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

Good morning, everybody, and welcome to SRT's interim webcast. I'm Simon Tucker. I'm the CEO. So those of you that have watched us before and seen one of these before will know that there are certain things that are off-limits that I can't explain to you about because we have confidentiality with customers. But I will do my best to give you the context to the interim results that we just announced. And also then to be able to provide you some real granularity on the business in which hopefully you're invested and/or considering investing because I can see that there's quite a few new people in terms of numbers that are watching this today than we've had before. So first of all, let's just quickly run through the results. I think it's a very good start to the year. GBP 18.8 million of revenue and the profit of just over GBP 2 million being quite a bit ahead of where we guided everybody immediately after the period end. You'll remember that in the days immediately after a period end, we always give a very quick update to the market to put you out of your misery so you know what our revenue is and what the profit is or the approximate profit. Our CFO and his team and the auditors then go through the accounts before we then do the formal release either being the interims or the main year-end results. So we have cash of just over GBP 2.4 million sitting in the bank. Some of that is restricted. And what we mean by that is when you contract, particularly with our systems business, sometimes we need to provide contract guarantees. And so that cash is then segregated against that contract, which is why we refer to a figure of available cash of GBP 1.5 million. So of that GBP 2.4 million, GBP 900,000 of that is allocated at guarantee, which is then released as you then deliver the project. We have quite large receivables at the moment and that's largely because of the timing of the payments that we have received and that they are now clearing. We mentioned in our statement that sometimes we receive checks from our customers. This is not an unusual event in international business with these large governments. We've been receiving checks for years and years and years. So I know that some people think that's a little bit unusual and worrisome. It is not. It is then simply a case of banking that check and clearing that. And so the timing of those payments towards the end of the period meant that they're in receivables as opposed to cash. Subsequent to the period end, we've also received further payments from some of our system customers. So that's on the financial side. And if people have specific questions on the detailed financials, then use the text messaging service that is on this webcast and I'll answer those at the end. And just to remind you, nobody will be identified or anything. So let's then talk about the business that is achieving these results. And then as you all know, we have 2 divisions. We have a transponders division and we have a systems division. So I'm going to talk first about our transceivers division. So the transceivers division grew 24% year-on-year. It is -- and even in the previous year, it had grown substantially as well. So this is now a long-term growth trend. And that's being driven by fundamental market drivers, which we outlined many years ago, which is the digitization of the marine domain. And that's manifesting itself by people and authorities starting to put these black boxes known as AIS transponders on boats, on buoys, on infrastructure and it enables them to all exchange data in real-time with each other. And that might be for basic functionalities such as anti-collision or more sophisticated functionality such as the depth of the water at a given moment in time at a port or the air bridge gap between a bridge and a river, which is tidal, which is very important or whether a lock is open or closed or whether a dock is free within a port. And so this digitization of marine domain is then linked to autonomous shipping. And this is now right at the beginning of its long-term adoption path. And we are right at the center of that having pioneered AIS transponders many, many years ago. So this growth is sort of overnight success after years with accumulated development to build up that product portfolio. And within our transceivers division, we have 3 subdivisions. We have our OEM and module business, which is where we take our core technology and we work with partners, with marine electronics brands, many of whom that you'll -- are household names, and we help them have or enable them to have their own AIS products under their brand. And you buy that off the shelf, you wouldn't know that it ultimately is coming from SRT. The benefit for the OEM is they don't have that huge investment that is required to get to where we are today. They can immediately have a high-quality product that they know is high quality, that is going to be delivered on time at the best possible price and the sub-segments in the marine electronics industry. We then have em-trak, and em-trak is our own brand, and this is a value brand in the market. And em-trak we have grown from nothing now to have over 1,000 dealers and distributors worldwide. And that continues to grow. We -- the focus for the business in the future is to continue to supply that organic growth into our dealer base across Europe and elsewhere globally, but also as the United States now starts to adopt at a much greater rate to grow our dealer base