Synectics (LSE:SNX) — Interim Results

0:01 Good afternoon, and welcome to the SYNECTICS PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be dismissed at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. Have the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Paul Webb, CEO. Good afternoon, Thanks, Alessandro, and good afternoon, everyone. As Alessandro said, we're here to take you through the interim results for SYNECTICS PLC for 2023. I'm Paul Webb, chief executive, and with me today is Amanda Lander, our chief financial officer.

0:50 For those of you who don't know the company so well, just a very brief introduction. We develop and provide security and surveillance systems, and we choose to do so in a number of specialized markets where security is critical to operations, often in environments where there's strong regulatory requirements as well. We work through a global network of integration partners to deliver and and support the systems. And we also have our own business in The UK, the tax is an integrator and a channel to support some of our customers directly in The UK markets. Increasingly, our our systems and solutions are based on our proprietary software, SYNECTICS, which is a very powerful and flexible command and control software platform.

1:35 However, we do also produce specialist camera stations principally for use in the oil and gas market with the close protection, etcetera. Okay. I'll give you a very brief overview of their performance in the in the last period, the first half of this year, and Amanda will take you through the financial headlines. I'll come back and look a little bit at the market sectors and the the current situation in each of the markets we operate in before we look at the financial performance in detail. And I'll come back at the end and just summarize where we're at, what we're trying to do going forward, and and give you some sort of summary. Okay. So brief overview. The results are in line with our expectations for the period, continued progress in both profits and and revenue that that will be aligned to the full year results. Obviously, we're quite heavily weighted to second half, which is not unusual for us in this the seasonal nature of our market.

2:39 The progress in this period underpinned really by a very strong oil and gas market. And we announced recently that we've increased our supply chain and production capacity to cover that with a couple of large contract wins very recently in that. Less progress in some of the other markets. I'll come back and describe those in more detail in a while, but they are inspected to improve going forward. Critically, the order book is very well ahead. We'll go through the details of that a bit later, but very well ahead against the the prior year. And we're really pleased that the strong order intake has continued since the period end and with almost 5,000,000 of new order intake during June alone. So this supports our expectations of significantly stronger trading in the second half of the year. So our full year expectations remain unchanged, and we believe they're in line with market expectations.

3:38 Good afternoon, everyone. This slide sets out the financial headlines for half one twenty twenty three compared with the first half of twenty twenty two. Just like to note at this point as well that following the sale of the non core business in the second half of last year, all information in this presentation relates to continuing and underlying performance. As Paul has mentioned, there's been good progression in the half. Revenue is up 14% to CHF21.9 million. Higher revenue and continued strong gross margins has meant we've been able to grow operating profit and profit before tax by over 60% to CHF 800,000 and CHF 700,000 respectively. And this has resulted in an earnings per share of GBP $3.07, up quite significantly since H1 twenty twenty two.

4:27 Order book is up at GBP 28,400,000 and net cash of GBP 4,000,000 is GBP 200,000 less than at the previous half year. However, this is after the net cash outflow in relation to the sale of the discontinued operation in the second half of the prior year. Thanks, Amanda. Amanda will come back and take you through the results in in more detail in a moment. So as you can see, revenue well ahead of the previous year. It's very pleased with that, and particularly, the order book's very strong. The gross margins in all areas of our business remain very strong, and we'll take you through that in a bit more detail shortly. And we've had no material delivery impacts on the the continuing challenges within the global supply chains. There are pressures there. We are managing them very well. Though I suppose we are factoring longer lead times into most of our contracts and projects at the moment. And particularly in the systems part of our business, increasing recurring revenue, and a lot of customers now signing multiyear support contracts rather than just annual renewing ones.

