Hello, good afternoon, everyone. My name is Shawn Severson, Head of Sustainable Investing at Water Tower Research and Co-founder. Well next in our Fireside Chat Series today, we have Philipp Stratmann, CEO of Ocean Power Technologies, ticker OPTT. As you may recall, we had them a few weeks back as an introductory call. Very glad to have him back again today. As a reminder, this, our research as well as this chat and others can be found at watertowerresearch.com.
That's www.watertowerresearch.com. All of our webinars and our research is open access, I'd encourage you to take a look at that. Today we have an exciting topic. We're going to talk a little bit about the defense industry and security industry as it applies to OPTT. Some very exciting opportunities there and actually some recent news and, you know, a number of things we're going to address today. I'm going to go ahead and start if you're ready, Phillip.
Yeah. Sounds good. Thanks for having me back, Shawn.
Good. My first question is a general one. Just in terms of the overall industry and opportunity in defense and security, you guys have talked a lot about it, you seem pretty excited about it. Let's maybe run through for investors why you feel this way, what the opportunity is, and go from there.
Yeah, absolutely, and I appreciate the opportunity to explain some of this to you and interested investors. Generally speaking, I think if you're looking at the industry in general, ocean security is national security. If you look at how the world is developing and where we are seeing areas of conflict arising, a huge amount of that is going on around our oceans. We do believe that our systems are very well suited to long-term maritime domain awareness deployments. You know, we have very little to no adverse effects on the environment, and we can be deployed very quickly in contested waters.
This is all part of our ongoing shift that we have explained, you know, recently during earnings calls and also in our last fireside chat to our shift towards, you know, a model that focuses more on recurring revenues and ongoing market opportunities that we can participate. You know, we see the defense and national security market as being instrumental in that. You know, it's a large market. It enables us to deliver ongoing revenues at the same time as delivering an actual value to our war fighters and our allies out in the ocean. You know, this is obviously the result of the pivot that we've carried out, and we are starting to see the initial benefits, and we'll continue to grow this as we evolve in and with the market segment.
I know we're going to discuss this a little bit more, but what was the legacy solution or the incumbent solution, you know, that you're addressing today? Or is this really just creating new opportunities for security and defense industry because of the ability to do remote power? Just trying to understand how some of these issues were addressed previously.
Yeah, absolutely. It's a bit of both. You know, obviously, the underlying problem statement hasn't materially changed. What has changed is the pace which with the adversary can go and do work out in the ocean. We are trying to keep up and ideally accelerate beyond where, you know, adversarial powers might be. What we can do by being able to deploy remote systems that act on a stationary basis, in the case of the buoys, with very low, you know, signatures and/or in the case of the roaming markets with the vessels, is act as a force multiplier.
In the national security and defense markets, that is where you augment the capabilities of Navy, Coast Guard, you know, allied type operations, law enforcement, and being able to provide information in parts of the ocean on a 24/7 basis, where otherwise you would have had to deploy a large-scale ship out into that area with all the manpower that comes with it, with all the fuel you need to burn to do that, with all the training you have to provide our very highly skilled sailors in order to carry out those tasks. We can now be the eyes and ears of our, you know, of the war fighter out in the ocean to monitor what's going on, so we can really pinpoint where a potential manual intervention might be required.
I think it's important to point out this isn't a science project. In fact, my next question is specifically around some recent recent events that you attended and displays. This is something that the military is actively pursuing and, you know, defense or all security departments are addressing. I think it's important this is not just an idea for the next five years. There's implementation and rollouts today, which I want to spend some time talking about the demonstration for the U.S. Navy in Bahrain. I think that's a critical milestone and certainly talks about commercial viability and development of the application and the technology.
I'm glad you brought up the demonstration in Bahrain. You know, we're very humbled and proud to support, you know, U.S. Navy in those efforts. You know, as you mentioned, yeah, we recently finished a several week demonstration for the U.S. Navy's Fifth Fleet, which is based and stationed out in Bahrain. It's called Digital Horizon. I think it was 15 advanced systems that came from 17 different industry partners, which are showcasing unmanned and artificial intelligence technology to really enhance, you know, regional maritime awareness. A bit of background, Digital Horizon was created to advance the command's effort to integrate new unmanned technologies while also establishing the world's first unmanned surface vessel fleet by the end of next summer.
