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

Good morning, everybody. My name is Simon Tucker, I'm the CEO of SRT Marine Systems. Welcome to webcast. So as usual, some of you will be new, and some are old hands at this, perhaps a little bit fed up with hearing from me all the time. There's a couple of rules that I like to follow. Number one is, obviously, I'm going to try and not make anybody inside and won't make anybody inside and cannot make anybody inside. And secondly, like it or not, we have obligations to customers who are also watching this webcast either live or at a later date. And obviously, don't want their maritime security plans and what have you aired in public for their neighbors and what have you. So we have to respect that confidentiality and be aware that it's not just shareholders and the like that are viewing this. So let's start with transceivers. So as you'll know, with our business, we have 2 divisions. We have a transceivers division, and we have a systems division. And our transceivers division makes navigation safety transponders. When we talk about navigation safety, they enable boats to communicate with each other in real time, see where they are, identify each other, avoid collisions, autonomous navigation through infrastructure, avoiding infrastructure and the like. And also now we're moving into VHF radio, which is voice communication. And so that business, we produce a standard set of products, and they're sold through 3 different sales channels. We have our OEM sales channel; we have our em-trak, which is our own brand sales channel; and we have DAS, which is digital aids to navigation, which is specifically around aids to navigation on ports and waterways. So transponders that will go on to bridges and buoy and the like. We produce a common set of products, which are then customized for each of those channels. For our OEMs, we create a unique product, and we sell to them. Most of our OEMs are the big marine electronics brands. They have a whole portfolio of marine electronics products, and we provide them with a specific type of transponder called an AIS transponder. And coming up next year, some of those will then start to take our VHF radio offer, which is called NEXUS, and start to integrate that functionality into their MFDs and their navigation suite. So you can imagine now rather like your -- in your car where your phone is integrated into your navigation display, if you're now on your boat and you're buying a whole suite of navigation equipment from a big marine electronics brand, all of the various functionality will be integrated into that navigation screen and you can touch the screen and speak to other vessels, et cetera. And our NEXUS product will enable that. Last year, the OEM business dipped a little bit, and that is directly related to the newbuild market. So most of the big marine electronics brands sell into new boats. So when you buy a new boat, you take a bunch of extras as you can imagine and one of those is marine electronics. And obviously, new boat builds go down a little bit, which they have. So do the sales that we achieved through our OEM sales channel. But we expect that to level out this year and then start to rise again in the next couple of years. We then have our em-trak brand, where we have about 5,000 dealers and distributors all across the world. So a very powerful network that we've now built up. And that increased in volume during the year, and we grew the top line revenue, again with a healthy margin. We have a lot of plans to expand that market. We will start to do some more marketing now. Focused around our dealers, the power in that in em-trak now is it's a real brand in the marine electronics market. It's a recognized brand for its performance and quality and reliability and customer service, courtesy of our team back at base. And we have 5,000 trained, knowledgeable dealers and distributors. Some are tiny guys, maybe I know based in Malta or in United States, wherever it might be and some are very big shops and outlets. And so we'll be expanding em-trak. And the big expansion there is not just our AIS transponders, which are continuing to grow, but also NEXUS. And NEXUS is our new VHF-DSC/AIS combined radio. We launched that in November in METS, so last month, formally. Previously, we had done a soft launch to get some feedback from the market we could integrate into our testing and preparation of that product. We've delayed the release of that for some time. And the reason we did that is we wanted to get that feedback from the soft launch. We wanted to be cautious about getting this right, getting the functionality smoothed and to make sure that given the brand over the years that we've built up is not sullied by something that is less than perfect. And so whilst that's cost us time last year and money, this is well invested into what is quite an exceptional product. And what this product is, NEXUS, which is being launched as the X100 under em-trak is a combination VHF marine AIS radio, but it allows interface into your mobile devices. So rather than being fixed at the helm, with the CV Star radio talking to people, you now have digital voice processing on your mobile phone. You can make calls on your smart watch to other vessels. You can create an intercom -- private intercom with people on the vessel itself. So if you want to speak to somebody on the bow, while you're at the helm or you're down in the cabin, maybe there's 4 of you, you can do a group call on your watch, all through NEXUS. If somebody falls overboard who is connected to NEXUS, it will immediately create an alert for everybody and point in the direction where that happened. There's a whole array of functionalities that sit with all of that. But