5:38 So good to see some progress there. As I said, the the the progress in the period underpinned really by a strong oil and gas market is as strong as we've seen since 2014, really, and that's expected to continue for at least the next couple of years. It tends to be a cyclical market, but we tend to have quite long visibility around projects in there. So we are expecting that to remain a strong market for at least the next couple of years. We've announced over the last couple of months a couple of significant contracts for Saudi Aramco, principally for the Zuluth development field in there that will be generating revenue in the second half of the year. So the progress in the first half of the year is built on a number of smaller contracts rather than delivering this large value contract.

6:29 And as I mentioned, we've turned up the supply chain, increased our production capacity, hired some old staff in that area in line with this expected increase in demand that will continue. And in fact, our output, our production output in the second half of the year this year is expected to be the the highest level of production that we've seen since 2014. In the gaming sector, the casino market, we still believe this is a very strong market. It's a a market that was our strongest market pre pandemic. Clearly, pretty much completely closed down for a couple of years. We're seeing recovery starting there, but we're still seeing delays in in in spending and contracts. Like footfall and revenues in most of the major integrated resources returned to pretty much pre pandemic levels, but the the spending, the capital projects have not quite taken off yet.

7:25 We mentioned last time we spoke about a major contract in The Philippines for a new book casino. That's we'll be delivering revenue in the second half of this year, so later than previously expected, but will be delivered in pretty much in q three. And it's been slow going in North America. It's been slow to pick up, and we've seen delays there. But we did secure we've actually secured two new modest sized casino properties since the period end. So within June, we've had a couple of contract wins there as part of our our 5,000,000 order intake in in the period in the month. And a lot of long term support agreements in gaming, where most of our casino customers have now signed up for multiyear support contracts. And we've necessarily been really focused on looking after our existing customers as they've been returning their operations to normal.

8:19 But our focus now is into looking for new projects and and further projects in the future. I mean, progress in other markets has been more modest. We do expect that to improve. We got some fantastic bits of reference material, some bits of work we've done in City Of London, a lot of work we did last year around the Commonwealth Games for West Midlands Police and other authorities there. The work we previously done in Berlin gives us a lot of building blocks, technology, and references for smart city integrated transport type applications. We're seeing at the moment budgets are not really in place. The spending's not where we may wish it to be, but we still see that as a really strong market in the midterm future. Just looking at quickly at a couple of the the customer sites. So I've mentioned the the projects that we've been doing in the period.

9:12 The the the two large contracts for Saudi Aramco with two different integration partners. So for an offshore field development, I'm pleased to say that our camera stations are a specialized three three mode camera stations, explosion protected cameras have been specified by Aramco for the whole of the facilities there. They're a high performance product. And we expect to see further work with that customer, particularly in 2024. I mentioned the casino project in The Philippines. We'd had hoped to get that last year. That project started in 2019, but the construction went on hold for two or three years. We did get that award during this period, generate revenue in the second half.

10:00 But, positively, for their midterm, the the operator of that resort, it is their second property. We did their first property with them about six or seven years ago. They have subsequently announced that they are now looking for a third site in The Philippines to open another resort. So expect to be in pole position for that. Continued work with the city of London Police where we got a groundbreaking cloud based deployment. We essentially operate and support the the city of London from our technology center in Sheffield. Ongoing work there, further integrations to other systems expected over the next year or two. And, really, we're supporting City of London Police with a a ten year program that they call in their secure city program.

10:47 So we're really pleased for continued work there. And very much related to it. We're close to home actually with the NHS Trust in Sheffield. We've recently just delivered a a system across multiple sites there, which is a little bit of a departure from our usual public space area, which tends to be local authority city center, which very much public safety. It really feels that that those sort of large campus and NHS type estates, I guess, eight buildings across the city lend themselves to some of the the capabilities of our SYNECTICS platform. So looking forward to exploring that market sector more so in the next months or so. Okay. I'll pass over to Amanda who can take you through the numbers in some more detail.