in the United States and grow our activities there. Today, just -- it's quite interesting to note that only about 10% -- 10%, 15% of em-trak sales come to the United States, yet the United States is by far the world's biggest leisure marine market. And that is typical with technology where Europe is normally at the lead of the adoption of that and then America follows behind. So on our vessel transponders for commercial and leisure, which we reach the market via our OEMs and module and also via em-trak, we see that, that will then continue to grow at pace. We then have DAS, which is Digital Aids-to-Navigation Systems. Now we pioneered that 6 or 7 years ago with the world's first AIS-AtoN transponder. This is a very sophisticated, complex transponder that has to do lots of things and at the same time, consume miniscule amounts of power because it's typically located on a buoy or a bridge somewhere there isn't much power. And we became dominant in that, again, because of the performance and the quality of the product, not because of the marketing, I'm sorry to say, because of the product. We're now moving into what we call our DAS phase, which is where we're packaging those up so that port authorities, infrastructure owners can more easily deploy those. It's no longer such a rigmarole to be able to put one on a -- they buy the transponder, then they have to buy their solar panel, then they have to buy something else and integrate it with something else. It comes as a complete package. And it enables us to engage more directly with waterway authorities, be that the European waterway authority or the U.S. waterways authorities or people like Panama Canal or Suez, loads and loads of different water authorities who are looking to digitize their marine domain. And these devices communicate with the vessels which have AIS on them and exchange information and help that autonomous shipping, but also help safety and navigation. And we're starting to see that really start to grow. So on our transponders business, despite having huge challenges with production, we grew that by 24% year-on-year. And that is a credit to our -- to the product quality primarily, our sales teams who've continued to push and our supply chain team, our production teams who have come under a huge amount of stress with availability of components. Those of you that are aware of the electronics industry will know that typically one of our transponders is maybe 100 different components in it from 40 different suppliers around the world. They've all got different lead times. They all have to be on the desk, if you will, at the same time in order for the production process to happen. And you order that over a period of 6 months typically. In today's world, that lead time is now 12 months and it's not sure. You'll place an order with the company and they say, yes, we'll deliver it in 8 months. We plan that production around that. Month 8 arrives, and they say, I'm sorry, it's not available 6 months. Our team then immediately, normally within hours, has to go out into the market, find that from a gray market wholesaler, validate that, that component is the quality and the right one that we need and buy that immediately for cash and to secure that component. And this has been something that's been going on since COVID. It continues today. And to my mind, makes our achievement of growing this business even more remarkable. Never mind the fact that it's a 24% [ year-on-year ] growth is pretty remarkable in itself, never mind those constraints. So I think that in the next year as this component issue starts to unwind, that we will be able to further accelerate that growth. Looking a little bit further ahead and what's been going on in development, we have our major focus is NEXUS. So NEXUS is a new product that we've been developing now for nearly 2 years. It is a combination of AIS and VHF-DSC radio. So in layman terms, it enables you to communicate via data and voice in marine communications, all in a single box. And it has a lot of innovative functionality, which has been designed in from scratch that makes all of that super convenient for either the commercial or the leisure boat-owner. And I'm not going to talk in detail what that convenience is just yet. We will do that in our marketing when we really start marketing that from the beginning of the next financial year. That product we've invested many millions of pounds into, it is now in its test phase. And in that test phase, it go -- that test phase goes through several different phases. So the first bit of that is what's called type approval, so does the radio technically comply with the standards that are required by the various radio authorities like the FCC in the United States? Secondly, does it work in the field well? Is there latency when you press the button? When you turn the knobs, does everything work as it should do? Is the voice crispy clear? We've invested huge sums of money in, for example, the way the structure of the speakers, the digital signal processing of the voice to make the voice clarity excellent. Well, is that -- is it clear when it's on a boat? Is it robust enough when a fat finger tug guy is pressing it and he's upset with something? All of that testing now is going on. And we're very, very cautious with that because as I said to you earlier about why the transponders business has established itself so well and it's growing, it's the quality of SRT's products. And that makes us a relentless competitor and dominant competitor