it's all about the convenience of boating and any of you -- that our boaters will understand but it's actually pretty difficult to be maintaining everything while you're running around the boat, having a nice time if you constantly need to be at the helm to do all the communications. So we're really excited by that. It was received very well when we did our soft launch, and this was confirmed in November. For the first time ever, we've built up a forward order book, and we will start shipping in February and that is the commitment we've made to our dealers. The initial sales focus of that is not to make a big splash to the consumer. This is not how we operate. We don't waste a fortune money doing all that sort of stuff. We have 5,000 dealers. So we have started a program of educating those 5,000 dealers on the X100. That is where the power of talking to their customers, each of whom who've got tens and hundreds of customers and they can go and talk to those customers in detail about the X100, and that is where the order is coming from. This is the power of the years of building up that dealer network. It gives us and our brand -- it gives us the market penetration in an instant to launch that product. So our focus is training our dealers and not to distract from our dealers' relationship with their customers initially. This is why you're not seeing the X100 up on the em-trak website at the moment. There's no need for that. It is all focused on educating those dealers. With a big splash at METS in November, we're now educating them. Testing continues. Preproduction has started. We will ramp up production slowly in the first month -- 6 months of next year. Just to make sure that if there's any further feedback as distribution widens into users that we can capture that and refine the product before we then incrementally increase production. Typically, a new marine electronics product, transceiver product will have a life of 10 years. So it's not like there's a rush to market, and we must sell tens of thousands of these things in 6 months and then change it in 6 months. This investment that we've made in this product is something that will be amortized over that period of time and the returns commensurate with that, which we expect to be significant and to grow those revenues over time. So X100, otherwise known as NEXUS, which is the core product, will find its way into the market from February in the em-trak brand later on in the year under some of our OEMs. So we're very excited about that, and that is looking good. Turning to DAS. We nearly doubled our revenues last year in that area with a sort of 80% gross profit margin. Overall, our transceivers business did about 49% gross profit margin. And this is reflective of the complexity of the technology that we've built up and the products that we've built up. And now we're starting to see the growth in the market where aids -- digital aids navigation are starting to be deployed more widely. You've seen, obviously, in the States where a ship hits a bridge, the disaster, that can be in the hundreds of millions of dollars that can be happening there. You're now starting to see electronic AIS navigation rolled out and that is why we're starting to see that growth. It's a slow maturing market. But we got in there early, which means we've captured the market. We are the de facto product that everybody is specifying from, I don't know, SpaceX's platform that they put out in the ocean for the rockets to land on, that needs to be marked as the shipping hazard. They use our AIS AtoN to buoys that you'll find in Rotterdam or Trinity Household around the U.K. So we see that continuing to grow very nicely, long into the future, and we've got a core technology advantage with that, which is a combination of different things, size and critically power consumption on those particular products. So our transceivers business is -- we're very pleased with -- and that whilst it doesn't have the sort of [ sets ] and fireworks of $100 million contracts, we do have this global network, this global brand and we have the products and the core technology. And this continues to grow into what is a big marine market. So turning to systems, which is our business where we develop and deliver to customers integrated maritime surveillance systems. So I know everybody wants to talk about contracts or wants me to talk about the contracts. But just I want to address the few points. I do read the Board's and unbridled optimism and all at jazz. So let's just address some issues because I think that it's hard if you're outside of the business and not in full possession of the facts, and I can't communicate all those facts for the reasons that I said earlier, to understand what the situation is. So we started this business about 10 years ago in a vacuum of nobody believing that actually you needed air traffic control type systems for the marine world. It was a sort of forgotten space. And when we started it, everyone sort of felt about laughing and things and nobody would ever do it. And then Bahrain, albeit a small country, implemented the world's first national vessel identification and monitoring system using the system that we have developed. Since then, we have signed and completed contracts worth well over $50 million. And that market has developed to a stage now where without any marketing at all, countries are coming to us and saying, we want to replicate what we have with our air traffic control system, but in the marine domain, and the marine domain is much more complex, has many more vessels and movements than an aviation space. And this is a long -- each customer that comes to us, it is a long-term initiative on their part to build up their systems. They don't just buy a