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

Good morning, everyone, and welcome to another webcast from SRT. I'm Simon Tucker, CEO of SRT. So as usual with our webcast, I'm not going to make anybody inside and I have to be cognizant of our customer confidentiality, irritating as that maybe to some, and indeed, probably more so to me because if I was able to perhaps show you and share to you what I have in my briefcase and correspondence, I think a lot of answers would be provided to your questions very quickly. So a bit of background to the webcast because I think we have a lot more people looking at this one than we have done previously based on the numbers that I can see that are watching. The purpose of the webcast is to explain our business in a little bit more detail, give you an opportunity to ask me questions directly, and I will answer them all. They come up in front of me on my screen. And for me to explain operationally and commercially, I appreciate everybody wants to know about the contracts and all these different things, but it's to give you a holistic view on the business. So some of you will find this a little bit humdrum because you've heard it all before. And some of you who are perhaps new to the business, hopefully, will find some of it interesting. I think I'm going to start with COVID, but I'm not going to labor on it. We have transitioned very well into a new way of operating. We've evolved our business so that we haven't really finished in the way that we operate. We continue to ship all our products, transceivers. We consider -- we continue to deliver our projects that are active at the moment, and those that are in our pipeline that are at the end of that long process of winning that business. And hopefully, with a contract about to -- or perhaps we can announce. It is not delayed, it has not affected our ability to do that. I think some of the ones that are sort of further down the track that aren't even in our VSP have -- or perhaps a little bit slower by COVID. But the transition that we've made, thanks to our staff and the investments in our business model that we've made in the past, have proven to be pretty easy. So I'm not blaming COVID for anything whilst it's certainly an irritant. So you'll know that our business is divided into 2 divisions, one is transceivers and the other is systems. Our transceivers sell black box products into the commercial and leisure market, that is driven by regulation and safety. And our systems business sells surveillance -- integrated surveillance systems that are predominantly used by coast guards, fishery authorities or port and infrastructure owners. And the purpose of those is to monitor maritime activity and detect, if you will, the bad guys, the illegal events and then a set of tools that enables them to actually manage them because it's a fact lot of good you detecting them and not being able to deal with them. So if I start with the transceivers. On our development side, you can provide our business, our transceivers business today into 3 core pillars: that being Class A, that being Class B, and that being what we call DAS, which is digital age to navigation. And those 3, we have the market-leading products in the world, and we have continued to sell them. We expected with COVID, as it's sort of dragged on, there to be a drop in the demand for that, that hasn't been. We've continued to refine those 3 pillars, those products. We have the base products. So for example, we, during the year, produced a new series of Class B around our existing engine, but with a focus on connectivity. Why do we do that? It's because if you buy an AIS transponder, you're buying that because you want the data. And the question is how and where do you want that data? Well, most people have a mobile phone these days. And if you look at people, on the boats, on commercial boats, on leisure boats, they're all using their phones, they're using tablets, et cetera, and they're all downloading navigation applications. There are thousands of features, thousands of features around the place. The data is there to enable it. So when you buy an AI transponder, what you wanted to do is to be able to connect wirelessly to your chart plotter, your PC down in the cabin, your tablet that your wife or children or husband is using, your mobile phone, et cetera, and your friend's mobile phone, all sharing that from a single device. And so we've implemented that seamless wireless connectivity within those products. It all sounds very easy, but it's actually, when you're developing these products from scratch, that process took us about 9 months to do that, and that's now done. The big thing this year is what we call [ Nexus ]. That's our internal code for a new project, and this is going to add a fourth pillar. And this is around -- I'm not going to sort of go into much detail right now, is around a communications product. And so now there will be 4 pillars to our transceivers business, that will be Class A, Class B, DAS and the communications and data-related product called [ Nexus ]. That is now well underway. We will be introducing that product to strategic OEM partners at the end of this year, 2021, with a view to starting shipping at the end of calendar year 2022. This is a product that plays ideally to our R&D capabilities, which is integrated software-defined radio. We have a distinct advantage in that where we can provide very integrated, low-cost core electronics, around which you can then build the product. And like with our existing transceiver products, there will be some very innovative functionality in there for the user. Our focus is about convenience for