in the market and we will not compromise that. So whilst the test period could be shorter, we made a conscious decision to make sure that's a long and arduous test process. And as a result of that, the product will start coming to the market around the middle of next year, the summer of 2023. This is a product that takes us into a new and much larger marine segment, communications, voice communications and we believe that as a premium high-value, high-margin product that this will be very good for SRT and at the same time, really delivering some significant benefit. And I don't use the word disruptive because we don't know that till we see the adoption rates, but something that we think will be adopted very quickly by the market. And it's extremely difficult to follow, having taken our team many years to develop. So this is our transponders business. Moving to our systems business. Well, those of you who have followed us in the past will know that really pretty much everything stopped during COVID and then when COVID started to die down, the customers started to re-engage with us, and then it was sort of spooling up. We've now started to see that spooling up in January earlier this year. We signed a GBP 40 million contract with the Coast Guard in the Middle East. And this is now progressing really well. So we now have 2 active projects and total worth about GBP 70 million, 1 in Philippines and 1 in the Middle East. The one in the Middle East, we have completed our first phase, and we believe that the next 2 phases will now be run in parallel as opposed to serially, which then brings revenue forward starting from January. So instead of this project being spread over 3 years, it's now going to be over 2 years. We've seen very good results. The technology has performed and amazed the customer. I think there's no other word for that. And for those of you that perhaps come to the AGM later this year, will do a site visit, you can chat to some of our people and get the feel as to the reaction we've had from the customer. Again, it's that product and the quality of the product that is driving this -- the demand of the customer satisfaction. So dealing with our 2 existing customers. So in the Philippines, we have BFAR, that project is going well. We're now restarting the installation of the transponders that was in advance for a period of time because the fishermen and the various groups have various legal action and all sorts of stuff is going on. All of that has been investigated, put aside and dismissed and now that is now restarting. That means that, that project will finish probably in the middle of next year. And then we're in discussions with a follow-on project, which will see a significant expansion. That expansion project is not currently in our VSP because it's not really been framed yet, but that will be a significant expansion. Like with all our customers, once we have them as a customer, we think of them as an account or rather like building an airline, they start with perhaps buying an A320 and then they gradually build up their projects. So there's a succession of contracts to come. With our customer in the Middle East, as I said, we will start phases 2 and 3 from the early part of next year, complete that in 2023. And then there will be -- we expect there to be subsequent project after that in 2024, '25 to significantly expand that base system that they've then installed. And this will then continue into the future as well. So then looking at new system projects. Well, we have this thing called a validated sales pipeline. So we have an increasing number of inquiries from all around the world, including from existing customers, as I just discussed. And we need to have some way of making sense of where we focus our limited resources. Of course, the new one is always the shiny, exciting one and the salespeople will rush off over there. And in a business like ours with such a huge global market and us having relatively limited resources, it's very easy to spread yourself too thinly. So we use this concept of validated sales pipeline to focus our attention on those that are real within a given time period. We know they have the budget, the political will to do it. And we focus 95% of our resources on that. The rest of them, which are then building up, we have a set of documentation and of course, we don't just ignore them. We're driving the information to bring them along the path until they are able to say, yes, okay, we know what the first phase of building our system will look like and roughly what the budget is and we have the political buy-in for this. And now we really need to start specifying the project in detail. At that point, we get involved. And at that point, it then goes into our validated sales pipeline. So it's sort of conveyor belt inquiry, initial consultancy with the customer, validation. Once it becomes validated, it goes into our pipeline and then it goes from the pipeline under contract. So in the validated sales pipeline today, there are about 20 opportunities. The total value of those is about GBP 600 million. The ones that we're particularly interested in are worth about GBP 230 million, of which there are 5, 4 in Southeast Asia and 1 in the Middle East. And really, we're a passenger on their process. We're at the point here, these are customers that we've been in discussions with for quite some years, in fact, their processes stopped during COVID. They've now re-spooled up last year. And now they're in their final, I suppose, technical