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

Good morning, everybody, and welcome to webcast from SRT Marine plc. I'm Simon Tucker, I'm the CEO of SRT. So the old hands will know the rules of the game. But as always, I try to cater for new shareholders. So excuse me if I'm repeating. So the purpose of the webcast is to provide you with a full update on our business, what we're doing with your money as owners of the company or prospective investors of the company. What I won't do is make anybody inside. That does frustrate people from time to time in that I can't fully answer the questions. And that is the nature of some of our contracts that we have and the customers that we have, who are extremely concerned about their security systems that we are providing for them. And obviously, they don't want them spread all over the net. So onward and upward. So this morning, we've announced our annual results. No surprises, as you know, immediately after each period end, we do a market update and provide some guidance on that. We did GBP 30 million this year, which is a little less than we had hoped to do. Nevertheless, a big increase. So why the big increase? It's quite simple really, that we all came out of COVID during which time our systems business was not able to go and deliver any milestones or do anything because of the travel restrictions. And that was obviously 2021. And last year, that all went away. And we were able to start delivering revenue milestones. And as a result of that, from the two existing contracts that we have at the moment, one in the Philippines, one in another coast guard in the Middle East, we generated GBP 18 million worth of revenues as well as being paid obviously the cash payments associated with that. And so our systems business went from 0 a couple of years before to GBP 18 million worth of revenue last year. Similarly, our transceivers business also grew substantially. Some of that is a result of a price increase that we put through because of the increase in component pricing. But a lot of that was down to growth, increase in our distribution and just general market adoption of AIS that continues to roll forward. And so what you're seeing is a product of many years of research and development in the technology, in the products, in the market, in our distribution. It was a lull for a little period of time. And now we're coming back out of that and reaping those rewards. And I will make the point of thanking all of SRT staff for all their hard work during this time and particularly last year, where the ramping-up has been pretty ferocious. So let's talk a little bit more detail about each of our divisions. We have two divisions. We have a systems division and we have a transceivers division. I'll talk about our systems division first. Our systems division, which delivers maritime surveillance and security systems predominantly to two types of customers, the national coast guard or national fisheries. Why those two? Typically, a coast guard in most countries has jurisdiction over the territorial waters and EEZ. And they're in charge of security, prevention of smuggling, search and rescue safety, border control. And what they want is persistent surveillance of those very large areas to automatically detect where there is an event or an area of interest where they need to manage an asset and undertake some kind of operation to thwart an activity of some type. On the fisheries side, we'll have seen that environmental protection has become extremely high on the agenda, not just the protection of the reefs and aquatic culture, but actually as a result of that, the protection of food supply and the ability to export into international markets. And this is particularly important in Asian nations, which have very big fisheries operations and a lot of reliance on fish for food and at the same time for their exports. And what they want to be able to do is to -- is recognize now that if you can control fishing and let fish stocks recover, actually fishing becomes more productive. And so actually, what these systems -- what our system does for the fishing authorities is enable them to ensure that regulation is being followed and help the fishermen to fish in the right spots. This is not something that being new that they always liked initially. But this has now proven that by monitoring and controlling fishing, you can improve the productivity and improve the exports. So those are the drivers for our systems. And really, most of these countries have no integrated maritime surveillance at all, unlike air traffic control. And we, as you all know, came and developed that. And so we have a product called the SRT-MDA system that we spent 8 years developing. And we now have a fully integrated system, which is operating in several countries around the world, three, in fact, and a number more coming, which I'll talk about in a minute. And during the course of last year and in the year going ahead now, we will continue to develop that system. We continue to improve the functionality in particularly around a few key pillars. And those are data fusion and integration. So we fuse lots of data from different sensors across a very disparate network. So some of these countries might have thousands of different islands and hundreds of different sensor systems that all needs to be integrated in. That's a very difficult task to do. Once you have all that