SRT Marine Systems plc (SRT) Earnings Call Transcript

Yes. Great. Well, thank you. It's no more open questions for you and really good to hear from you. And I hope we can catch up with you again over the next few months.

Yes, with pleasure, and thank you for hosting you tonight, and thanks to your audience. Have a wonderful year.

Thank you. Great. Okay. Well, we now have another company presentation for you this time we've got Simon Tucker with us from SRT Marine Systems. And Simon, many of you may remember, he's been on our Mello show a couple of times in the past. First one being in Beckenham, and I think that was probably in about 2008 or '09.

When I was a young man.

When you I were a young man. You came to Darby as well, which -- that was our very first major conference, that one was.

Well, like I said to you earlier, you were instrumental in us getting through the dark times to these bright times. You introduced us to a lot of investors and made a lot of money out of us. So with us, rather, not out of us.

It's a good mutual relationship. It's all good. Engagement is important. Anyway, do you tell us how things are going now.

Okay. Shall I share my screen to take everybody through this presentation that I've prepared. Okay. So hopefully, this can be seen. Come through David?

Perfect. Okay.

So good evening to everybody. Thanks for your interest, and I will wait for people to interrupt with questions, either put your hand up or at the end. Okay. That's fine. So we are a global defense tech business, and what you see in front of you there is a bunch of pictures of the stuff that we're actually doing. I think in today's AI generated CGI world, there's a lot of people talking about what they're doing. We are actually delivering surveillance and intelligence systems for civil defense to countries worldwide. From the Middle East, where I'm talking to you tonight to Southeast Asia and now moving into Africa. And we're doing this with increasing pace. So when I talk about civil defense, what do we mean? So there's two types of defense. There's civil in [indiscernible]. We are in civil. So what's the difference? Military is about defending against it, an attack typically from another sovereign or attacking the other sovereign whichever you want to be doing. And typically, these are theater-based systems connected to a kinetic asset, be it a tank, a missile system or whatever. So that is hard defense. We are in civil defense. And this is all about law enforcement, sovereignty, territory and border security, mission-critical assets such as oil rigs and the like. So where I am in the Middle East, what would that be? That would be oil rigs, that would be border control, that would be smuggling that would be protection of desalination plants and things like that, stuff that is typically done on a very large national scale day in, day out, rather like for us in the U.K., you have the police and you have the civil defense things that are operating. We are squarely in the civil defense market, not in the military selling missiles and weapons and things. And actually, the civil defense market is bigger than the military defense market. So key investment metrics with us. This is a large market, and it's growing. What is growing? Well, previously, there's been analog systems where somebody would sit and look at a bank of cameras and there'd be a big sort of TV screen in front of them with thousands of cameras. Now you want to have intelligent systems that are scanning all those cameras, facial recognition, car boat recognition and spotting through behavioral analytics and highlighting where the bad guys are. There is a huge market now growing, which we saw 10 years ago. And because we were such a first mover, we're now at the apex of that. We have proven core technologies. We're not out to develop stuff from scratch. It's not all just an idea. We have 5 sovereigns today that are using our system day and day rely completely on it. There are no plan Bs. So we're proven and we're continuing to grow on that. We've got ourselves into an established position, and that's because we were there so early. And now you're starting to see that really ignite we've won GBP 500 million worth of contracts. We've delivered GBP 180 million worth of those. So we've got another GBP 300-odd million to deliver in the next year or so. And then we've got a forward opportunity pipeline from existing and new customers, which are currently sitting around the GBP 1.8 billion mark. So the business is exponentially growing and across multiple domains, our markets, it's civil defense. As I've said, this is today about a $56 billion market globally. Our typical customers are sovereigns. So the Ministries of Interior and within those ministry interiors are people like the Coast Guard end, you can see the pictures of those boats that are on the right. That is the Indonesian Coast Guard. And will they need a surveillance system to say where those boats go they've only got a certain number of boats and they've got nearly 2 million square kilometers of EE. They've got 19,000 islands. They need to have intelligence to know where to direct those boats. And they're trying to do law enforcement, critical infrastructure protection. And we also have a business where we're providing commercial and professional mariners with devices that enable them to navigate more efficiently, more safely and autonomously. And so those are the two markets that we're in. We're in commercial vessel, autonomy and safe navigation, our NAV Safety business, and we're in the national Surveillance and Intelligence business. Just a little picture here on the right is a surveillance center that we've installed in the country in the Middle East, all the screens are blurred because obviously, it's national security. Again, what I'm trying to highlight here and we're sort of emerging, if you will, from the depths for some time is that our systems are deployed, customers are using them, and we're just at the beginning of the growth really. So we divide our business into two. We have a navigation safety business, and we have a Civil Defense Systems business. In our navigation and safety business, this is all about using advanced rated communications automatically talking to boys, other boats together, and it enables the ships to and vessels of all shapes and sizes to navigate autonomously and safely and more effectively the growth drivers there are regulation. Increasingly, these vessels are now being regulated to fit these black box transponders that talk to each other. This all started a few years ago when every ship over 300 tonnes had to be fitted with one under an IMO regulation, which is only 150,000 boats. But now you have a sort of plethora of regulation that is driving that. As a result of that, we've manufactured and shipped about 400,000 units, and we have built up a global network of 5,000 distributors. That business is growing, growing, growing. On our Civil Defense business, we had the idea nearly 12 years ago that countries take it granted that they have an integrated air traffic control system, and they