system and that's it, it's done. It's just the same as a business IT system that they start with something and then the -- which is often limited by their budget and also their capacity to move from very disparate analog systems, a man with a pair of binoculars or just a man looking at a single radar scope into a digital complex digital-led system. And where we are today is we have 10 years of R&D and experience under our belt. The SRT-MDA system is now an extremely comprehensive, robust and mature system that we are continuing to evolve, adding analytics and augmented reality and various other functionalities. This is a continual thing. But we have the proven technology and the proven ability to deliver these systems today. And that's because we started this odyssey 10 years ago. So what's happened in the last few years is we've built up what we call a validated sales pipeline. These are those countries that have come to us and said, we've taken the strategic decision to establish a national maritime domain awareness, system of some type, be it focused on safety or security or fisheries management, environmental sustainability, but we've taken that decision to do that. And we've entered discussions with them as to how do they want to build that up? What does the first project looked like. And today, what's happened over the last few years is that VSP has built up and some of those have come out and being converted into contract, be that in the Philippines or Indonesia or Kuwait. And as they've gone into contract, more have come in to that validated sales pipeline. So we have a bunch of prospective opportunities where we haven't validated those yet. We have a bunch that are validated, and we expect to turn into contract at some time in the next few years. And then we have a pot that are in contract. And we expect to see that cycle to continue to go over many, many, many years. Each time we get a customer, we expect likely to be having repeat contracts from that customer for multiple decades as they build up their systems. And each time they build up the system, they will need more maintenance and support and data. So there's a raft of sub agreements that go with that. Normal fair in building these sorts of big systems. And we have got ourselves into the position as being the leaders because we started so early and we've gone through the pain of developing that technology and experience. A couple of other issues I want to discuss that I think perhaps aren't clear are clearly discussed by people. The difference between a performance bond and project financing. Some of our customers, when we sign with them, pay for their own systems from their own money. Many of our customers -- most of our customers can do that if they want to. So that is separate to a performance bond. A performance bond is a guarantee that we give via our bank, which typically is about 10% of the contract value, which basically sets guarantees that we will implement the project, as stated. This is extremely low risk, and we've never had a claim on any project bond. We've done this previously. The magnitude of those bonds and the number of the bonds is now increasing because the contracts are getting bigger. Those bonds are typically supported by our balance sheet and the combination of the UKEF export credit guarantee scheme, which allows that to give you additional support if the balance sheet is stretched. And so we avail ourselves and have done that on several occasions with the UKEF. There was a recent example in Kuwait, where the time scale was so compressed that it was just too quick for them to do it in that period of time. But in the coming months, it will be swapped out from the arrangements that we've made to date. So the only reason we didn't use it for there is it was just too quick for UKEF to come up with the goods, reality and our customer. I've noted the sort of comments we should chivvy people along and let them wait and stuff. It's just not how the world works. In this instance, it went super quick and we had to react within that time scale. When we talk about project financing, this is where a country will take a loan from another country, again from the U.K. government to finance the project. That loan isn't from us to them. It is from the U.K. government to them. So an example is our Indonesian project where the U.K. government is supporting a loan to Indonesian government, normal affair that happens all the time, billions of dollars every year are done like this, and they are providing a loan to the Indonesian government in order for them to then pay us for the project that they want, and therefore, they repay that loan back over a number of years. Again, some of the projects that we're doing in the future, that will happen. We will sign a project agreement, which will be contingent on that finance agreement being finalized. But I think what is not understood very often is that the -- you do not sign a project agreement unless the fundamental terms, the agreement has already taken place between the U.K. government and the end government, typically the Ministry of Finance for all the terms, and they will lend the money and they will borrow the money. That was already agreed. Obviously, the paperwork and everything then takes time afterwards, and we've learned that, that can actually take a long time when it's two governments talking to each other. So hopefully, that's explained the difference between bonding and between project financing. So let me just talk about the projects specifically that we have. So if we talk about our contract with the Indonesian Coast Guard, we signed that in May 2023, so last year, quite some time ago. The loan agreement between the 2 countries for the project financing had already