11:36 Thanks, Paul. So I'll go through the summary income statement to start with, and then I'll go through a bit more detail behind it over the following slides. So I've mentioned the solid revenue growth in the half, and that's driven predominantly by our systems business. Gross profit was up 10% to million. Gross margin was down slightly 1.6 percentage points and I'll touch on that a bit more in a minute. Operating expenses have increased just under 7% and that's primarily due to cost inflation and new investments. And that all leads to a profit before tax of CHF0.7 million, which was in line with our expectations and compares to CHF 400,000 in the first half of last year.

12:24 And then if I move on to revenue, on the left of this slide, this graph shows the regional revenue movement since the same period last year. And then the actual revenues by region are shown underneath the graph. The three regions EMEA, Asia Pacific and North America are part of the systems business. And then on the right hand side, I wanted to give a flavor of how the revenues are made up and so the donuts show proportion of group revenue by sector. Systems revenues are up over 17% on the first half of last year and you can see the progression on the graph in EMEA and Asia Pacific offset with a reduction in revenue in North America. As Paul has mentioned, the progression particularly in EMEA, which is a region that's now seen growth for the fourth period in a row, has been due to strong performance in the oil and gas market.

13:20 You can see on the top right of the donuts the increase in the proportion of total group revenues in relation to oil and gas, which now accounts for about a quarter of our group revenues. Asia Pacific has also seen revenue growth and that is also due to strong oil and gas as well as some recovery in the gaming market in that region. And revenues in both of these sectors in Asia Pac have nearly doubled since the same period in 2022. Progress has been a bit more disappointing in North America, where revenue has reduced by 1,800,000 compared to H1 twenty twenty two. This is due to slow progress in gaming, as Paul has mentioned, where project awards continue to be delayed. However, a key reason for the difference is due to a large one off refinery project that we delivered in the previous year that hasn't repeated in the current year.

14:11 And then the security business has seen revenue growth in the half, although this has been relatively modest at SEK $05,000,000. And the increase is predominantly due to the recognition of some orders for the on vehicle business, those orders that were delayed at the end of twenty twenty two due to supply chain constraints at the time. And if I look here at revenue profile and order book profile, on the top graph, I've shown consolidated revenue over the last few halves, and this highlights the revenue progress since 2021. H1 twenty twenty three has been the strongest half since the start of the pandemic in 2020. And linked to that, the bottom graph illustrates the order book at the half year point for each of the last three years.

15:01 So the total order book was up about CHF4 million on the previous half year and the previous year end positions. And then in the bottom graph, the lighter gray area demonstrates the amount that we expect to be traded in H2, which you can see is about two thirds of the total order book. That's well ahead of the same point in the previous couple of years. The top graph then illustrates the level of revenues that have traded in the previous second half based on the order book at those half year points. And therefore, we're confident of a stronger second half based on our current order book position. Looking now at gross profit and gross margins. Gross profit increased CHF 800,000 to CHF 9,100,000 compared to the first half last year, mainly due to increased sales volume.

15:50 Gross margin, as I've mentioned, has fallen slightly by 1.6 percentage points, and I've highlighted the movements in the graph. So the biggest movement in the margin is the sales mix due to the increase in oil and gas and on vehicle as a proportion of the group's revenue, both of which have slightly lower gross margins than the other sectors. Secondly, pay rises were implemented from January and there tends to be a bit of a lag in terms of being able to pass on some of this increase to our customers. We've seen a small impact of material and product price increases and also a small impact to the margin from the movement in the dollar over the period. Despite the fall to 41.7%, it's worth pointing out that this is still a particularly strong margin with margins from this year and last year being record margins for the business.

16:44 If I move on to operating profit, so the first block in the graph relates to the gross profit increase. Then I mentioned earlier that operating expenses were up just under 7%, and I pulled out a few things to look at here. So the first is staff costs. Just under half of the increases there is due to pay rises, and the remaining element relates to new investment where we've added business development and stores heads to support the existing and future growth of the business. The overhead block relates to inflationary increases across the business. In particular that from professional fees and electricity price increases. Development and technology costs were 1,600,000 in the half and that was consistent with the first half of last year. However, the amount that has been capitalized to the balance sheet has increased by CHF 300,000, which has a positive impact on the income statement.