process before the contracting process. That sounds all a bit peculiar wording, but I think there's no other way to describe it. They have their internal processes before they issue contracts and we're not party to that and we follow that. What we do believe is that they're nearing their end. They are, from my perspective, slightly overly cumbersome and complex processes, but that is the nature of government. And what we find is that there are no shortcuts. You follow those processes, you do what you're told and out comes a contract and you execute the contract and you get paid and then further contracts then follow on as they build up their systems. So those GBP 230 million worth of contracts, we think are not so far away. I can't give you a precise time scale. Some of those are perhaps nearer than others, perhaps truly imminent. But as I said, we're a passenger for that. When they come out, really that's when the real challenge starts insofar as that these are big projects, they need to be delivered, installed and there, we are in good stead. So our development team has been developing our SRT-MDA system for many years now. We are now at what we call Release 12, which is -- for those of you who aren't in the software industry, I mean, each time you do an upgrade of functionality, you call it a new release. And it now has some very sophisticated functionality. The core differentiators that customers latch on to is our ability to integrate, lots of sensors spread around the place, both on [Technical Difficulty] and on patrol vessels and on drones and on [Technical Difficulty] into a single system and the network multiple operators spread around the country in multiple operating centers and they all see a common -- they're all working on a common operating platform and they all see the same thing. And the system integrates all of that together. And that sounds an easy thing to do, but it's a pretty hard thing to do when you're talking about so many different types of sensor data. It's not just AIS, it's AIS, it's RF, it's optical, it's radar, light detection, all sorts of things that come together that enable the detection and then the identification of a vessel. The next bit that we've pioneered is intelligent analytics that differentiates us. And this is where we are able to through the behavior of vessels and the relative behavior of that vessels so that the way vessels behave in proximity to each other indicate what they're up to. So it would indicate whether there's a smuggling event, whether it's illegal fishing event, whether it's perhaps a potential terrorist attack on an infrastructure. And that enables from the hundreds of thousands of vessel movements the system to pinpoint the alerts and highlight those alerts to the operators, give them intelligence on that all in real-time, in their secure environment and then a list of actions as to what to do about it. And they can then say, well, this asset is available in this place and he's an hour away from intersecting that. And that can be all be controlled within the system. So it's come a long way from when we originally bought GeoVS as a 3D visualization tool. That 3D visualization is still important for close-up understanding, but the product is entirely different. And again, once the customer understands the power of maritime intelligence and that this can be had from a system sitting in their country without an external off switch, this becomes extremely powerful. So that integration, the analytics and what we call the alert and action management system, a key differentiators within our system that we've worked hard to develop and we will continue to develop. And our team of developers will continue to grow and we will continue to push the horizon on the functionality. The driver of all of this market for us has been around for some time. I've recently been asked because of Ukrainian things, has suddenly things changed and there's suddenly greater demand? No, all it's done is confirm what a lot of countries knew 5 or 6 years ago, which was really they're on their own. The West isn't going to come to save them. They need to stand on their own 2 feet and they need to, therefore, have their own systems, they don't have an off switch. And as a result of that, they're looking for -- these are national security systems in civil defense, not military. And as a result of that, they want -- rather like with air traffic control, they want to have their own secure, reliable systems that give them maritime domain awareness. And we looked out and called it right many years ago. And today, we have the proven product with the references and the partners around the world that enable us to deliver that. So looking forward to the second half, we'll continue to be delivering our Philippine project and our project in the Middle East with our new coast guard friends. We expect there to be several more contracts that are signed and the initial deliveries made, which will then enable us to achieve our forecast, which has been put in the market by our broker. Depending on the exact timing of the signing of the contracts will then enable us to then extend our forecast into next year to give the market some guidance as to where we will be next year and perhaps the year after. We're holding back on that at the moment because the figures are so large that I wouldn't want to guide incorrectly and then have to roll back even though we had a great outcome. So transponders business will continue to grow despite the problems with