been agreed. We signed the contract, so it defines exactly what the project is. And then since then, the 2 governments have been having their discussions to finalize the loan agreement. During that period of time, the U.K. has changed its government administration and Indonesia has changed its government administration. And I think that, that has slowed down those discussions. But where we are now is the final i's are being dotted and t's crossed between the 2 governments prior to activation. And when that activation starts, we will start to implement that, which we expect is pretty soon. You'll have seen some announcements, and I think those of you that -- between the governments and stuff will know that those things are not made lightly. There are complex discussions, I think, between the U.K. government and the Indonesian government, and it does take a long time because there's lots of people involved and parties involved and what have you. But we are sort of there with the final bits and pieces. There's no negotiation. It's just completing -- I can't actually tell you exactly where it is, but it's not because I don't know, I do know, but it's just dotting of i's and crossing of t's to finalize that, and then the activation will start, and we will start delivering. So I note that people they are angst and everything else. This is a normal process for these sorts of scaled projects and for when you're talking about a finance agreement between 2 governments. We have our Kuwait project, which started very quickly. We signed that last month. We started delivering on that very quickly. This will take 18 months to 2 years to complete. Same sort of time period as Indonesia, $213 million. We have an implementation phase and then we have a support phase. So the support phase is maintenance of the system, making sure it's all up and running, continuation of training. But the lion's share of that revenue is yielded by implementing the system, building the infrastructure and putting our SRT-MDA system onto that. It's an extremely ambitious customer who's in a real hurry, has been found out. The time between the notice of award and signing a contract was 4 weeks. That's it. So we've already started delivering that. We've got people out there now. And yes, that carries on. It is the gold standard of maritime surveillance systems, and we expect that we will have further contracts from the Kuwait government in the not too distant future as they seek to expand from surface into other parts of the ocean subsea near surface as well, so drones, et cetera. We then have 2 further Middle Eastern contracts, one of which we have announced that we had our formal notice of award. And then we advised that we would sign that in December, and that is still what we expect to do. And on that particular one, we may also actually start the first deliveries this -- just before Christmas. It just depends whether they want us to start doing that then or just do it in January. The fourth one -- and that one is worth $9 million. The fourth one, which is worth about $15 million. We also expect -- it seems likely that we will sign the paperwork, we complete all the paperwork in December, but we will start shipping in the new year. And in fact, I'm certain, we won't -- we will push the customer back and say, no, we need to start -- we will start the project in January because we have so much on with Kuwait and this other Middle Eastern one where we need to get going and also the preparations with Indonesia, which will be likely first shipping in very early part of next year. So those 4 projects, 2 of which are starting now, 2 of which are starting in the new year are collectively worth about GBP 320 million. The majority of that comes over during their implementation periods, which vary from sort of 2 years to 1 year. So we have a lot of work going on. We did expect some of those to have started earlier of the year. And so we have built up some of our overhead and resources to enable us to have the capacity to do that. So what does that mean? People like in-country engineers. These are big projects. These customers are ambitious, and they require continual engineering support on the ground to make sure these things are implemented. These are enormous projects, you need to hire those people. And it's 6 months before they become productive. Why does it take 6 months? You're talking about super complex system, and they need to be on the ground managing that. That takes a lot of training. So we hired them quite early with hindsight, perhaps a little bit too early, which meant that the overhead built up earlier when the revenue was coming later, hence, incurring a loss. But on the flip side of that, that now places us in a much better position to be able to accelerate with all these projects. We still will be hiring some more people to fill in some of the gaps but it does place us in a great position to be able to deliver those projects. Looking forward, beyond that, we have a number of other projects in our validated sales pipeline, some more in the Middle East, some in Africa and some in Southeast Asia, where we see significant project opportunities in the next -- over the next 1 to 5 years. A couple of them we would hope, as indicated by the customer, we would have those under contract during the course of next year, possibly also starting next year. So therefore, on top of them, these existing contracts, some of those from existing customers and some adding to our stock of new customers. So on our systems side, we have a very busy road map ahead of us for the next however many years, certainly, under the existing contracts, significant deliveries and revenues around GBP 320 million over the next 3 years. Notwithstanding any conversions from the validated sales pipeline, where we've seen steady conversions over the next -- over the last couple of years and now we've reached that point of implementation. So I think I've given everybody, hopefully, a good feel as to where we are.