17:42 And then finally, results were negatively impacted by a foreign exchange loss of 200,000, which related predominantly to the retranslation of monetary items on the balance sheet. And then lastly now, I'll look through the net cash position. So the business has retained a strong cash position of 4,000,000 at the period end compared to CHF 4,300,000 at the year end. And I'll highlight now some of the key movements in the cash. Operating cash flow, which relates to the first four movement blocks on the graph, has been relatively stable at SEK0.8 million. And within that, we've had a working capital outflow of SEK1 million. And that's due mainly to an increase this half in some larger debtor balances with a couple of our overseas customers who tend to take slightly longer to pay as well as an increase in accrued revenue relating to oil and gas projects, which take longer to deliver and therefore tend to sit longer in accrued revenue.

18:47 The company continues to benefit from the government SME R and D tax scheme and we elected to take one of the recent years in cash, so we received CHF0.4 million for that in the half. CHF0.6 million of CapEx, so CHF0.4 million of that related to the continued investment in new product development and CHF0.2 million related to general CapEx across the group. We've also paid the final dividend in relation to 2022 in the period. And then finally, the group's balance sheet remains strong. We also continue to have the committed but unused banking facility of £3,000,000. Thanks very much, Amanda. I'll just spend a couple of minutes now taking you through some of the the core things we're trying to do with the business.

19:37 So with a a new chair appointed to the board halfway through the period. And so another relatively new appointee to the nonexecutives on the board. We took some time in the last quarter to to review the business and ask ourselves some questions on what we're trying to do. Firstly, we ran we're we're clear that our focus on specialist markets is the right thing to do. We're not looking to make generic product to offer to generally general security market, but the the markets we operate in special requirements. We're able to differentiate our offering in those markets. And we really believe those markets that they're global, and they're either strong now or or in recovery.

20:22 So we believe that these markets offer us still significant room for growth revenue growth over the next few years. That said, we are looking at some adjacencies. I mentioned the the health care adjacency to the public sector market in The UK, which we just started exploring, but also geographical adjacencies to where we operate. And what we believe to to to get further growth beyond the recovery and growth we're seeing at the moment, we we believe the right way to do that is through partnerships. We we deliver most of our projects through partners around the globe, and we do have some specialist channels, partners who are actually developing business, finding opportunities for us. But we're now actively recruiting and developing more partner sales channels to to support our planned expansion over the next couple of years.

21:16 We're reiterating our commitment and investment in technology. It was really good to see some new hires over the last period and some some some really exciting talented new people in our team in Sheffield. We were concerned a year or eighteen months ago. We have discussed that here, but it was difficult to recruit and even retain some people, particularly in the software development area given the nature of return to work and and various other attractions in the market. Really pleased to say that's turned around significantly. We've hired a lot of good people in the last few months. That will continue in the second half of the year, and we're really excited with that what that brings us. The investment in the product, a lot of it is just continuing incremental improvement on the product platform. We need to constantly meet the emerging and evolving needs of our customer base, and we're determined to do that. We're also doing a lot under the hood, a lot that's not so visible to actually bring the the fundamental platform that we're building building our solutions on up into the modern world. And a big part of that, which is related to the the the strategic plan of growing through partnerships, is making the software much easier to deploy.

22:35 We we get a lot of very positive feedback from the users saying that the product is very easy to use, meets their operational needs, not always the easiest product to to deploy and set up. And so quite a lot of reliance on our experts do that. So we wanna take some big steps forward, and we're making some good progress on that to make the product easier, maybe more modern, more intuitive to configure for some of these very complex project requirements. We continue to to support cloud based deployments. We got significant deployment in the city of London, is pretty much market leading, groundbreaking, and we continue to to evolve features that are cloud based, allowing potentially subscription based and software as a service models going forward.

