XTEK (ASX:XTE) Presentation, FNN Online Investor Event, March 2021

Company Presentations

XTEK Limited (ASX:XTE) Managing Director Philippe Odouard talks about the company's 1H21 results and outlook for growth underpinned by high-value proprietary solutions and a favourable market sentiment within the domestic and global defence industry.

Good afternoon, ladies and gentlemen. And thank you very much for listening to what I have to say. Certainly, a slightly different picture compared to my predecessors, but it's still a very interesting area. XTEK listed, of course, a market cap of about $40 million.

A few key investment highlights that you can see here. We are very well positioned for very high growth, underpinned by high value proprietary products and solutions. And a very, a very favourable market sentiment within the domestic and the global defence industry. So we focused on market leading soldier solutions. We don't do a run-of-the-mill thing. It's always very innovative and new. We are benefiting from the US expansion, which is accelerating our ballistic solution strategy. We have bought a company in the US which is, of course, the biggest market for defence in the world. We have actionable intelligence, software interfacing with unmanned system, which is very exciting. And we go back into that in a few minutes. There is a very favourable defence market sentiment at the present time the increasing the budgets in general in the worth, are pretty substantial. And we have a very strong pipeline of opportunities and near term catalysts as well.

Next slide please. So, if you look at our financials that we've announced at the end of the first half of 2021, we have a revenue that has been growing from two years ago, a bit steady compared to last year. But I think the main news here is the gross profit has gone up in terms of dollars, but also very much in terms of gross margin. We went from an 18% gross margin last year to 26% for this first half. And that is really important in terms of the message I have to pass today. If you look at the three pies that are on the right, we used to be very much of a company making distributing products from typically overseas OEM. That is shown in particular in the FY20 figures you can see in the first pie. Because that involves the proprietary products in yellow, only 25% and the distribution product, which is low margin, in grey.
And you can see how it has already evolved during the first half of 21 to getting to about 60%, 70% of the high margin products and the distribution getting down. So the low margins products are typically being reduced. And when you look at the medium term, that tendency will continue to go in that direction. So, strategy is really going from distribution product low margin to our own products, which are much higher margins.

Next slide. What we do in terms of our products, we have ballistic solutions on one side, which is always in terms of protecting the frontline protectors. We do work in the combatant area, not the headquarters or the back office. But here we talking ballistic solutions in helmets, hard armour, soft armour, ballistic shields, with our own product, our own technology. On the other side, we have unmanned systems, small unmanned aerial systems on one side and manned ground systems, spacecraft on the other. So typically, unmanned, very new technology. And something that goes in between, which is actionable intelligence. It's data that we derive from these unmanned systems to get action into the war fighter.

Next slide. Recent operational highlights on the ballistic solution on one side, we've invested very much in our Adelaide manufacturing centre, which is manufacturing products in our commercial XTclave scale demonstrating the required high level of ballistic performance. We successfully delivered three-quarter of our first big contract with the finished defence forces. We have a very strong US performance with our subsidiary there that is now fully integrated with the main company in Australia, with a robust demand and expanding sales in the US. We've reported very key people, strategically advisors, with Brigadier Mark Smethurst in particular. But also, we've appointed Christopher Pyne, the ex-minister for defense on our board. In terms of actionable intelligence, we are leveraging actionable intelligence software on the C4 EDGE Program, which is for the Australian army. And we received a $1 billion contract for this. That really allows a number of Australian companies to do a system basically to manage the soldier at the frontline. We've received commercial XTatlas orders from the Danish defence in particular. And we continued our focus in supply of maintenance of unmanned robots, unmanned systems. As we've done in the past and with new people now, with Milrem Robotics, we are representing as well.
In general, we're well-funded. We have executed our international commercial commercialisation strategy following in oversubscribed getaways we did in August last year, which should allow us to invest into the US in particular with the same machine we invested in Australia.

Next slide. So, we have a world defence strategy in ballistics. It's not good enough if you're a starter in a new technology to have a fantastic technology. In that case, we have a very strong process, which is well-developed. And we have a strong IP in place and well protected with patients and the know-how. But we need to get products out a bit as well. So, we have a number of products which are very substantial, which are typically plates and helmets, which tend to be much lighter than what exists on the market. But we also provide a number of other products that are available, 1,000 of those, which we derived from our activity in the US because people don't want only a plate or only a helmet. They want other things as well. But we have a complete offering, which is there. Of note, the helmets in particular is probably the only helmet in the world that it can stop an AK47 bullet, which is an extremely unique product, and which is very much in demand at the present time. Good enough to have a good process, very good to have products, but you need manufacturing capability as well. So, we have that manufacturing capability that we inaugurated in February last year. And that's been producing as we've seen in small quantities to start with but is going as we go. And the other thing that we need is a very large distribution network and major customers. That's the reason why we bought that company in the US. And these guys have got a food distribution network in the US, mainly regional and functional, but with the military as well, being the biggest in the world.