I'm going to ask -- I've had a few questions, so I'm going to sort of answer those and also if you've got -- in front of you -- if you're watching this, you can ask some questions live. So some that have come in. One was about satellites and would be interested in dealing with certain satellites companies to build up satellites and things. Years ago, we considered implementing our own satellites. We decided against that. And the reason for that is everybody is putting satellites up. And so there is a wash of commoditized data that we can buy raw and process in the SRT-MDA system. Our MDA system is designed to be sensor and data agnostic so that we can work with the customer to say, well, okay, you don't want to get that data or use that center, you can use this sensor or use this data. And it enables us to -- as each satellite goes up, each time there's new centers, new data, there's intense competition between satellite providers, so the price of the satellite data is coming down, which is a benefit to us and our customers. So the short answer to the question is, we know what's going on in the satellite field. There's a lot going on, a lot of data, which is relatively low resolution compared to terrestial data but we're not getting into the satellite business, never will. Subsea. So you'll have seen that Ocean Infinity now has a sizable stake in SRT, which we welcome. That has helped us financially to be able to get -- make this enormous leap into these huge contracts and given us that cloud to be able to do that just like that. But also what's come with that is an operational synergy. They have exceptional expertise in robotics, so you start talking about autonomous vessels, both subsea and on the surface and in the air. And of course, autonomous vessels are now going to become a component of the SRT-MDA system. So they are used for remote surveillance, persistent surveillance without humans being on them. So if you can imagine archipelago in Southeast Asia or perhaps on the right -- on the fringes of the borders in the Middle East. You now have very sophisticated autonomous vessels out patrolling for days and weeks on end, feeding back surveillance like a mobile surveillance tower back into the SRT-MDA system, which has enabled to then use that data to spot the bad guys and areas of interest. And when they spot the bad guy or they spot an event, they're able to respond and dispatch a manned petrol vessel. So now we immediately have that very tight level of integration with an entity. And so when we form that sort of partnership, engineers can talk completely openly about everything, and you get that really tight integration operationally. And so we welcome very much, Ocean Infinity join the party. We give them access to markets perhaps that they hadn't access to. So it is a win-win situation all around, and we've already seen the fruits of that in Kuwait. We will work with them over time to extend. We've got a lot of our customers now saying, what can we do in the subsea. It's a core slab at the moment because there have been some cables cut in the Baltic. But if you take the Middle East, there's huge amounts of subsea infrastructure upon which their economies rely, which they must protect. And we will be in a unique position to be able to do that by delivering systems and capabilities from Ocean Infinity under the SRT hat within our systems. So we will be able to use that to detect perhaps submarines and things like that coming into territorial waters, coming near sensitive infrastructure, generating alerts, being able to track that to be able to coordinate surface vessels and the like to then respond, et cetera. So it's a logical thing. Another question I've had is why has there been a big share price spread? Well, I'm not in control of our share price. The best I can do is try to remind people about business when we go quiet and that we haven't just sort of disappeared down a hole in the midst of [indiscernible] that we are actually doing stuff. I think that's reflective. To be honest, my personal opinion is that we have had a long path to get here. If you're risk averse, you see us in one light. If you're an optimistic fellow, or lady, you see us in a different light. And I think that sometimes is that gap in buying and selling, and there needs to be that spread. I hope that as we start to deliver, and that's reflected in real and substantial revenues, sustainability and people believe actually what we say about the contracts and the customers and the market and things that gradually those people that are immediately skeptical and immediately risk averse, will actually see that what we have here with SRT is a business with real foundations built on technology, a market that wants our product, a product that is a proven capability, a proven brand in the market, customers come to us. We don't really do any marketing on the system side. We don't need to. And gradually there, that will change. And obviously, the spread will go with that. But if I knew what that would do, then perhaps I'd be doing something else. Just looking at the questions that -- will Trump's threats of tariffs have an effect on U.S. sales? I don't know. I don't know what he'll do. Does anybody know what he'll do? I think there's a lot of talk to create negotiating positions. What actually happens is a different thing. We had all that carfuffle with Brexit and stuff, and would it affect our business, and we continue to grow in the EU market. In the end, boat owners want to buy