It coincided with, I think it was the Manama Dialogue that took place in Bahrain, where, you know, various parts of USCENTCOM spoke, representatives of the European Union were present, you know, many representatives of allied governments. The U.S. Fifth Fleet efforts are really focused on improving what U.S. and regional navies are able to see above, on, and below the water. You know, we contributed some of our systems out in the region. In fact, some of our systems are still out there gearing up for what's likely to come next. This wasn't just a one-off and done type effort. You know, this is part of a broader effort with various task forces having been stood up in the DOD and, you know, US Navy, particularly to advance the drone and autonomous capabilities for the US Navy, including Coast Guard as well.
Maybe, Phil, can you just give a little example of how it was used? I mean, I know we hear about with the operation, what was wrong. Give me an example of what it did out there, the best that you can.
Yeah, absolutely. For example, our 22-foot variant of the WAM-V participated in one of the exercises that we did whilst we were out there, where it did over 48 hours on autonomous excursion capability, traversing, you know, from Bahrain, and then deploying all the way out into international waters and then returning back to the base. You know, really showcasing that over a multi-day period, you can operate autonomously in order to deliver payloads, deliver surveillance capability, deliver other robots, you know, be that aerial drones or underwater drones, into an area, do the job and come back home, and without exposing, you know, warfighters to any additional risk during those operations.
We were very proud of the length that we managed to demonstrate the capability that we had out there. Yo u know, outside of that, this comes hot on the heels of all the lessons we have learned from long-term efforts that we've done. I think we've mentioned in the past, we supported over, I think it was over 1,200 nautical miles of survey being done off West Alaska using one of our 22s at the back end of the last summer season in Alaska. All of these lessons learned have gone into us now being able to deploy over multiple days, delivering a multitude of payloads and doing it fully autonomous out in, you know, pretty much all across the world.
I think that's an interesting point, just talking about how the technology has been developed in a commercial state, let's say, right? You're talking about, you know, really being able to execute now on the plan, use them and these things. You're not... The technology's in place. You're not having to go out there and invent or modify things dramatically in order to solve for these applications. I s that fair to say?
That is correct. If you're looking at our technology in terms of the roaming capability, you know, we have the 8 foot, the 16 foot, and the 22 foot variant. You know, we have a range of power buoys that we can provide, and we have our, you know, maritime domain awareness software and hardware solution that we can deploy on top of the systems. Really what we are doing nowadays is primarily working on adjusting payload capabilities and tailoring them to the specific payload that Navy or somebody else or DHS wants us to take out into a specific demonstration they might have going on or into a live project in the case of a survey that we might be doing for, you know, for NOAA or for another civilian infrastructure investment side.
Take a step back. Obviously we've talked about the Navy demonstration. At the bigger picture, security and defense applications, what else are we looking at? I've seen, you know, Homeland Defense and Coast Guard. Maybe help us understand a little bit where some of these other operating units could take advantage of this.
Yeah, absolutely. You know, I mean, just look at the United States in, you know, just as an example. You know, there's thousands of miles of coastline that we have, you know, spanning two oceans and the Gulf of Mexico, and plus all the coastline that sits up in Alaska. You then extend that all the way out to the edge of the exclusive economic zone, and you're getting into tens of thousands of miles that require monitoring, surveillance, and various other activities.
You know, be that to prevent illegal fishery activities, make sure that fisheries are done on a sustainable basis by boats licensed to operate there, to prevent drug running, prevent illegal activities that occur across the border, you know, in general, and or prevent adversaries or monitor adversaries that are trying to traverse into waters where they have no business of being in.
Mm-hmm.
You know, an example is we, you know, we recently announced a half million dollar contract to support a U.S. government agency to demonstrate the ability to start monitoring, you know, at the edge or beyond territorial waters in the U.S., which is a system that we're deploying in late spring, early summer off the coast of California. I mean, that's one of many examples of where there's real traction of using the commercially available systems that we have and pushing them out into the ocean to truly now showcase that. Here's the market fit that we've got, and it works, and then expand on that and move it into the next stage of development and deployment.
I want to take that into a very investor and analyst-oriented question. Let's talk about the economics. What does the economic model look like? Specifically, I'm talking about in defense and security applications, may be different than some of the other industries and commercial applications as well. What does that look like when it models through OPTT?
No, that's a great question. As I mentioned right at the very beginning, other than obviously the strategic fit and the fact that, you know, we care deeply about ocean security, we from an economic model, it really lends itself to recurring revenues, as I mentioned at the beginning. That is partially due to the fact that the U.S. government is really shifting fairly heavily, as are other governments, from government-owned, government-operated contracting models to, you know, ultimately contractor-owned contractor
models.