the user. Again, that sounds all very obvious. But from an engineering standpoint, we're off to you develop products that work really well and of the core performance very well, but perhaps the functionality is a little bit clunky. This will be very -- it's a product that are used on a boat, we use on a regular basis. That's very important. So we're putting a lot of effort into that. So that's our transceivers business on the development side. On the sales side, we've seen good sales, maintenance of margin. And this is all despite COVID, where you've had shipping issues. You've had people not being able to go to their boats, lockdowns, all that sort of stuff. And so we're expecting around the GBP 8 million revenue mark for that business this year. So we don't PR news when we get GBP 200,000 orders anymore. I don't believe that is the way a responsible business operates its public relations. When you're regularly getting orders of that magnitude, and indeed, when you get notable orders, it might be from a notable authority in Canada or United States or somewhere in Europe or something like that. This is day-to-day business, and I would take this opportunity to thank our warehouse staff, who have pretty much the only people that come into the office, who are there day in, day out processing orders. All our products is manufactured in Southern Ireland, comes over and they dispatch it around the world. And that continues on a daily basis. So I'm very pleased with our transceivers business, and we've got a lot of opportunity there that we will continue to develop. Now let's talk about our systems business. This is the one where we're sort of pioneering this concept of integrated maritime domain awareness surveillance systems. And before I talk about the contracts, I know everyone is keen to hear about that. I'm going to talk about the development because unless you've got a truly sophisticated product that delivers all this functionality. All the rest of it is all a bit pointless because it's not going to end up in cash in the bank. We -- the core of our systems business is GeoVS. GeoVS is our software platform. Now you can divide that up into 3 basic segments. We have GeoVS HUB, and that is the data highway that sits within the systems, the data and the networking. And when you're talking about networking multiple sensor sites, each with multiple different sensors and satellite information and multiple operators within a large country where connectivity is constantly varying, this data highway, this GeoVS HUB system, is extremely sophisticated and complex. And overlaid onto that, you then need to have a multilayer security system. So this is the difference when you just sort of have a website with a few little targets moving around, and you have a national system that is handling huge amounts of data in a reliable way. And GeoVS HUB, over the last 4 years, has been completely re-architected from what it was 4 years ago in order to support that massive amount of networking, which enables us to have a modular system, whereby, we can look at -- we can talk to a particular customer, for example, in Southeast Asia, where they want to build their project in a series of contracts because it meets their budget requirements. And they want to start small and build up or they want to start in a particular area and then build the system around their country. So this is something that we really invested a lot of money in and that continues. We then have GeoVS CONNECT, and CONNECT is a series of applications that enables mobile devices to provide information into that system. Now this is all around our system being extremely low cost on a mass scale, and this is key for it being viable for these countries, countries where we operate outside of Europe and United States. They just simply borrow to do stuff. They're very careful with their budgets. And they're talking about not 5,000, 10,000 vessels, they're talking about 100,000 vessels. And therefore, it needs to be very cost effective to deploy. The obvious thing is everybody has a smartphone and things like that. And so the CONNECT applications sit on the phones. They lock those phones, and then it enables things like the fisherman to key in what they're catching and for that to be transmitted back into the GeoVS monitoring system. It enables port authorities to then check the identification of vessels in the harbor or at sea, very valuable for a coast guard. It enables the fisherman that perhaps don't have a mobile phone to go to a kiosk in the port and key in their information. It enables observers on fishing boats to audit what is going on in the fishing boats. All of these using these mobile devices are enabled by our CONNECT applications. And the third strand in our system is what we call GeoVS CONSOLE, and CONSOLE is what sits on the PC, that sits on the operator station in the command center. And that has a whole range of functionality, both visualization, analytics and what we call action management and alert management, which enables a series of operators. And they might be 200 operators operating in 20 different locations, all operating at a team -- as a team, all with different responsibilities and permissions and access to the system and jobs and things like that on the system, to operate as a single team from a single data set, which is provided by GeoVS HUB, if that makes sense to you. And we use some unique concepts, which are new to this sort of area. So for example, we are applying AI analytics and deep analytics. So you can -- based on the behavior of a vessel or multiple vessels, you can identify whether they're actually suspiciously is a vessel on an attack