didn't have an integrated border surveillance and territory system that would enable them to check all sorts of things that were going on unbelievable,and that was revealed to us in a contract that we have with the U.S. Coast Guard. That is what got us into developing the system that we have today. And now we have 6 sovereign partnerships. What we mean by that is a partner, which I'll explain later as a partnership with the country to build up their system over time. We've got an initial win of GBP 500 million worth of contracts and a visible pipeline that we're in discussions with today with about GBP 1.8 billion from existing and new customers. So talk about our NAV safety business. We make what I call AIS transponders and these are black box transponders that talk to each other. So all these lines that you see here is a vessel automatically communicating each other so that they can know where they are and avoid each other and navigate safety, whether it's a buoy or -- this is a Coast Guard boat or a big ship or a small leisure boat, they all talk to each other in real time. And we have the whole range of products that do that. We are the #1 in the world in that and that is now gradually being regulated around the world. Just to give a scale of that opportunity. There are 30 million boats worldwide. We think today, probably about 700,000 are equipped, of which we've shipped and supplied about 400,000 of those. If you go to marine traffic, which I'm sure we all have when you sat in the beach and on that super yacht over there, each one of those trials has one of our transponders on it, and they are transmitting. And then marine traffic buys that data from various receivers and you don't see all of them, but you see a lot of it. But each of those triangles requires a black box on it, and they come from SRT and Somerset. Customers or anything from a leisure boat owner. Some of you, if you have a boat may have one to the largest cruise ships to the U.S. Coast Guard. We supply the R&LI, we supply the U.S. Coast Card. We supply the World Navy. We supply the Dutch Coast card. Everybody who's anybody comes to SRT and buys our products. We have built a massive distribution network, which are our eyes and ears around the world, and we use that very effectively to grow the business without a huge marketing budget, good profit margin of around 50% mark and the future growth, why not be making $100 million, $200 million contracts, but we see this business growing from where it is today, which is a GBP 10 million a year business with a 50% gross profit margin to a GBP 35 million, GBP 40 million a year business in 3 to 5 years. We then have our systems business, where we're exciting is its big contracts. So what is that all about? We talk about a thing called intelligence-led operations. What is our customer buying when they come to see us. They have limited assets and those assets are patrol boats. And they want to know where to go and when to be there. You need to have the intelligence, not information. You need to have the intelligence that is derived from that information. And so our system gives them that intelligence and the digital command to control to sit in a command center like this, which you can see up here on the right, with all our software, tracking hundreds of thousands of movements at any one time. And from all of those picking out who's people smuggling whose drug smuggling? It's a terrorist of threat, what's the safety of threat, where is -- there is an oil slick? Who did it? All of that sort of stuff. So they get the intelligence and they can decide what asset to send to what area. And we don't do any marketing. The only marketing I do is to you tonight, if you will, to raise our profile, start to raise our profile in the stock market for the first time. customers here come to us. They want to have this intelligence that enables them to operate much more effectively and we're now getting the Lilly pad effect where we have important and big reference systems in Southeast Asia, in the Middle East and now Africa, and neighbors are seeing those, and they're wanting the same thing. So in the Middle East, we've gone from one country to three countries. In Asia, we've gone from one country to two countries and in Africa, we've had our first country sign up with us. And once you've got those countries, each of them are then on a multi-decade path to build up their systems, it's not one and done. So what does that system look like? This looks like a bit of a complicated diagram, but this is the solution that we provide. And it's modular. So if I take Indonesia, where we have a contract at the moment with the Coast Garden, we're building a system up that has 35 coast stations. It has four command centers. It has 35 drones. We're integrating 12 of their patrol vessels and some of the aircraft and we're providing some satellite data and it all fuses into their command centers. We're already talking to them about expanding the number of coast stations they have in a follow-on contract because 35 when you have 19,000 islands, isn't so much. And they'd also probably like some of our unmanned surface vessels on a lease basis. So you integrate our secret source is our ability to integrate all of this within a single software platform within not buyer some cloud data center. This is an on-premise closed security system for the country that they can use. And they get all the intelligence they need and they command and control. Now they can direct their patrol vessels to go to the right place at the right time. But it's a modular system that they build up over a period of time. And like I said, in Indonesia, the [ vous ] contract is $180 million. And we now should finish that beginning part of next calendar year. and we will then start on the next phase to build that up and then once we're in the middle of that phase, there will be another phase, et cetera, et cetera, as they build up. And where we've got to after all these years is multiple moats in our business that gives us a pretty commanding position in the market. Leaving aside the brand and the trust, which is enormously strong, and particularly, if I talk about this region here, we have a particular customer that is really going for gold on their system and the rest of the GCC in the Middle East is watching. And they're now saying, well, I want the same. I want -- I see that working. I've gone to talk to my neighbor and he said SRT, fantastic. This is what you want. So the brand that we now command and the trust is super, super powerful. But beyond that, in the product, we have this ability to integrate huge amounts of data and sensor systems across very extended areas, if you take Indonesia, it's 3,200 kilometers end-to-end. There's four timezones. And that's a hard thing to do unless you just stick it up in the web in the cloud, when you're actually doing it in a private secure system, that's a very hard thing to do with lots of different data. There's the intelligence to extract intelligence out of the system is very difficult. What you're actually seeing here is our system spotting where spoofing