What that enables us to do is to provide the vehicles on, you know, day rates. Obviously, it's not like a day rate where I need it on Tuesday, but I don't need it on Wednesday. You know, these are long-term agreements. During those agreements, we agree on day rate equivalent that it would be out there for. It means that we provide the service personnel in order to maintain the vehicles, carry out the operations that we do. Obviously, that is a very similar approach that we've taken with some of the civilian markets. You know, we're actively building out an inventory fleet so we can respond quicker.
From a customer's perspective, and in this case, you know, it being, if you take the U.S. military for example, it enables them to adopt civilian technologies that exist and are, you know , so to speak, off the shelf by now, quicker and get them quicker into the warfighters hands without having to go through the process going, "Okay, I want to buy X of these, then I'm going to train my teams up to go and deploy them," and so on and so forth. It is a way for government to rapidly integrate commercial technologies and get them into the hands and into the areas of the warfighters where they're truly needed. You know, recurring revenues make our life easier, they're interesting for our investors, and they certainly provide a great stable basis upon which we can build the next level of our inventory for the fleet.
That's interesting. It's like a reverse flow because normally, you know, a lot of new high-end technologies developed in military and, you know, worked on and built there for application and purpose. This time, you got a commercial market that's really enabling military applications, right?
Absolutely. You know, there is a great correlation. I think it's because it's generally hard to do anything out in the ocean. You know, once you've found a way of having mastered some of it, you can get it into certain applications in other parts, you know?
Yeah.
Efforts, as I mentioned, things we have learned from deploying in Alaska, you know, we can equally use down in, you know, in the Middle East. Yes, the weather conditions are more benign in terms of waves, but on the same hand, you know, you're dealing with temperature extremes, whether it's really cold or really warm, either way, you're going to have to learn how to deal with it. You're dealing with being remote and having to have all your spares available.
From understanding how our customer operates. You know, we're proud to have more than 10% of our employee base being veterans. You know, we're thankful for their service, and they add a huge amount of knowledge to how the operator thinks that is really truly cares about the data we collect because the war fighter cares less about the underlying autonomous asset.
Right.
Cares way more about the payload we take out there, because ultimately what they want to have is the intelligence at hand to make informed decisions about where they need to deploy their real big assets next. Therefore, we can lighten their load by providing, you know, the vehicles or the payload as a service and helping them more quickly get to the next level of technology development.
Let's spend a minute talking about milestones, specifically in fence and security. You know, does this mean being invited to additional demonstrations or what from outside should we look at to , you know, track the progress and know that things are going well? What things will be on the horizon for you?
Yeah. I think, you know, as I said, as I mentioned on the buoy side, you know, we'll be, you know, we're prepping the buoy to head out to California, go and do the demonstration for government department to look at, you know, border monitoring and surveillance. We will be looking at additional larger scale demonstrations. I mean, I call them demonstrations, but they're really major military exercises with very established assets.
I think that is a great sign by being spec'd into these larger exercises, because what that means is that there is a true acceptance of these autonomous assets, be they roaming or stationary, being integrated into what are established military exercises that happen out in the ocean. Obviously from there onwards, the development of, you know, projects and operational needs where these assets start getting spec'd into and being provided on a longer term basis to various fleets, and/or allied partners.
Could I ask one last question? We're in about 20 minutes, and then I'll try to get a few from the audience as well. My last question is around, you know, the development of other markets. I'm trying to look at it from a sense of from military. Are you really seeing, you know, which direction is it going? Are you seeing these military applications and then there are a lot of commercial ideas for use that are coming around or, you know, is there a lot of information and knowledge coming from that in terms of how you can use this equipment for, you know, for commercial applications?
Absolutely. You know, we like having multiple streams of revenues, and particularly ones that are essentially almost counter-cyclical, so that we're not entirely beholden to government budgets. There's obviously the civilian and commercial side, you know, that we support. You know, that can include some of the more civilian government entities like NOAA, for example, to support the monitoring of climate change or weather events or other efforts that go on. It is supporting wind farm developers in monitoring their lease areas, you know, using buoys and/or vehicles. It is doing survey work for oil and gas clients.
In fact, you know, we've publicly stated that, you know, we have a master services agreement in place with Sulmara, and one of our vehicles has recently done work in, you know, in one of the islands near the Gulf of Mexico for an energy company to survey the seabed. We've got a similar asset going out to do some work in the Middle East on a similar project in the not-too-distant future. You know, so you can see how there is, there's definite similar applicabilities of what we're doing, going far out offshore to do surveillance work. Then there's the more mundane commercial monitoring work that goes on around, you know, energy infrastructure that exists all over the planet.