data that comes in, you need to fuse that. And this is different types of data, be it radar or AIS. They might come from different platforms such as vessels or satellites or coastal towers or drones, all into a single pop. And then we need to apply analytics because now you're detecting hundreds of thousands of targets. And our, what we call, Dynamic-Ai, which we have developed and we continue to develop and we'll always continue to develop, are looking for telltale signs, behavioral, typically behavioral, that tell us what they're doing. Are they -- is it smuggling? Is it illegal fishing? Is it potentially a security threat? That sort of intelligence, which then distills out from these thousands of vessels to the operator, to the particular coast guard, "This is the area you need to look at. This is the vessel that you need to look at." And so the development activity last year in our systems business focused on those -- that area of data fusion, analytics and then visualization and alert. So actually, they can do something about it in a command-and-control aspect. So it's a whole flow system. And we made very good progress with that. We have around 50 engineers that have been working on that. So this is a huge system. And our secret sauce is our GeoVS software, which integrates all that together, which sits on top of the hardware. And that R&D will continue. We're now on release 13 of our system. And next year, we will see release 14 and release 15, continual increase and improvement in functionality and new functionality and new capabilities, which then benefit our customers and want them to roll out those systems more. On the business side of it, the commercial side of it, we have two active projects at the moment, which are when I mean active, we're actually doing installations and we are delivering revenue milestones. When we deliver these projects, they're made up of lots of different milestones, hundreds of milestones. And some of those are sub-milestones, which, if you will, aggregate together to become a revenue milestone. So you have to deliver all these little bits and pieces. And then the sum total of those become a revenue milestone. So you'll typically maybe get a revenue milestone every 3 to 4 months. But look, in between that, you're delivering lots of little bits, maybe the tower arrives, then the radar arrives, then the camera, then they're installed. But the actual revenue milestone is that tower and its complete element is commissioned or a command center or whatever it might be. And so we have been delivering those in those projects. Our fisheries project in the Philippines is fully operational. They are tracking and monitoring fishing boats. They are electronic fish catch reporting, auditing, all of the stuff in a modern, digital fisheries monitoring system. Our Middle Eastern coast guard project, we completed the first phase. There are further two phases that will go. And we are now preparing for those. And we will start implementing those in the second half and achieving those revenue milestones. So we've had a very good progress on moving those projects forward. And our Middle Eastern coast guard project, we will expect to complete at the end of calendar year 2024. At the same time as that, we have taken our -- excuse the sirens if you can hear those. At the same time as that, our validated sales pipeline of new prospects has increased. So when I spoke probably this time last year, the value of that pipeline was about GBP 500 million. And these validated opportunities are where we are in active discussions with the customer. It's beyond just a general inquiry. We know that they have the budget. They've made a political decision to proceed. They've decided who is going to be the owner of the system. And we're exchanging proposals with them and in discussions with them. Obviously, some are nearer to signing than others, some are at the beginning of that process. Typically, that takes a couple of years. And so we've got some that are just before contract signing, a few in the next -- in the coming month or so. And then some that probably will not be signing until the end of next year. But during the course of this year, that GBP 500 million, one of those, GBP 140 million contract, was signed earlier this year, leaving us with GBP 360 million worth of opportunities. But that opportunity pot has grown to be worth about GBP 1.4 billion today with visible projects, some of those with existing customers and some of those with new customers. Obviously, we have better visibility with those -- with existing customers. We knew a lot of those were coming, but they just simply haven't qualified for our VSP. So we go into this financial year now with our Phases 2 and 3, which have been amalgamated together in our Middle Eastern project, which will -- the first revenue implementations will start at the latter part of this calendar year and complete at the end of 2024. And our new GBP 140 million contract, we're now in the process of preparing for that. And the first implementation -- revenue implementations for that probably will happen around Christmas, early part of the new calendar year but in this financial year. And we expect that implementation period to be about 2 years on that project. At the same time, we are expecting that some of our further validated sales pipeline contracts will convert into contract during this financial year. So I