trajectory for a vital infrastructure facility. Is there a transshipment going on? Is there people smuggling? And it will create alerts. We then use digital visualization to enable the operator to visualize that very clearly and understand what's going on, and that's very important. We're all visual people. And then, of course, they need to take action. And within the system there's a whole series of different management tools that enables them to take action, maybe a boat is detected speeding in a waterway, you can automatically send a ticket and things like this. So all of that is embedded in GeoVS. And this is an ongoing development. All of those functionality, you continue to add functionality to those major functionality pillars, but also we add new functionality, whatever that might be. And what we've done in the last 6 months to rearrange our operating to be even more agile so we can deploy our teams in a more agile basis as opposed to fixing our developers on to just, let's say, a chart to stay and what we call EMC display, and then other developers are purely fixed on, I don't know, a particular area of GeoVS. We now look at features and functionality and the characteristics of that. And then we assign a development team to do that and they've given a period of time to produce that. And that produces a very, very modular system, but also enables us to deploy the right resources in the right place at all times. And we have found that, that has now really started to accelerate our ability to develop these features and functions. And therefore, GeoVS is really sort of leaping on in its abilities and functionalities. So the other part of our systems business is delivery. Once we get a contract, we need to deliver. And what we've realized in COVID times is that our model, our core model where we enable a local partner to do the installations, actually works much better than we thought. And what we need to do is to standardize even more so our delivery approach, train our partners and really lead them much more to get on with it because it's not -- because of the way the system is designed, providing people follow a standard process and they're well trained. It's not -- I don't know, I don't want to say it's not difficult, but it's able to be -- it's best able to be done by the local partner in their own hands. And in fact, with the restriction of travel, we need to lead them to do that. And so we restructured delivery to give much more power just to our project manager in countries, supported by a PMO office in SRT and a dedicated engineering support team who can then provide 90% of the support into that project, but also they can then access other ancillary support within SRT, who have other day jobs. So for example, procurement for buying products, product management for training, et cetera. And the net result of that is it's increased our ability to handle some of the projects that are coming up. We've had to really sort of, with the realization that these are happening, that we've had to really plan for that and be able to do it within our existing resource so we don't scale our overheads when these projects come through. So the result of that reorganization is actually a much more efficient and effective method of delivering our projects. This is, of course, combined with the system itself being much more developed and refined. So let's talk about existing -- let's talk about contracts and projects. So IMEMS, which is our landmark project with Philippines' fisheries department, that is progressing well. I have had a question today asking me about the individual milestones, and could I explain all of those? I'll explain roughly, but I won't go into detail. And the reason for that is confidentiality in our agreements with BFAR. If they choose to put all that out on their website, then that's -- then I can talk about it. Until they do, I can't. But essentially, you have coast stations that need to be put in. There are around 140 of those, and I'd say we're about halfway through the commissioning of those, which is great. We have about 5,000 transceivers to put in, and we are a good way through that. There's some lumps and bumps when we first started, where you're going to put the transponder, boat is not turning up, all that sort of stuff. COVID, stopping things. With lockdowns, you weren't able to actually get to ports and all this sort of stuff. So -- but that's all progressing well. Our local partners' teams are all trained up in installing those. We then have 15 regional control centers, and they are now in the process of being installed and commissioned. And then there are 2 national data centers and 2 data centers. The first of -- both of those is up and running and was last year, and it's in daily operation, and they are monitoring about 500 of their vessels that are over in the Western sort of fisheries areas continually. So Philippines tuna fishing industry is now being run from that. And there are 2 backups that are now being installed in a new building that wasn't ready when it was supposed to be ready. Again, because people couldn't turn up because of COVID and things. And obviously, we can't install stuff if there isn't a roof and there isn't power. So the reality is the Philippines is leading the region in fisheries monitoring with their system, and we're making good progress. We expect all of that system and everything to be completed by at the end of the year. I think the increasing pace in the last month or so is down to this reorganization that we've done in much greater ownership by the PMO. I hope he doesn't mind me mentioning, [ Dean ], who has done a sterling job with staying in the