the components, which you see unwinding. And our systems business will continue to crack on. We will continue to have challenges within the business, be it components and transceivers, not being able to get to sites in our systems business. When we get there, they're not prepared. All of that sort of day-to-day stuff, life is not a bed of roses, we'll continue to deal with, but we've built up the knowledge and the team to do that. And I think given that this is an interim results and before I go to the questions, I do want to just publicly thank our staff who have been under a lot of pressure in the last 3 years. We did not stop working through COVID. That has gave us -- given us a distinct advantage of where we are and now with the pressure of delivering these things around the world, I can think of 1 chat that -- and I'll name it, Mike went away for a week and came back 9 weeks later. Other people have been asked on a Friday night, oh, you need to be in somewhere in Southeast Asia on Sunday. They've dropped everything and gone. Real people, real family is doing that. And so I really want to publicly thank that passion around what we're doing. And I'd also like to thank all our shareholders for having supported us to this point. I think it's a great fusion of British brains and British capital to get us to this point. So I'm just going to have a little look at the questions and try and answer them all. So NEXUS is a transponders product. And as such, it will be available through em-trak, but in a different format for our OEMs. Obviously, the OEMs want to have their own product. And so NEXUS has been designed to be customizable. And actually, the NEXUS that you see coming from OEMs, you won't recognize as being the one that em-trak is providing. I think that em-trak will probably be the first to launch because it takes some time for OEMs to integrate these things into their ecosystem because it's a more complicated product. That's not just on the marketing side, whereas with an AIS black box, you just change the label. With NEXUS, you need to -- not giving too much weight, integrate it much more into their ecosystem to get the value and that takes a little bit of time.

Are we are confident at our resellers -- so I'm just going to read the question. Are we confident at resellers that are contracted to us, such that they are fully motivated and offering our products aggressively and new retailers joining our success regularly? We have a great deal of confidence in our resellers, not all of them. I wouldn't say all of them are aggressively promoting it. But actually, the way the marine market works is that our resellers are there to consult with customers. Customers on boats are normally doing the research of what they need to go further afield. And AIS is no longer sort of unknown thing. It's now increased -- it's now really known as something you should have on your boat. And so what happens actually is the boat-owner will go to their local dealer and they bring to us. I want to have an AIS, which one do you recommend? And through education, we make sure that the reseller says up, you should have an em-trak or the boat-owner might go there and say, I have -- I don't know, I have beautiful Raymarine equipment and MFDs and things and I would like the Raymarine AIS. So that's the way the market works. What we can do simply with our resellers and our OEMs is make sure they have the best product and the best education around that product. So huge challenges in production. I thought I'd explain that, but I'll just explain that again. The challenges in production for our transponders business is getting a hold of the components you need to put -- to make the product. I think there's a sort of perhaps a misunderstanding this, this just-in-time business in electronics, fine if you're Toyota, but if you're anybody else below that, forget it, what happens is you order your component from, I don't know, a manufacturer in Japan, and they say, okay, it's 3 months for you to get it. And then you order another component from a manufacturer in Taiwan and they say it's 6 months to get it. So you have this conveyor belt of components coming in and they all need to be on the table for you to then start the manufacturing. But if one of those components is missing, you can't. So therefore, then you have to go out and buy them. The end of your question, this particular gentleman is why? Well, I'm rather perplexed. I mean, COVID was blamed for everything, the big broad brush about COVID, COVID, COVID. And 2 years on, now 3 years on, I don't really understand why that is still the issue. I think possibly that the electronic supply chain was so finely balanced that once it started to tip, it really did sort of fall out of kilter and demand planning was out of kilter and the whole thing hasn't settled and now it's starting to settle. But in the meantime, it means that we can't be sure that while we order a component, we will get it on the day that we're told. And therefore, we then have to go into the market to buy it, often at a premium. I won't read that one out. But thank you. Are we seeing evidence of it being unwound? Well, funnily enough, I was just reading in the FT -- the short answer to your question is yes, but a little, but not much. But I was reading there was an article in the FT over the weekend where people like Qualcomm and other big chip manufacturers are now saying, actually, they're not going to sell as many as they thought. So suddenly, demand is evaporating. And I do