think that's everything on the systems side of things. So pretty exciting. On our transceivers side, we've been doing this for some time. We were pretty much the first entrants into the market, when nobody thought this would become a thing. And we have grown that business now where we have many thousands of distributors around the world. We have our own brand, which is em-trak. And then we continue to supply OEMs and other marine electronics companies that are looking to outsource their AIS products to us. And as a result of that, that business did GBP 12 million last year, increased its margin. So we're very happy with that. I do not think that, that business will grow at 60% per year. But I think it will grow at a good rate of knots. So look, where is that growth going to come from? The growth is going to come from, in this year, just greater adoption through our wider distribution. We are known as being a reliable supplier of the best products. If you talk to most professional vessel operators, they will say, "We only choose SRT-derived products." And also, on our DAS products, which we launched last year, and we've now really started to get traction with that. And based on what DAS is, it's really selling into the -- this trend of digitization of the marine domain. And you'll see a little sort of picture behind me with lots of orange lines and stuff. And basically, what's happening now is, to improve efficiency and safety in the marine world, they're trying to connect all the different infrastructure to the vessels to have autonomous shipping. So for example, a ship that is perhaps going -- coming into a port will automatically be told when a berth will be available hours before they arrive. That enables them to throttle down and calibrate their speed, save fuel and arrive at the berth as the other vessel is leaving. Or perhaps instead of hitting a bridge, a transponder is telling them that the tide is high and they can't get under the bridge, "So wait an hour and then you'll be able to fit in." All of that sort of stuff, which, in a way, is taken for granted in air traffic control, where you have automated route planning and all that sort of stuff from ATC, well, it's now coming to the marine world. And our DAS transponders facilitate that. They are transmitting that information in real time to all the vessels and all the infrastructure. And we see a big market in that. And in fact, we're expanding that. We're hiring a dedicated salesperson for that division, which is, alongside the new salesperson that we -- Louise, who runs our transceivers business, hired for America and is now starting to see really good results there. So our transceivers business is pretty exciting in terms of the sales opportunities and distribution. On the development side, we have our new product, NEXUS, which has been in development for 2.5 years now. It has now started its test phase. We delayed earlier on this year, the launch of that product. We were going to be launching and starting shipping around October time this year. And I decided that we would delay that by 3 to 6 months. And the reason for that is we are moving from just data into voice and data. And voice is a much bigger market in the marine market. And that's new for us. And I want that product to be wow. We have come up with a new concept, which integrates with personal mobile devices and gives access into the marine communication world in a seamless fashion, which is what 90% of boaters want. And this needs to work seamlessly and brilliantly and wow them right from the start. And the way you do that in electronics is to be conservative with your testing. And those of you who have known me will know that I'm not one to slow things down. I always want to go faster, faster, faster. In this occasion, it's the right decision to have more robust testing, more extensive testing. We will have people around the world using that and feeding back so that when it comes out, it is absolutely perfect in the market really as well. This is a very big market opportunity for us. And therefore, we want to maximize that. And so in our forecast, we've not included any revenue for that this year. But we expect quite an impact next year. So that's our systems and transceivers business. So we go into this year with a forward order book of GBP 160 million. We've got an opportunities pipeline, which is now GBP 1.4 billion. We are very recognized and known across the world with references, which makes it much easier for us because people know us and trust us in the government sector or maritime surveillance systems. But that is the product of the long and arduous route that we have -- a part that we've charted for the last 8 years. And we're now starting to enjoy the fruits from that. That is not to say it is not without its challenges to deliver these things and to work with government systems. Each government is different in the way they operate to procure things. And we're really a passenger on that bus and we follow that. But the demand and the desire for these systems, these surveillance systems, is just really right at the beginning frankly. And similarly, on our transceivers business, much wider distribution. Our production is able to scale. We have more sales resource, more marketing. And so we just see a plethora of opportunities on our transceivers business. And we'll continue to do what we've done for years and grow that business.