Philippines for months on end, taking personal risk going backwards and forwards with COVID and quarantine and all the rest of it. So thank you to him and the PMO team lead by [ Tess ]. So let's talk about new projects. Of course, I read the bulletin boards and the chapels, about VSP and buses and whatnot. I suppose the frustration for you and for me, for you is visibility and what does imminent mean? And when is this going to happen? And is it real? And all this sort of stuff. And for me is my inability to show you what perhaps I have in front me in documentation, which would make this webcast a lot shorter and a lot easier and make everybody a lot happier. The reality is we don't announce until these things are signed. The reality is these are very big projects with governments who have their own procurement processes that they follow, and they will not be deviated from. So we do have our validated sales pipeline, and that is a real tool that we use to focus our small sales resource on opportunities that we are pretty certain are real and will be coming at some point in the next 3 years or so. We get lots of inquiries all the time. We are addressing a market where pretty much everyone says they want maritime domain awareness, and they want surveillance systems and everything else. Wanting something and being able to proceed with it and being ready to sweep with it, these are 2 different things. And so if you were to talk to any of our salespeople, you all know that we're pretty ruthless in delineating between what goes into our sales pipeline and what stays out of the sales pipeline, but we continue to work with the people that are outside the sales pipeline until we know that there are budgets. Political decision has been made because you need to have that laws and all sorts of stuff in place before it gets in there. Once it's in our validated sales pipeline, of course, it is a long process. I had a really good nice conversation, albeit quite challenging, with a gentleman. He said, "Well, look, this is ridiculous. You're spending so much time with customers, maybe you should charge them with consultancy fees and all the rest of it." And that would be great, and I like that idea. It's just not the reality of the situation. The reality of the situation is that we are selling into a market that wants these systems, but doesn't know exactly what they want. And what they want to do is to consult with the market. And if you're consulting with the market, they look around and see who's doing stuff. Lots of people say they do all this sort of thing. So they're faced with an Internet section with lots of companies. We are well known, so we're always sort of included in that. And then they want to investigate and learn and understand what's out there and how that relates to their needs and their budgets. And that's a consultative process. And if you don't partake in that, well, you don't stand a chance. And this is where you win these contracts. You've got to persuade the customer that the attributes of your system, the specification of your system are what they want and what they need. And that is where the development of this really clever functionality that we have done in our system comes in because you start to introduce that, be it, for example, that a fisherman can, uses existing mobile phone to report their catches, but they can track the vessel once every 15 minutes anywhere globally. A fraction of the per monthly cost of old-style systems that perhaps use very expensive, traditional satellite systems and things come into play. And so we have this long consultancy process where they're building up their requirements and specifications. And then they make the decision to, right, they're going to go with it, and they need to apply for their budget. And actually, when we say apply for the budget, it might have been approved in principal, but now they need to get the cash budget so that, that means the specifications and then the approval to contract. And the contract is normally a small tender process. And of all of this VSP, which stands at over sort of GBP 500 million at the moment, there are in about 22 projects. There are 6 which have a value of about $120 million, which we are really in the contract paperwork stage, frankly. And it does take longer than any of us would like or expect. All these countries have really rigorous processes. They need multi-agency approvals and all the rest of it. And so that does take a little bit of time, and it's not a defined time line, and it's not something I can control. The worst thing about these 6 is everything is done really. And we've -- we believe that we've -- well, I'm certain that we have persuaded them of our specifications, and now it's just for the paperwork to be completed on their end. I am ever ready with my signing pen as soon as that pops out. And so we are -- I don't want to use the word imminent because that come and bite me or whatever, or jam today. It's jam, pots of jam, whatever it might be. But like I said at the beginning of this little section, if I could -- if I was able to share with you what I have a know, then a lot of concerns would be ameliorated. It does take a lot of work with answering questions. We see a lot of the documentation, which has to be right. You're talking about hundreds of pages. One is 146 pages. There's 6 of those, and we need to make a small type and we have to make sure all of that is correct, and then multiple agencies need to make sure all that is correct. We are very near the end of that process and then a couple of them sort of any day type department. So I mean one of the things has been what is -- again, somebody