wonder and we've often wondered whether there's sort of this fatberg of production that is suddenly going to come out into the market and people like us have been buying whatever we could because we were terrified we wouldn't be able to get it and then creating a false expectation of demand. And actually, in reality, demand will suddenly settle. So perhaps we might see it settle than we -- settle quicker than we thought, but I prefer to take a rather cautious approach and say, let's just assume it's with us for the next year or so. Main competitors? Well, I suppose we've had the market pretty much to ourselves in the systems business because nobody saw the business as nobody saw that there was a huge business in civil defense. And the parallel that I draw is that in the '60s, air traffic control was all done by the military. And then somebody said, well, actually, most of the planes are civilian. And now you have a civil air traffic control system and worldwide, this is now a $10 billion a year market. Similarly, in maritime domain awareness, most countries have nothing except for their Navy and their navies are blue-water navies and they're designed to thwart attacks, track something and kill it, not manage the marine domain, stop overfishing, search and rescue, prevention of accidents so you have predictive detection of incidents and things. And so nobody saw that when we took a different view and we believe that, that is actually where a huge market will grow. And we were right and now we're starting to see that. So in that vacuum as a little company in Somerset, we've been able to build up our system and our profile in the market and our references in that way. But the big -- some of these big system integrators that are in the military systems do now see that these are not small opportunities and therefore, I don't think we'll have the market on our own forever. And so we do see them trying to get in on that, but their products are fundamentally flawed and that they're designed to put on a single platform, not to be able to network hundreds of centers across a country. And it's a little bit like saying I have a Formula 1 car, but now I'm going to enter the Paris-Dakar Rally. Well, good luck with that. You can make it look like a rally car, but unless you actually re-architect it from scratch, you're just going to get stuck in the first sand dune. So I think we have some competition coming, but they're going to have to work awfully hard to catch up with where we are, awfully hard and will take years to do. The other question you've got here is how do we convince governments that our systems are secure? Well, firstly, one of the USPs about our system is not delivered by a web service from the cloud and all this sort of business. We've recognized that this is national security, there's data protection at stake and the system entirely resides in-country. The data center, the whole system is installed, operated by the customer under their control, under their ownership, full stop. There is no off switch. And these customers are pretty sophisticated, and it doesn't take much for our team to then explain to them how the system is architected and that the system is secure. And actually, now that we're dealing with the end customer as opposed to third-party partners all the time or just as a transponder provider as we were, I don't know, 7 years ago or something, nowadays, we're now dealing directly with the customer and you can explain to them how that system architecture works and security and security is one of the main things. Given [ from this ] remote manufacturing, can we start to onshore any of these? Well, I think it's a nice aspiration, but the U.K. doesn't have the infrastructure to manufacture the chips that we need. Electronics just doesn't work like that. I think that -- I mean, just on a -- so just for everybody's help here, the question is given the problems with remote manufacturers and components, can we start to onshore any of these? I think there's 2 things. First of all, even the limited onshore manufacturing of computer chips, for want of a better expression, that exist, they'd have the same problems as anybody else. And I would dare say they'd have more problems because they wouldn't have the scale. Could we do chip manufacturing in the U.K.? Certainly, but we'd have to start investing now. And in 10 years' time, we'd have the benefit, whether that our new great leaders have that vision or not, we'll find out [indiscernible]. So I don't think there's any short-term solution to that. It is just the way of the world for electronics. Is there any potential for increased SRT sales in the U.K. market given the volume offshore electricity assets, so wind turbines and things? Yes, absolutely. Most of those will have Aids-to-Navigation, which is our DAS division. Trinity House is a big customer of ours for our Aids-to-Navigation, for example, which look after all the AtoNs around the British coast. We sell to wind turbines and oil rigs. That is exactly what I'm talking about, which is where that opportunity for DAS will arise. What are our debts at the moment? We currently owe GBP 6.9 million. So I think I've answered -- well, I have answered all the questions that have been posed. Hopefully, I've given you an overview of the business. I say again, I think it's a good start to the year and shows our trajectory, but we have much greater aspirations than that. So thank you, everybody, and I love you and leave you and we'll speak to you soon. Thank you.