So the exact timing is not in our control, but we're very comfortable with those. And these are all very significant contracts, in aggregate, with more than a couple of hundred million pounds to us over the next 2 to 3 years. That is in addition to the rest of the validated sales pipeline. What I can say is we've never been busier in regards to that. Our process is a consultative one. I often see people, and I'm asked the question why don't you charge for consultancy. The consultancy that we give to the customer, the customer often starts with, "I would like a maritime surveillance system but don't know really what that means. Where does the data come from? Do I need coast stations? And if I do have the coast station, what sort of site do I need?" And so by providing that consultancy with them, you are able to build a relationship and trust with them and enable them to specify our system, which is what we want to do. It also gives us knowledge of what they're seeking to do and try to manage that process to our favor. So for example, that they choose sites where the connectivity is very good and we don't have to then provide additional equipment to overcome that connectivity and things. It is part of the sales process. And that's why the validated sales pipeline concept is so good because before we actually start investing that time in there, we know that these are serious opportunities. So we're very happy with all of that. Obviously, when any of these contracts, which are very significant, sign, there will be an RNS, and I will do a specific webcast about those as well. But the webcast would be announced in the RNS that is announcing the actual contract.

So I'm now going to turn to some questions. So the first one here, we've got market expectations in the market. Again, the AIM rules are very clear. If you don't think you're going to meet them, you make an announcement. We've not made an announcement but very clear about where we are. What are the chances of a deal with the U.K.? Not high. I don't think -- I think the U.K. takes an awfully much longer time than some of our other customers to do anything. So we don't see the U.K., Europe and United States for our systems business as any sort of good short-term or even medium-term prospect for our systems business, I'm afraid to say. The coronavirus. Well, thus far, no, it has not affected us. Our delivery teams obviously travel a lot. Our sales teams travel a lot. So we take precautions with that. Don't go and hang around in public places when you are in fishing ports and docks and things like that, wear masks and what have you. Any electronics manufacturer will have components that are coming out of China, and that includes us. But the way we plan our production is 6 months ahead of time. So at the moment, we have strategic stocks of finished product components, and we have production in progress. So at the moment, we see no effect on our production. That is not to say if China was completely shut down for the next 9 months, we wouldn't have any problems on our transceivers production. I think in that case, everybody, every -- whether a Dell server, your phone, your camera, everything has componentry from China. It's the reality of the global supply chain. So at the moment, it doesn't affect us. Bear in mind, with our systems business, the biggest value generation in our systems business is software. So for example, one of the contracts in the Middle East, the first milestone is a data center. It takes us all of 5 days to install and configure and commission. That comprises a lot of Dell equipment, server equipment, et cetera, but the value is the GeoVS HUB software that sits on that. So I don't believe it has any bearing on our systems business. But naturally, being in the electronics business, we keep an eye on it. Current -- what is the current VSP level? I always get chuckled at when I give a figure for that. So I'm reticent to do that. What I would rather do is focus in on our 6 near term. And once those have come in and we've proven that, then I can talk more widely about the rest of the other VSP opportunities. It's significantly more than those 6. Are we adequately financed? Yes, obviously, the company relies on getting sales as any company. But with all our forecasting that we have as we sit today, we're very comfortable with that. We have our loan note program if we wish to call on short-term financing to bridge any gaps or anything like that. We are aware of, and we know explicitly, the payment terms on the contracts that are coming in the Middle East, having, careful how far I go, been seeing certain documentation. So we don't see any issues with that. That is why we put that loan note in place so that we're not dealing with equity issues and all that sort of stuff. So I think I've answered that question as well. I'll just go into a bit more. So on cash flow, when we sign a -- if I talk about one of the Middle Eastern ones that are nearby, we know the payment terms, the milestones, et cetera. All projects are pretty much the same. You get a down payment on signing and then you get paid on delivery of milestones. Typically, the milestones are data center, coast stations, operator stations, transceivers. And depending on the scale of the project, a particular one I'm thinking about that's near term is over around 18 months, it's about $60 million. That -- the majority of that, the value of that, is in the monitoring system, so it comes pretty quickly and we get payment for that. So they're very cash and capital generative. So hopefully, that's given you a good profile as to where we are at the moment. As I said, when one of the material contracts are signed, there will be an RNS. And within that RNS, we'll announce a subsequent webcast where I can talk to you a little bit more and tell you a little bit more about that particular contract. Probably not the country name as they are extremely sensitive as you guys aren't the only people looking at this, their neighbors, et cetera, are also looking at everything that we put out. Naturally, if anybody has any further questions, e-mail me. I respond to every single e-mail. Call the office, talk to myself, to our Operations Director, Finance Director. We see that as an opportunity for you to really understand and feel confident about the company in which you're invested. Thank you very much, and I'll speak to you very soon.