23:26 But also further integrations to the number of best in class AI and artificial intelligence analytics type type capabilities. For clarity, we don't develop any of our own analytics or artificial intelligence, but we integrate to almost all the best in class market leading, whether it be facial recognition, number plate recognition, lost object, left objects, direction of travel from many brands all integrated into our command and control platform. We believe that the long standing customer relations we have are very valuable. It's a really part of the DNA of our business, not just because of the significant repeat business that brings us and also the advocacy that these long term customers give to as we give to us as we're looking for and expanding into new markets and and new customers, but also reflects a very human nature of our business. Some people look at this sort of business, think it's very techy, surveillance technology, but it is a very human business. At the end of the day, we're about protecting people, looking after the safety of people. And our customer base absolutely live and feel that.

24:41 So our our our relationships, our long term relationships, the ability to rely on us for support and to always be there is a really fundamental part of our our overall offering to the market. But one area that we feel we could do better is engagement with all our stakeholders. We worked quite hard during the last year to introduce a new website, which has been well received and significantly increased our social media activity. Though I'm very conscious that most of that activity and engagement is with our customer base, our existing customer base. So we're trying to take steps to to reach further and broader to engage a wider audience, And that includes engaging more deeply and more comprehensively with the investor community as well, which we're committed to do over the next period.

25:30 Conscious as well that there is heightened public attention around supply supply chain security, around sourcing of products. So that's but attention in the public and in the media is is helping to draw attention to The UK developed and provided system and solution. Okay. So I'll just quickly summarize and give you a little bit of outlook, and then we're going to look at some questions in a minute. So we're operating in strong markets or markets that are about to recover are recovering now. And we really believe that we're in a good position now to return to further growth and that these markets do offer really solid long term potential for for further growth. The business is in great shape. We've come through a difficult few years in good health. The balance sheet's very strong. So we believe we have a really solid and robust platform on which to to base further growth. We've now had four consecutive periods of progress, both revenues and profits, slow but steady progress over the last couple of years, and clearly expecting further progress in the second half of the year. The order book is well ahead, a significant amount of that world trade in the second half.

26:46 The order intakes continued very strongly since the period end. As I said, we've got about 5,000,000 of order intake in June alone. And so the trading for the second half means that results for the year will be in line with market expectations despite the the significant weight into the second half, which is usually for us seasonally stronger. Okay. Thanks very much for listening, everyone, and we'll take a a few seconds to to have a look at any questions. Paul, Amanda, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few minutes for you those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

27:36 As you can see, we received questions throughout today's presentation. And if I could just hand over to you just to read out those questions and get responses where it's appropriate to do so, I'll pick up from you at the end. I'm looking at the first one, Emmanuel. I'll answer one from Matthew. He's saying you've got great gross margins. And what could be done to increase an operating level on the systems business? Well, I think, yeah, the gross we're very proud of the gross margins that we're able to deliver in in all our business sectors, you know, even within the security integration business. Gross margin's around 25 points. It's it's as high as anyone really in the sector. But it's very highly geared, the systems business particularly. So as we see further revenue growth, you'll see a huge drop through to the operating margin on the bottom line. And you can see that coming through in the results of the last couple of periods. So just a little bit of top line growth, and you'll see a lot of that gross margin dropping down into the operating margin.

28:33 I'd just add to that, Paul, that we, you know, we have looked over the last couple of years at restructuring some of those operating costs, and we will continue to do so moving forward. And Steve asked what go on. Go Go on. On. If I pick up the next question on the non underlying legal costs in the half. So we've had a relatively small level of legal fees which relate to some final legal fees incurred on a case on an item. I can't really disclose any detail at the moment because it's classified. However, there has been some progress and it will conclude in the second half. Okay. Thanks, Amanda. And Steve asked what's left to do to speed up the deployment of the recurring SaaS style model to transform the operation and additional resources needed. Well, the intention is to make the next major release, the next major version of our synergy software platform certainly available as a subscription based model.