So I'm just going to see what questions I've got here and try and answer them all. So will the sign-off of the first phase of the GBP 40 million Middle Eastern contract trigger a milestone payment? Yes, we've had a number of payment milestones. And they pay. We just don't announce when we get paid because we expect to be paid. So yes, it came with a payment as did the previous ones. What is the status of the finance agreement between UKEF and our Asian coast guard project? They're finalizing that now and all the paperwork, which is why we're doing all the preparations to start the first delivery. Again, we watch that process that follows a well-worn process that the two governments go together that we are independent of. How do we propose to charge satellite data in respect of boats under the customers' control and those that are not, i.e., foreign vessels? I understand the thrust of that question. The reality is on satellite data, so satellite data is one ingredient into the mix. And this is constantly changing. Every man and their dog is putting up satellites. Every time a satellite goes up, it's got a different sensor or a better sensor. And so our selection of data just widens on a weekly basis, which makes it very interesting. And what we do is we buy that raw data and we resell that to our customer. And it's fed directly into their system, where they have all the analytics and systems to be able to make use of that data. We don't try and discern it and say, "Well, that image is related to your vessels and not foreign vessels." We simply charge for the data and then the customer uses that automatically in the system with all their terrestrial data. And actually, that's what makes it so powerful and the difference between sort of a website thing and actually a professional system. Can I give some comment on how I see future profitability occurring as admin costs seem to be rising with revenue, so the profit and cash seem to be elusive? I think that's a good point. I think what we've done is -- and what you're saying there is will we be able to make a meaningful profit? Yes is the answer. We now operate at the scale that we need to support these large projects. And I think those of you who have seen our research note for -- what's our research note, the research notes that have come out for this year, we'll see that actually now as the revenue increments, the gross profit generation far and away exceeds the smaller growth in overhead. So we now have the scale to be able to deliver these multiple projects and generate those higher revenues. So I refer you to the -- what the market is saying, the researchers are saying about this for us. How much of the Philippines is covered by your systems? All of it. So the fisheries ministry there actually can see the whole of the Southeast China Sea and out into the Western Pacific fisheries. They have a system that can monitor an artisan or fishing boat leaving Manila or a large oceanic tuna vessel that is going out into the Western Pacific to go and catch yellowfin tuna. So it has full coverage. And it achieves that by this unique fusion of satellite and coastal surveillance towers all into a single system, all from their -- in fact, they have 17 monitoring centers, the different offices and stuff, all networked together and coordinated together. Simon, where do you believe the business will be in 3 to 5 years? Well, we'll still be in Somerset. We'll still be doing what we're doing today. What we're at is right at the beginning of a digitization of the marine domain. They want maritime surveillance systems. They don't have maritime surveillance systems. And a parallel is look into the ATC, air traffic control market, which in the '70s was a hodgepodge of individual little towers at each airfield. And then they integrated that into a single system. And that's now a sort of $10 billion a year market. And SRT has, largely by luck in a way, come across this market. And we took the decision to invest in it to have the product and to be the leader in it. And so I would say in 5 years' time, we will be doing exactly the same on just a much bigger scale. We will have more customers with more repeat contracts as they continue to build up their systems. It's sort of pretty much a never-ending process. Are the clients of your current delivered projects happy to act as reference sites? Yes. This is the most important thing for us. And this started a few years ago when, frankly, Bahrain was the first country in the world to decide that they wanted a national integrated surveillance system. And they were so pleased with the performance of our team and our technology, nothing to do with me, that they were very happy to show this off. And this is the same with all our other customers. Once they see the performance of the technology and the system, then they are very pleased to ask -- provide references. That's not to say that these customers aren't highly intelligent, challenging people for us, and we work very closely with them. They're not always happy because it takes time to build these systems. But yes, they are -- the references are the best sales thing for us. What I would bear in mind -- ask you to bear in mind and point out to you is that we do no marketing at all. And yet we've grown our pipeline to GBP 1.4 billion, not a penny is spent on marketing, although we do have a new website coming in about 2 months' time, first one in 8 years. Today's results seem very positive. Why do you think the share price has dropped this morning in relation to them? I have no idea. I don't look at the share price every day. I believe that my job and the job of our teams is to run and work in the business. And the performance will speak for itself in the long term. And hopefully, those that do their research and listen to what we say have a nice opportunity to buy what was yesterday cheaper today. So I don't really comment on what the share price is. It will rise or fall to its natural level. It's out of my control. What I can do is focus on implementing our strategy and building a valuable business with real intrinsic value. How much AI is involved in systems projects? A lot. The heart of our system is AI. If