is going on. And ironically, you can see where positions proofing of vessels is going on. And so if you just display the Pulse positions of the vessels, that's information, but it's not giving you any intelligence. It's more interesting is if you can say, well, actually, we know that, that vessel is spoofing. So the ability for our system to have that intelligence is quite a thing. And then the command and control because, of course, once you've got that information, you need to do something with it. And so we've got a whole work process within the system that enables countries to run their assets efficiently. And finally, our ability to deliver. This is an image of a Philippine control center with one of our trainers in there. And so we work with the customer to operationalize their system. It's a little bit like, I suppose, if you want to buy an airplane, but actually you want to run an airline. So we teach someone how to run an airline on the basis they're going to come back and buy more airplanes. And so our ability to operationalize the system with the customer to transform them to be an intelligence-led operations. is a really powerful thing. And it's a little bit, for those of you that have been involved in businesses where you've bought some software, maybe you bought SAP or Oracle, it comes with a whole bunch of consultancy and training to enable you to use it because otherwise, you've just got a lot of money on some software we can't actually use it. So today, we have the SRT MDA system. This is the vision for the system that if you go for gold, you have towers on which you have our drone detection system, which we call DDTI, you have radars, you have USPs, you have subsea detection from sonar buoys. And these are made up of constituent components. So surveillant towers on which SRT surveillance tech sits. USVs, which we now have just started leasing to customers with our surveillance tech on that, all integrated into our command and control backbone system. So you can imagine, you can have multiple of these, 5 of these or 12 of these or 35 of these and 1 of these or 5 of these and 35 of those and then keep growing and keep growing your command centers. Where we're going, which is a natural progression, is into other markets, and I'll explain that in a minute. But on our revenue streams, we get those from multiple different sources from each customer. So we sell our core system integration technology. This is where we make our profit. It is complex computer equipment, which is enabled with software. And it's our software, which is called JVs that brings all of this stuff together. We then sell our sensor tech modules, which are radars and cameras, which we source externally, but we have a set of software that extracts, for example, from video targets through shape detection and various other technologies that we've developed and feeds that into the system. We have our own UXV systems now. So U.S. fees and UAVs. These are unmanned both autonomous and remotely operated vehicles that are part of the system and we'll go out and do long patrols, perhaps 14 days, 30 days before coming back they can do interception, they can do on-site surveillance without risking the Coast Guard and the people until they really need to go to respond. We get income from a range of SRT services. So they might be data services where we combine external sources of data. So for example, manifests with vessel tracking data and bring that together in create a single data set that we sell to our customers to training and operationalization. And we also build infrastructure for them. We'll build towers and mobile buildings, but we just subcontract that out to the local construction company or over the local buffets and what have you. So -- but it's the SRT services, the UXP Systems, our tech modules and our integration technology, where we make our money, which brings together into the SRT system. And it's the same for every single customer. It just depends whether some have more towers or less towers or more command centers or less common. It's the same system. And where we're going in the future, which is a natural progression is into land and we already have that pull from the customers. And it's really the same. So you still have sensors that are detecting now people and cars instead of detecting boats. Yes, that changes our analytics. We now have a pretty large data science team that are now looking at to behave, obviously, the behavior of a car is slightly different to a behavior of a boat. But again, once you've learned all of that within the system, the natural thing is for the country to have a single integrated border and territory civil defense system which tells them where that threat is and whether that threat landed at the beach and is now running up the beach and on to the road and they can follow them and find them. So it's a big expansion for us being pulled by our customers as they want these integrated systems. And so as you can see here, it's an easy migration the sealing technology that sits on front of this tower on the beach sits on top of its tower in the desert along a border the same technology that sits on this USV unmanned service vessel sits on a ULV and unmanned land vessel. And again, we're still training all of these guys and girls on how to use their system. And so the country here has a full border, both maritime and land border and obviously, air because radars will pick up drones and things all within a single intelligent system. That is what countries want they don't have today. So financial performance with all that off for me has seen as we've ignited this demand, we've seen our revenues grow from GBP 14 million to GBP 110 million in the space of 3 years. We expect that rate of growth to continue. Why? We've got a contract order book today of over GBP 500 million. We delivered GBP 185 million, but we got GBP 300 million to go in the next year or so. But we've also, during that time, grown our validated sales pipeline of new contracts from 0 to GBP 1.8 billion, in fact, is a little bit higher than that now. And on top of that, you have an addressable market that is growing exponentially. And so we have no need to market ourselves. We look after our existing customers very, very carefully. We are choosy with when we step out with our new customers because we want to make sure that we can service them because we talk about this sovereign partnership. They rely on us to beat them for the next 10, 20 years as they build up their systems and a succession of contracts. And so where we are today is we have multiple sodden contracts in these countries. We're supplying U.S. fees. We're not just talking about it. We're installing and have operating a variety of command and control systems around the world. The countries are using that. We've already got these countries rely on our system. We've already got another visibility of GBP 1.8 billion of contracts coming, and there's more besides. So overnight success after 15 years. And here we are, I hope you found that interesting, and I look forward to some questions, if there are any.