29:38 We're seeing pushback from the market on that still at the moment. We have offered subscription model to a couple of major customers who we felt it would suit them and suit their their business things very, very well. A lot of the markets we work in tend to be capital projects. So when it's building a new oil platform, obviously, or even even sort of these major casino resort builds. So a lot of them do tend to see it as a a capital expense Though we we are committed to putting a subscription model together in its entirety for our next generation software release, and we'll keep on offering it to the market and see if we can get some some more pickup there. So it's not so much resources needed. That's something which is in the planning. We are looking as well at the possibilities of offering product as a service, so offering the complete turnkey solution on a similar subscription basis, and that's still in the planning stage.

30:43 So should I pick up the dividend? So historically, the company paid an interim dividend in addition to a final dividend, and will we look to move to this form of distribution again? So we announced relatively recently that we were going to move to a final dividend only, at least at the moment. We feel this is more appropriate for the business given the second half weighting of the results. So the dividend will continue to be progressive in line with results. We feel like that's most appropriate for the business currently. Agree. And John asked us the proliferation of AI present any threats or opportunities to the business.

31:30 I already tried to cover this a little bit a few minutes ago. It's I mean, we have been integrating various analytics into our system, into our platform for many, many years, and that that continues. Whatever flavor of AI is in fashion this month or or this period, it tends to change. For example, we've those of you who've been up and and seen demonstrations in our technology center in Sheffield over the over recent years, we've actually demonstrated three different facial recognition systems to investors and customers just as as they become the more popular or adopted in the market. So there are definite opportunities there because on various projects that we're doing, people are seeing that they can they can automate more stuff whether it's using video analytics or other data sources to link with the video system, to link with our workflows and instant response type functionality in our software that they can do more with the data. They can get more information that they can make immediate decisions and reactions to. So that that, in turn, is potentially opening up more funding opportunities when people realize they can get more operationally out of the system than that they possibly felt possible before.

32:54 So we're doing a lot of work around storing, manipulating, and be able to search the the metadata, as it's the the data that comes out of these AI systems. It's stored along with the video and all the other instant responses within our system. And you can go back and forensically search that and look for various patents and instance, whether it be them for training or going back to look at responses, which we do now, but we're increasing the we're increasing more and more how how we're offering that to to people as more AI type things have become available in the market. Steve asked the contracts awarded on a tender process typically for new business.

33:43 I guess that depends on the market it's in. It tends to be in public area, public space transport. They tend to be tenders. A lot of the commercial business, most of the oil and gas and gaming business is not a tender per se, but it's just a commercial competition. And to to avoid being also ranting a lot of those in there, we like to work as early as we can with customers on project to help shape the specification to help them realize what they need operationally from the system. We have a lot of expertise and and depth of experience in that. So the example is the live example in my mind is the Saudi Aramco project we got awarded a couple of months ago. We've been engaged with a customer and a consultant for almost three years on that. And so rather than just go into a public tender and responding with a priced answer, if we can help the clients and help to shape the commercial opportunities, that tends to be a very effective way for us.

34:47 Perfect. Paul, Amanda, thanks for that. I think you've actually addressed all those questions from investors. And, of course, the company will review all the questions submitted today, and we'll publish those responses on the investor meet company platform. But just before we direct investors to provide you with their feedback, which I know is particularly important to you both, Paul, could I just ask you for a few closing comments? Yeah. Thanks very much. Well, as you can see, based on the current order book and the and the levels orders coming in, we're we're really confident of strong performance in the second half of the year. And beyond that, we think we're working in some really good markets that offer really good opportunities for growth. And so we're really confident we're seeing further progress going forward. Paul, Amanda, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations.

35:40 This will only take a few moments to complete, but I'm sure you'll be greatly valued by the company. On behalf of the management team, SYNECTICS PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all. Thanks very much. Thank you.