You know, the fact that autonomous assets and, you know, zero carbon emitting assets can materially lower the cost point for operators to monitor these systems, do the surrounding surveys, and help them do inspection, maintenance, and repair work at a much lower cost point than otherwise is one that we are, you know, we remain very excited about. As I mentioned, it does provide a nice counterbalance to the , you know, defense budget or other governmental budget items.
Absolutely. got a number of questions that I'm going to summarize into, regarding specific, operations like the Project Overmatch or TF 59, and I'm just going to ask the question in a general way. you know, what are you guys looking at in terms of any other exercises upcoming that you can cite that you want to talk about? Or, I mean, is this something we'd expect to see more press releases on as we go forward, you announce these and maybe what the, you know, what you would expect over the next, or the rest of 2023, I guess.
I can't go into any specific details right now, but as and when the next phases of exercises under demonstrations come out, you know, we will obviously, you know, inform the markets and our investors about these. You know, we are looking forward to several conversations that we're having and building up on the work that we did in Bahrain for Task 59.
You know, other large naval exercises like, you know, IMX take place in Bahrain, and you know, we think that the US Navy in particular, with the work it is doing around things like Project Overmatch, which is focused on the the medium and large scale USVs and looking at multiple autonomous vehicles integration, you know, aerial drones with autonomous surface vehicles. I think there's lots of exciting stuff happening. We are, you know, humbled to be a participant in many of the discussions around it, and we will absolutely inform the market about some of the upcoming activities once they materialize.
Great. Next question is, it's a good one here on the profitability of the different lines of the business, mostly lines, I think they mean applications. If we take defense versus NOAA versus, you know, private industry or oil and gas, does your business model and your recurring revenue model match up with expected profitability? I know you're not going to give specifics on one versus the other, but in general, you think they're going to be close to each other?
I think there's not going to be a huge discrepancy that is going to exist. I think in fact, you know, the price points for the assets and daily rates for service personnel, you know, they are openly and fairly negotiated with all of our counterparties. You know, we feel comfortable with where rates and profitabilities sit as a result. I think I mentioned this, you know, at the last time we spoke, Shawn. You know, by building up a fleet and looking at the useful economic life of assets versus the deployment periods, what is exciting for us is the fact that we can utilize these assets multiple times over throughout their useful economic life.
You know, it still has the benefit for the customer that they don't have to carry the CapEx and the maintenance costs. You know, that sits on our side. The fact that we can go and take an asset, have it out for 100 days, do some maintenance, take it out for another 100 days, do some maintenance, you know, and do that over and over and over again throughout its lifetime, I think that will lead to a fair amount of free cash flow being generated as we move forward.
Yeah, absolutely. Last question I'm going to take is regarding any other grants or third-party funding that still would be out there, or have you passed that stage?
Yeah. We're not specifically pursuing like a lower level or lower spend level, I should say, R&D funding. Right? We're obviously an active participant in funding opportunities that are directly correlated to efforts we've got underway. You know, we continue to do work for NOAA, we're doing work on illegal fisheries efforts. Obviously the major grant that we had was the one that we announced last year, which was just over $1 million from the DOE for the next generation of a wave power device. Other than that, some of it might be grants going forward. They are grants that add or augment on top of the existing asset base that we have developed, as opposed to being grants that we require a need to fuel the next level of fundamental platforms that we require in order to do what we want.
Makes sense. I'm going to stop it there. We're coming up on the half hour, and I'll turn it over to you for any closing remarks. Again, thank you everybody for joining us today. I know we had a number of questions we didn't get to, and I apologize for that, but hopefully you found this informative and obviously a very intriguing market for you, Philip, here to continue to explore.
Absolutely, Shawn. Appreciate the time to talk about it. You know, as I said, for us, we see this as a critical portion of our, you know, market growth as we go forward. You know, we think as an engine, ocean security is national security. We think it is vital not just, you know, for our prosperity, but for everybody's prosperity, that we keep, you know, oceans safe, oceans secure. We monitor appropriately where required. We remove people out of harm's way. We can do so in a way that enhances the enterprise value and benefits our shareholders who, you know, have trusted us with their investments. You know, we never take any of it for granted, and we remain proud and humbled to be able to participate in this market and grow the company within it.
Great, Philip. We look forward to having you back or somebody else from OPTT. We got a lot of interesting things to talk about throughout the company. Looking forward to that. Thank you again everybody for joining us today, and thank you, Philip.
Thank you, Shawn. Have a good day.
Bye.