Thank you for that. That was really interesting and I will work my way through the questions. [Operator Instructions]. So first question we have here from David. He says, Hi, Simon, you have an awesome pipeline of potential business. That hardly seems credible. Can you please describe how you qualify these opportunities?

I think it's a great question. Frankly, I sometimes wonder, I can't believe these sorts of figures. We carefully validate that by knowing the customer deeply. So nothing gets into our validated sales pipeline until we know that the political decision has been made that, that country wants to have such a system. We've submitted multiple proposals. We've engaged in multiple levels with the customer. We've arrived at the budget that they want to do for their first contract, and we have some idea of the time scale for them to make not the decision to proceed because that's already been made, but actually to go through their process of contracting. And we have to have confidence that, that's within 3 years of when we're stating that, that contract will come in. And so there's quite a lot that is not included in that GBP 1.8 billion, probably twice that, that doesn't qualify on all those measures to be in there. And the reason we came out with our VSP frankly, was to get to nevermind the 80-20 rule, we like the 90/10 rule, where 90% of our sales resource is focused on where the real opportunities are and not the people that perhaps are idly interested it's maybe 4 years away or 5 years away. So it's very carefully vetted. And half of that GBP 1.8 billion, of course, is from existing customers where we have a very close relationship and therefore, we're talking. I have a conversation tomorrow about this about a particular customer and what's next for them, whilst we're in the midst of doing their existing project.

Great. Now Adrian wants to know about competition. What is the level of competition in your market?

I think there's a lot of competition in the civil defense market, and we're often confused with defense. So if you -- if I've done a good job of explaining the difference between civil and defense, in the civil market today, we have in surveillance and intelligence. We really don't have any competition where anybody is providing an integrated national system. You will see some nice CGI videos from various companies that will say, well, we can tell you about a little area with some radar or satellite company with some kind of satellite service where they'll use one particular type of technology to spot boats. But out what we're offering countries is the ability to aggregate all that data into a single platform, extract intelligence and basically run their national intelligence and security on that system. And today, nobody is competing with that. Nobody has a system that will do that. Now why is that the case? It's because 10 years ago, everyone thought we really is doing it. There was no market. And we started with a contract in Bahrain, which -- and with the U.S. Coast Guard just before that, which gave us some insight, we took a different view. And so for years, we were able to build up the system without anybody viewing. I think we have a very substantial lead and we're peddling hard to, frankly, keep up with the demand, even at the pace you see as scaling, we could probably go even quicker. But when you're talking about a market this peak in a few years' time, there is undoubtedly going to be competition coming. So that's how I would answer that question.

Great. Now Quentin wants to know about Nexus. You didn't mention them. And could you tell us what it is and how it's going?