sent me an e-mail saying, it appears that nothing is going on. And I suppose that's the purpose of this webcast every 3 or 4 months that we'd remind you that because we don't pepper the market with PR, that it's not that we're not doing anything. The transceivers business continues at pace. The demand for that carries on and AIS is being adopted. It's much more standardized. If you're buying over a 30-foot boat, it's likely that as new, it will have AIS standard, and that business is growing nicely. On the systems business, it doesn't take too long to do a little bit of research to see that people want to monitor and need to monitor their fishing boats and it's -- they're now being regulated. A very small proportion, perhaps 2% of fishing boats are actually monitored today. And we're the major game in town there. And on coast guards, they have -- all have 20-year-old systems, and they're all now looking to upgrade those. And we have a very sophisticated and proven and reference system in the market, and so the demand sits there. Equally, I would ask you to remember that these are governments and therefore, it does take time. However, within that validated sales pipeline conveyor belt, there is, as I said, 6 of these things that are sort of right on the end.

I'm just going to have a look and see what questions I've been asked and see if I can -- if any I haven't answered. There's a question here about the IMEMS project. I think I have answered that. A question here about dividends. Well, of course, we'd like to pay a dividend. And I think the transformation of these projects when they drop in will cause, from a cash flow standpoint, will enable us to consider that, being frank about this, and this is not something that's the Board agreed or anything like that. I think that once we've paid down our debt and have a decent cash reserve, then there's no reason for us to maintain the -- keep accumulating cash. We don't need to make any acquisitions or anything like that, and then we would look at doing -- returning that because I can't deploy -- I think Mr. Buffett says, if I can't do anything with it, I need to give it back to you. Can we sustain ourselves without raising money if international travel restriction continues to the end of the year? Yes, we have modified our business model so that we can support our in-country partners who do the deliveries. And we've got our transceivers business, which will continue to deliver. And then our systems business, the actual physical screw driver work and everything else, is done by the local partner. The signing of the contracts, et cetera, is in relevance to that. I think the paperwork has slowed down because just like us, they have restrictions, COVID restrictions at their offices. They have less people or -- [ like and stuff ] wanted their agency we're dealing with in the Middle East, deals with something like 500 to 1,000 contracts a week, and their staff is down to 80%. So what we expected in September is sort of around now. Can we make it clear where the link is on the Investor page? Yes. All right. We'll have a look at that. I will tell [ Lou ]. What changes do you see in the last -- for most countries' approach maritime security? None. We haven't seen any changes in the approach for maritime security. I think we don't -- when we look at the media, we suddenly think that national agencies change their view because the BBC comes up with a story about what China is doing in the Southeast China sea. This is not what happens. In these countries, when you go and talk to a coast guard in Southeast Asia or a coast guard in the Middle East, the issues that are seeking to resolve with their system have been existing for some time and don't change and continue to exist. It's just every so often the media picks up a tiny little bit and makes a big thing about it. There is no change in fisheries. They want to monitor and manage their fisheries and protect their EEZs, protect their fishing grounds and their own fishing industry. On coast guards, they feel the threat of security and they want to protect their sovereignty. And now that this technology exists, they want to adopt it, then the planning of that. So there's no change at all. The demands that we are selling into demand. That doesn't mean they suddenly go, "Gosh, Simon, this is exactly what we want. Let's sign tomorrow because they all have a process." Don't use my hands and arms to be so expressive, lacks confidence and negativity. Well, I'll take that advice, but I'm afraid I am what I am, and hopefully that transparency comes through. We mentioned involvement in new satellite system. I think we also -- some time ago, just to remind people, we looked at doing our own satellite -- buying our own satellites because you get these LEO orbits small satellites. And we looked into it. We got very near to signing a contract to deliver a system called OCEAN-SCAN, which would have initially put about, I recall, 8 satellites into a LEO orbit to receive the transmissions from our transponders and also to do some infrared detection so you can detect the vessels because you need to do 2 things, you need to detect and you need to identify. What that project did when we evaluated it was confirmed that lots of people are doing exactly the same thing as you can see now. And the result of that is there are certain [ plethora ] competing systems with huge amounts of data that we can then buy and process. And so we never progressed with that. We have no interest in owning our own satellite when other people are making huge investments and selling data at tiny -- in that tiny amount. It does not give a return on capital employed. And plus