the product. And we are pretty much the only game in town with the quality product to trust what price your safety, what price to have that reliability that everybody associates with SRT and em-trak. Even if there was a tariff, is that going to affect things much? That's not been the evidence with Brexit. So I'm not too worried about that and I can't predict what will happen. But I can predict is we will continue to make quality product that the customer in the market wants. Can you highlight the biggest execution risk related to project implementations? I think the biggest -- how to answer that question. We've done this before. There aren't really any great risks other than time scales. There are the inevitable delays, weather, for example, which prevents us to get to a site on time. There's lots of suppliers that all need to converge onto a site to be integrated into that site to be commissioned. But individually, is it a risk to build a 80-meter surveillance tower or a building, not really. This is common fair. Is it a risk to -- for a radar to work that we bought from a reputable supplier for years of -- with years of manufacturing? Not really, but they might deliver. Instead of 7 months, they might deliver on a 9 months time scale. Is our technology new and never been proven? No. It's been in active use now for nearly 8 years and been continuing to evolve and supported by a massive team at SRT. So I think the only execution risk is just getting the time skills right. And as you'll know, if you've ever been in a project even, I don't know if you've redone your bathroom, things don't go according to plan and you have to move around with that. But we have very good project managers in each of these countries that are managing that and a very good support team, which we're building up what we call a PMO office to support that. What effect do we see AI having on our business? Well, we use AI in our -- I think -- well, I think the first thing is everything gets labeled as AI at the moment. Often that's nonsense in our opinion. So -- and certainly, if you ask some of our data analytic engineers, what actually is AI, it's actually a small subset of that. What effect do I think it will have on our business? We're implementing that into our system. We already have quite extensive analytics that will look for areas of interest, vessels of interest trying to determine is that people smuggling or is that drug smuggling or is that weapon smuggling? And obviously, we will continue to improve that by using AI in the system to enable that to learn from the various operators. One of the unique selling points on our system is -- the original concept was this -- we're going to mop up all the data and knowledge from users on the boats, from users on the coast line, observers, from the operators. And as they use their intelligence say, well, actually, I don't think that's drugs. I think that's weapon smuggling. The system will learn why they characterize that boat as a drug smuggler and that boat as a weapon smuggler or why that particular fishing boat, it's not illegally fishing, it's okay, and there aren't the false alerts. So I think AI will have a big effect in the value of the system that we're delivering to the customer because it will give them much more precise and higher confidence information, which then enables them to react in the right way and have less false positives. So I think that's how it works. We may start to use different forms of AI in coding. But we're talking about quite complicated coding, so -- and I'm not a software engineer. So I'm not exactly sure how that will affect in improving our efficiency of creating our technology. We do use AI to try to shorten certain things in creating documents and training and things like that. It's quite useful, ChatGPT and stuff to use that. So we are adopting it, but let's not get carried away. The big effect will be in our system where we've already been using it for a number of years. Okay. So I think I've answered pretty much everything. And our Philippines business carries on as normal. We have a customer there that I just haven't mentioned with BFAR. We've signed our sustainability agreement, that carries on. There continues to be some negotiation between the commercial fishing companies and the Philippines government over changing regulations and everything that goes around that. And I think that hopefully, that will settle down and sort themselves out. So overall, we're in a really favorable position. We've done some fundraising, which has put us in a much stronger position. It has enabled us to take these contracts. At long last, those contracts are now -- now started to be delivered. We're in a position to do that. It's not to say it's easy, and we still need to sort of build up capacity to do that. So hopefully, I've asked everybody's questions. We will have an AGM on the 23rd of January. As usual, cakes from 9 a.m. and tea and coffee and open day. The idea there is to come and talk to somebody else other than me. Come and talk to our project managers, our engineers, all the people -- 130-odd people that actually live and breathe and make this business hum as a great British business. Come and meet them at 11:00, we'll then move to the local hotel and have our AGM followed by a bit of a lunch and then everyone can go home. But I do encourage come to the office and actually see the products, see the people that are behind it, if you're interested in what we're doing with your investment. So thank you very much. And if there are any follow-up questions, you have my email address, e-mail the company or anybody else in that, and they'll be happy to answer. So thank you very much, and I look forward to some updates in the coming weeks. Cheers.