Yes. So Nexus is in our safety business. It's a -- the reason I didn't bring it up here is that it's it would be like me discussing one particular radar type in our system business. So Nexus is a VHF AIS combination radio system that we developed, which is one of our products in our NAV safety business. The innovation with that is, if you know anything about boats is communication between both is by VHF Marine Radio. And so you drive down to your boat and your nice car with your Apple Car Play and everything is all integrated. And then you get on to the boat and you pick up this crackly, smoking the Bandit CD star radio and talk to the Coast Guard and it's attached to your console, so you can't move away from it in things. And what Nexus does is it links to your phone and your phone becomes that. So you can walk around the deck. You can also then ask your better half. Could I have a cup of tea, who's down in the galley or you can talk to your crew. Are we going to hit the dock? Or are we going to hit that boy. And so it brings a lot of convenience to the boat. It took us a long time to develop this complex product to deliver the convenience to commercial and leisure at [ Marinus ], and we launched that and started selling it cautiously in January. And the reason we did that is it opens a massive new product category for our NAV Safety business. And so and is an absolute safety critical device. And we wanted to make sure that there are no gremlins in there where somebody pressed the button to communicate, and it didn't go for bid. And so we've shipped about 500 of these, which was our production run for the first 6, 7 months. We now have those people that have been using them and had their feedback, and they've now become advocates and people promoting that out into the marine world. And so now we're now broadening the distribution amongst our 5,000 distributors. So we're very happy where it's going. I know some of those that have known SRT and you clearly do, which is why you've asked about Nexus, wanted us to launch it and sell 50,000 of them immediately. Me too, but that possibly would have been a bad decision in case there was something wrong with it or there was a gremlin in there. And so we've worked through it in a logistical fashion, and we're very happy with it, and now we're starting to make grow that. It's a cool product.

Now Bill says, can you say a little bit about your major shareholders? Is there any overlap between your business and the Ocean Infinity Group and they're your biggest shareholder?

They're not our biggest shareholder. The [ Percy ] family, from [indiscernible] is our biggest shareholder. But that's a side they are a major shareholder. They have made an investment in the business without any commercial handcuffs or any commercial arrangements between us whatsoever. They recognize as a business that the marine domain. We know more about the moon than we knew about the sea. And there in the commercial oil and gas field mostly, they've made a commercial investment in us. They've done rather well out of it. the overlap has been that they have some very good autonomous technology, which we've made use of in some of the USPs that have been supplied initially. What we do in the future, we're both separate businesses. we'll see. But there is no long-term commercial arrangement between us. They are a -- an investor is the same as anybody else. Given the scale of their investment, we invited Oliver Plunkett, their CEO, to join the Board. And frankly, irrespective of whether he was CEO of Ocean Infinity or McDonald's, I would want him on the Board. A great guy knows his staff and speak his mind, and we have some really robust conversations and he's in it for SRT to be successful in Ocean Infinity. We've got a number of other major shareholders, so I'm not going to name who I know very well of similar sort of wealth self-made that have recognized our business and stuck with us. And so we -- I think anybody that's communicated with us, and I welcome everybody e-mail me after this. And it used to be that I would e-mail back in an hour. Now I'm a little bit busy, and it takes me 24 hours, so apologies for that. but I will e-mail back. So we try very hard for investor engagement because it's your money. It's in the company, and we're the custodian of it. We take that seriously.

Great. It sounds like a good partnership with your...

It's not a partnership. They've got an investment. They have an investment in us. They've made an investment. We do some work together. But we're not joined at the hip in any way, and there's -- we're both independent companies doing our own thing. But I think what they do is great. What we do is great. And I think all over that sits on the board is a great guy.

Yes. Good. One here regarding border security. Last and immigration are big political issues at the moment here in the U.K. and Europe. Is that translating into real orders? Are you seeing interest from Europe and the U.K. as demand comes rather than just customers in the Middle East and Asia?

Yes, is the short answer to that question. I think that Europe and the United States hasn't had the jeopardy. I think 10 years ago, who ever thought was Europe's expanding, Russia might become part of Europe all that sort of stuff. And now there's a war on the borders and people's WiFi, god forbid, is being cut across the Baltic, all that sort of stuff is happening, so that jeopardy happened. And yes, as a result of that, there is interest in these sorts of large-scale civil defense systems in Europe. But Europe is slow to move. Other countries, this particular region, Southeast Asia, they will take our national security. They've been taking it very seriously for some time and now want the best and they have the money to do it.

Good. Now Jake wants to know, how do you get around the bad guys in boats, probably small boat, who will be surely removing any monitoring devices so they can remain hit?