these small satellites you need to replace, start falling out of the sky once they're in a LEO orbit, which is called the lower Earth orbit. And the minute they're up there, so every 5 years, you've got to replace them. So our strategy, which is to improve and [ right ] is to pick from the best data, which is constantly changing. Every time a rocket goes up and new satellites go up, there's new data for us to buy that are -- that GeoVS can process and analyze and detect the particular targets that we want. And I think this has worked well. Protection about our software being hacked and copied. Well, there's a myth that you can hack your software, you can steal the software on your mobile phone. A software is -- when it's deployed on a product is an image. It's not something that can be hacked. Hacking is about getting into our system and stealing our software. Well, a big part of our GeoVS HUB is security. So encrypted communication, firewall to protect entry and when there is entry, encryption of the data itself. And so because we're selling to states, we have to consider attacks by state actors, and we think about that within our own company. And so I don't say there isn't a risk because there's always a risk, but we are cognizant of it, and I think it's pretty low. I think, also, if you were -- if I gave you a CD with our GeoVS software with the millions and millions and millions of lines of code, without the documentation, without the knowledge of the 50-odd people developing it, I think it would be pretty impossible for you to deal with it. Cash flow, admin expense control. Well, we've always been tight on that. I still get a 12-week rolling cash flow every week produced by Richard, our FD. Every commitment by the company is only done with a purchase order against an agreed budget and we control all our payments. So the commitments of the company are controlled carefully against budgets. Nothing gets spent at all without approval, full stop. And so I think that we operate on a -- if you talk to anybody within SRT, you'll know that we don't slash the cash at all. We operate on a zero-budget basis. Does something need to be spent or not? And that will make any difference when these contracts come in. The purpose of the business is to generate free cash flow and profit, and we expect that it's always got to be minimized. Do I have any comments about the balance of initial revenue for contract build-out versus ongoing revenue to support data access, software licenses, et cetera? Yes, I've got a lot to comment on that. Our customers' contracts as a lump sum. So let's say, it's $20 million to deliver a monitoring system, and that will be divided into milestones. And we'll get -- we will invoice and get paid according to delivery of those milestones. We don't do the traditional then, software licenses going forward because they buy the licenses. The model that we deploy which fits with what the customer wants and what these countries want is I want to buy the system. And then what I want to do is add to that system. So once you supply the system, it's not, "That's it. Thank you very much." Like any IT system, you then start to add smaller modules to it or perhaps a bigger module to then plug into it. And then you have existing data. So for example, if we develop a new functionality within GeoVS that requires some satellite data, of course, they don't need to buy the data. I would hope that the sort of rough -- the rough thing would be that for each contract of about, let's say, $20 million, there would be $2 million of recurring revenue, which would be data and small upgrades. And then every so often, there will be another $10 million, $20 million contract to then add to that existing infrastructure that we had delivered and then further data and licenses. Maybe you should have said cash flow, cash position plus cash position to fulfill imminent contract. I'm not sure that I understand that question. So I'm going to -- if you want to -- the person that sent that, if you want to send that again and clarify, I'll answer that. How do I see cash flow for the next couple of years? It depends exactly on the timing of the contracts. I would hazard a guess, well, it's not a guess. I'm pretty -- well, I know what cash flow is really. Very positive, enabling us to repay all our debts, build up our reserves and start delivering dividends. So that's -- which has been the [ anchor ] for some time, and I have the existing 6 contracts that we see coming will enable us to do that. Do we have good cash resources and then further contract delays? Yes. Yes, we have good cybersecurity systems. They're probably never as good as they could be, but we're very careful with those. And we have a lot of people in our systems team. And again, I think it's good to point out that our GeoVS HUB system is a really complex IT system. We have a systems team within our development team. Some are the people from former Ministry of Defense, experts that have designed this system. And so our security system within that is called the [ DMZ ], that's what we call it. And of course, we pay attention to that within our own business as well. I think -- well, I don't think, that is the end of all the questions. So thank you very much for everybody's patience. And I hope to -- you'll hear from us soon. I probably won't do another webcast for another 3 months, so you'll hear from us via the usual route, via the stock market before that. So thank you very much for your patience and support. And if you've got any questions, do e-mail me or indeed Neil Peniket or Richard Hurd, who is our COO and CFO, respectively. And we'll see you soon. Thank you very much.