you think that a single radar, on each turn of that radar, produces 3 megabytes of raw data every 2 seconds, so if you have 100 of those, that's 200 megabytes of raw data just on the radar, never mind cameras, AIS, RF, light detection, all these other sensing systems. And to detect tens, if not hundreds of thousands of targets, what you need to do is -- most people are going about their business normally. You need to extract from that, those that are doing something suspicious. And that is where analytics come in. And you need to have -- it's a bit of a buzzword now, isn't it? AI analytics. But you need to have that analytics sort of constantly learning about the environment within which that vessel is operating. So obviously, in the marine world, the way a vessel operates will be relative to the weather, relative to if there's a reef there, other boats, all that sort of stuff. And you need to be -- your system needs to be intelligent enough to take that into account. So a lot. And it's a never-ending process. We are continuing to improve that. And it's a big USP for us. And in fact, in our product management team, we have an analytics lab, currently quite small, but we're building that up specifically around that area. What kind of customer feedback do you get for the systems you've installed? We get a lot of customer feedback. The way we structure ourselves is our project and contract managers are working hand-in-hand with the customer. You can imagine they're going from an old way of operating to a new way of operating. There's a lot of training in what we call CONOPS, which is how are you -- not just what does the joystick do on a plane? How are you going to fly the plane? How are you going to operate an airline? So how are you going to operate your maritime surveillance system, your new intelligence-led digitized operations? And so we get a lot of feedback from them. Things they don't like, it can be as simple, "We don't like the colors or something." Or it can be, "We don't like that functionality there, or can we change that or implement that," whatever it might be. So we are very close with our customers. And we -- I think if you went and talked to any of our customers, you would hear that we are very ingrained with the customer. Are there opportunities for military applications? Yes, I suppose. We are in civil defense. I think I'm real excited about military applications because of the value. But actually, we see the opportunity slightly different, rather like with communication systems and things like for the police, where they have their own dedicated communication system way bigger than the military communication system. It's a different but parallel market. Of course, there are overlaps. But we see the opportunity in civil defense. These countries have coast guards. They have border forces. They have fisheries who have really no maritime domain awareness systems to speak of today. And they want them. They recognize the benefits, the huge benefits of them. And of course, they will share information with their military and stuff. But increasingly, military as we know in the U.K. is about a long way away. I think when it comes to homeland security, that's a different thing. And that's where we are. And so we have no intention of really sort of straddling into the military realm. Will there be nowhere to hide on the high seas and there are opportunities for supernational bodies to use tracking systems to defeat criminal activities? Is this an opportunity for SRT? Well, that's really exactly what we do. And so you need to have sensor systems to detect all these boats like that sit in the picture behind me. They don't all cooperate and transmit information. And in fact, most don't have a transponder. So therefore, you need to use different methods to detect them. And that availability of data is growing. Countries recognize the jeopardy for their marine domain. And that's what's driving our business really into a huge slate of demand that really wants to really know what is happening and control the high seas. So that's exactly what we're doing. And that is the opportunity we saw nearly a decade ago and set about building the technologies and the products and the distribution and the knowledge and all the rest of it that goes into the pot to be able to do that. So I've reached the end of the questions that I -- no, I haven't. I'm not going to answer that one. Do I have a suitable solution for Suella? Yes, we have a maritime surveillance system, which we could install across the South Coast. And it would tell you exactly when a boat is departing from the French shores to here. Obviously, what they do about it is up to them. What the system will do will detect it immediately and give an alert. And then somebody needs to go and do something about it. And what that is, it's nothing to do with us. Just the same as our -- in all our other countries that we're dealing with, where they're installing these systems, it gives them the knowledge and the ability to issue those commands to do something about it. It gives them advanced intelligence. What they do about it is they now have the tools and they get on with it. That's not any of our affair. So I think I told everybody about everything. I would just remind you that our -- we have our systems business, which is super exciting and big figures and what have you, our transceivers business as well, generating great profits and continuing to grow. They are complementary together because we do include transponders in some of our systems projects and we link functionality. So we're very focused on what we're doing. We do it well. And again, I would like to thank all our staff around the world, many working very long hours, weekends and all that sort of stuff to satisfy our rather demanding customers as they should be. And thank you for the shareholders as well for supporting us to this point so far. So thank you very much. And if you've got any questions, further questions, you can always e-mail me or the company. And you can expect a reply the same day or certainly by the following working day. So thanks very much, and I wish you all a happy summer, and I hope you all avoid fires. Bye.