Transcription of The Stock Network Interview with Electro Optic Systems (ASX:EOS), Dr Andreas Schwer, Managing Director and CEO
Lel Smits: Electro-Optic Systems has completed a multi-year transformation, strengthening leadership, commercializing high-energy laser and space control IP, and expanding into growth markets while also enhancing its counter-drone portfolio. With an unconditional backlog of $459.1 million, EOS has recently outlined in its full-year results how it’s positioned for global growth across NATO, the US, Europe and the Middle East. I’m joined today by the CEO and Managing Director of Electro-Optic Systems to discuss how the company is accelerating market traction following its turnaround.
Andreas, welcome back to the Stock Network.
Dr Andreas Schwer: Many thanks for inviting me for this interesting round.
Lel Smits: It certainly has been a very interesting period for the company, and in terms of your most recent announcement, it’s really shown that you’ve refocused on counter-drone systems, high-energy lasers and space control, sold non-core assets and strengthened your balance sheet.
In terms of the year ahead, what are your key focus areas going to look like?
Dr Andreas Schwer: It’s twofold. Obviously, we want to execute on an excellent order book, which is with $459 million, quite a record high. We have the great potential to turn more than 40% or 50% of this order book into revenue this year, plus all the orders which we expect to come in this year, plus the revenue which we can expect coming in from our recent acquisition, Mars, once the steel is formally completed.
That’s the first element, delivering and creating revenue and obviously achieving a positive net earning situation. The other big pillar of activity will be to continuously work on the order intake, and we expect that this year will be the last year in terms of order intake. We have great opportunities ahead of us, and we hopefully will end up this year with a much, much higher order book as we have had end of last year, which was already quite a success.
Lel Smits: And Andreas, in terms of that growing backlog and global demand, you reported an unconditional order book of $459 million at the end of last year. What’s really driving this demand, and do you expect these drivers to persist into the year ahead?
Dr Andreas Schwer: Yes, it will continue. It’s building two big pillars now. One is obviously the demand globally on anti-drone systems, which comes with cannon-based air defence to a large extent. So we have got many inquiries and many opportunities ahead of us, short and mid-term, now getting also into larger quantities. We have been selected by key customers like the US Army, the British Army, the French, the German, and many others.
So that is a big, big driver. But obviously now, even more, after we have signed the first contracts for high-energy laser weapons, and as we have opened, as the only company worldwide, a serial production facility for high-energy laser weapons, we are in the pole position to sign new contracts. And that’s obviously something which is in the focus of this year, to sign something before the year ends in the domain of high-energy laser weapons.
And there’s only one competitor with us on the market, in the global market. So that is giving us lots of confidence.
Lel Smits: Excellent. And also speaking of potential, last year, you announced a contract in North America. Can you tell us more about the opportunity there?
Dr Andreas Schwer: That was a very strategic landmark contract, even if the size of this contract was small, but it is the door opener to the large US Army market. So you need to understand that the US Army selects their suppliers always for the next decades to come, for the next generation of platform families.
So we have been successful to be selected for the next generation of APRAMS main battle tank for the US Army. That is a landmark contract because the procurement plan of the US Army is to procure more than 2,500 of those vehicles in the future. Plus, we have a great outlook of retrofitting to a large extent the existing APRAMS fleet.
So just this opportunity with the US Army alone has a market potential on order intake potential of up to 3 billion US dollars for US. And the same kind of procurement process is going to happen over the next 12, 14 months for the other platforms like the Bradley tank or the Stryker infantry fighting vehicle. And also there we are now in the pool position and we can expect further push there.
We lost the US market in 2008 against a Norwegian competitor because we were commercially naive at that point in time. Now we are back after 15 years of hard fight and our Norwegian competitor made over this timeframe more than $10 billion of revenue in the US market. Now we have a great chance to get back and to get to a large extent this kind of amount of money into US books over the next 10, 15 years.
So it’s a great success. We expect the next follow-on order for the next or for the second pre-serial contract in the course of this year and then from 2027 onwards and the large volume contracts creating a very substantial revenue stream for the company. So just this contract by itself, it’s a game changer for our RWS business for EOS.
Lel Smits: It certainly does sound like a game changer. And while we’re talking about commercialization with high energy laser weapons, in August last year, you announced you’d successfully commercialized your IP and high energy laser weapons systems by way of a world first export contract for a 100 kilowatt system to the Netherlands. How important was this milestone for the company?
Dr Andreas Schwer: It is very important also in two respects. First of all, it’s the first contract where an army is on client is formally introducing a laser weapon into operations. It has left now the field of test and R&D. That is the first thing.
The second thing is we are now in the pole position because we have served the first client with the first system. And we have ongoing discussions with about 10 other clients to also sell to them high energy laser weapons. And a very good testimony is that the Dutch client is more than satisfied with the progress of the first contract.
We have had the client at our opening event of our Singaporean facility two weeks ago. He was giving lots of credits to us saying that we are running ahead of schedule. We are negotiating now with the client to accelerate the delivery up to end of 2027.
So it’s more than half a year faster than what the contract would formally require from us. He’s ready to upgrade the contract by adding features such as navalization to it. And he’s ready to start the negotiations for further laser units to come.
And moreover, the Dutch government is planning to formally release an additional budget defense budget just for high energy laser weapon procurement of 3 billion euro over the next six years. And we have a great chance to become their strategic partner in the laser weapon domain. That is also for us a game changer.
You can imagine that we get to quite some good extent access to this kind of budget.
Lel Smits: Excellent. And finally, Andreas, when it comes to building an integrated counter drain ecosystem, you recently announced that you’d agreed to acquire Mars, a provider of AI enabled command and control systems. How does this acquisition enhance the company’s counter drone offering in a global defense market?
Dr Andreas Schwer: So far, US was delivering effectors or sensors, but we have not been in a position to deliver turnkey solutions, integrated counter solutions for any kind of client. That has changed now. With the acquisition of Mars, we are in the league, the same league as all the big brands offering end to end systems.
But we have the advantage that Mars has developed a very modern, highly innovative system, which is tailored for standalone solutions like protection of airports, critical assets like nuclear power stations. So it comes in for a price, which is only a fraction of a price you have to pay if you buy an integrated system from one of the big brands. So it’s highly attractive and it opens up the market in homeland security and also in commercial terms like commercial airport operators.
That is unique. Now we have this vertical integration done and it opens up many more sales opportunities also for our effectors, cannons, cannon based RWS and the laser weapon business. We can help Mars to reach out into other regions where they have never been present.
Mars is one of the few market leaders, but they are extremely active in the Middle East. They protect all the palaces of the Saudi king, all the Saudi Aramco installations behind Qatar, Kuwait, UAE. They are very strong there, but they never reached out to Europe.
And the key limitation was they had not the financing, not the balance sheet strength to serve even for big bonds or for performance bonds. We can give this kind of financial strength to them, opening up instantaneously greater opportunities for them to further expand. So that is for us also an extremely strategic step forward.
Lel Smits: Andres, it’s certainly been a very busy period for the company and I look forward to seeing what happens next in the year ahead.
Dr Andreas Schwer: Thanks for your time.
Ends