Next slide. So, that's how this machine looks like. And it actually is the new process. You put your plates into a very high pressure vessel, and you process it in a very unique way, which gives you a nicer static pressure and a very strong product and very light at the same time.

Next slide. You can see here that we have successfully manufactured and shot the first unarmored plates there, achieving required ballistic performance, which is very important in that commercial XTclave. We have successfully manufactured large batches, as you can see on the picture. And we have launched a full commercial launch in the US on the 1st of March. So really, we are on the cusp of a large contracts and distribution in the biggest market in the world and as where as well. Future capacity, up to about $40 million a year. This allows you to make up to 80,000 plates a year or about 400,000 helmets.
Next slide. This is where we located headquarters in Canberra, but with about 38 people. The factory in Adelaide with 21. The factory, again in Columbus, Ohio in the US and a number of representative, which allows us to represent our products across the world.

Next slide. Actionable intelligence. We have a piece of software that takes the data, the full motion video from a UAV, and converts that into real time, a very accurate geo-referenced 3D mapping. Which is very important to give you a comparison with previous data on one side, but also gives you a real time situation of awareness and targeting. Targeting with a small UAV of that size is actually very, very unique. And it's very critical to the soldier safety. Especially as we interface those into our other weapon systems, in particular in ground robots. So, not only do you target, but you can pass on that target to a weapon system to engage a particular target.

Next slide. So, we are, on our market channels, I've mentioned the C4 EDGE on one side, which is a program involving a lot of different Australian companies. We have contracts about that. We have been supplying very large contracts to the military here in Australia for small UADs. 1.3 kilos, about 45 minutes endurance. And we do product delivery as well as maintenance on those. And we have a number of other products that we're developing, and we try and integrate as much as we can into larger systems.

Next slide. We are very active in the space industry as well. The XTclave that you've seen, allows you to make material that is much stronger than the other composites that can be done. And much lighter than those, which is very important in space. That particular ultra high pressure processing actually reduces the composite outgassing, which is a very important factor when you make composites for space. So we've been successful in signing a partnership and contracts with Skykraft . This is for spacecraft manufacturer. They have given us a contract for a satellite launch stack, which allows you to stack about 20 small satellites into a launcher. Funded by an Australian space agency grant, Australian space agency, with whom we have a joint statement of strategic intent that we signed about a year ago to cooperate with them on their activity worldwide. So, very, very exciting prospects in there that are starting to pay off because we have contracts now in that field.

Next slide. So, outlook and key catalysts, we have a medium to long-term target of about a hundred million dollars revenue. Last year, we did about $40 million. So we're well on the way to get there. With gross margins at around the 30% mark, that is quite important for us. And it's all underpinned by the fact that we have now this XTclave manufacturing capability on one side. We have a US distribution and manufacturing base. We've established a global network for exports, and we have continuing SUAS supplier and maintenance, which is underpinning a lot of what we do. We do a lot of growth in actionable intelligence and more interesting advanced company material, especially for space. Catalyst to make it happen. We're well-funded. We have $10 million in cash to execute the strategy at the end of last year. And what we expect to see is complete the delivery of ballistic relates to the finished defence force. We're three quarter there, so it's going well. Should be done by the end of the first half of this year. Launch additional ballistic products in the US. We have a number of them that have been launched very, very seriously in the last few days, but we have more that are coming up. We need to order the key parts of our US XTclabe machine. The second machine that we installed in our factory in the US. So that's something to look for. We're looking at that to be done during this calendar year. We'll install, commission, optimise this US machine in calendar year '22. We expect to complete our space project in partnership with Skykraft in the second half of CY21. And we'll achieve a further commercial order. Hopefully for XTclave across domestic and international target parties. As we go, we'll be receiving more regular orders, but we see those increasing as we go quite substantially. And in the end, we continue the supply and maintenance of small, unmanned aerial systems to the ADF, to the Australian Defence Forces as well.

Next slide. So, thank you very much for your attention. I know you won't ask questions, but if you want to contact us, here is where you can get to for more information, then you can contact me. I thank you very much for your attention and have a good day.


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