Pennant International Group (LSE:PEN) — Group's growth strategy and prospects

0:00 Good morning, everyone, and thank you very much for joining the PENNANT INTERNATIONAL GROUP PLC IMC presentation. Before we begin, we would like to submit the following poll, which you will see on your screens. Throughout the presentation, investors will be in listen only mode. However, questions are encouraged and can be submitted at any time via the Q and A tab in the right hand corner. The company may not be able to answer every question, but it will review all questions submitted and publish responses where appropriate. These will be available then via your dashboard. Finally, we would like to remind you that today's presentation is being recorded. I will now hand over to Philip Walker, chief executive and Darren Wiggins, chief financial officer.

0:42 Good morning, Joe, and good morning, everyone. My name is Joe just introduced is Philip Walker, and I am the group CEO of PENNANT. So this is our introduction to IMC. I'd like to welcome any existing investors as well as any new potential investors to this session, which I hope you'll find informative.

1:00 I'm joined today by our new CFO, Darren Wiggins. Darren, would like to introduce yourself? Yep. Good morning, everybody online. My name is Darren Wiggins. I joined PENNANT as interim CFO, actually, in September of this year and made that position permanent in November. Thanks, Darren. So this presentation is designed to be an introduction to PENNANT, explain how the business has changed, and really to look forward and outline the opportunity that presents itself. We do look forward to your questions, but also your feedback after the session. This is our first time, so please feel free to give us any feedback you think is appropriate. So without further ado, let's get into the presentation.

1:46 For those of you who've come across the business before, there's one message to take away from today's session, and that is business has changed. There's been a major shift in the company direction over the past few years and a real strategic shift towards a highly scalable software and technical services model. We've invested significantly in our software suite, which you'll hear about today. We have a new supportive board that's packed full of experience and a new CFO. Darren, perhaps it might be taking worth taking a second to explain to our listeners why you did join PENNANT. Absolutely. No. Thanks, Phil. Yeah. As as mentioned, joined PENNANT as interim CFO,

2:31 and and we quickly, myself, Phil, the board, made that position permanent in November. I think that highlights the confidence that I have in Phil, the board, and the wider penancy. It also shows kind of how I'm encouraged by the pedigree of the company, which Phil will kind of talk through a little bit later in his presentation. The hard work that's already been undertaken to reposition and restrategize this company in the face of some difficult market conditions in all fairness.

2:58 And, of course, the opportunity that our that our product portfolio affords us, and I think that's gonna be a a major focus in today's in today's presentation. So so today's presentation is split into three segments. Gonna do spend five, ten minutes talking about PENNANT, overview of the business. We're then gonna give you a bit of a flavor around what is OXILIUM, what is this software product we're talking about, and then finally wrap up with looking forward and including some financials. So what what is PENNANT? What do we do? PENNANT's been a very complex technical business for people to understand, but what we do is pretty is quite simple. We allow our customers, which are predominantly defense primes, OEMs, government organizations, to make data driven decisions that manage critical mission critical assets in regulated sectors.

3:51 We do that by providing them a powerful suite of software tools, which align with global standards and specifications, and that's a critical point, the standard specifications. And all of that allows our customers to drive maximum operational efficiency from their assets at the right cost. And never has that been more important than in the global context of today.

4:13 And in this, our aspiration of PENNANT is to be the system support enterprise solution of choice. Now that could be quite a lot to get your head around. So as we walk through this presentation, we're gonna try to explain to you exactly what we do and what that means. But just to point out, now we're 80% defense focused, but we are truly a global business. We have The UK headquarters. We have offices in North America, Asia Pacific, and we we operate globally. We're all global customer base. And on that note, I'd like to share a snapshot of our customers. I'm particularly proud of this customer base. For a small UK SME, we've got a fantastic blue chip customer base built up over the last period.

5:00 This presents us with a fantastic opportunity to cross sell our capability into this tool base. But more importantly than that, it gives us credibility when we're going to our customers talk about who we support and what we do. And moving to an enterprise solution really brills up the value chain. Traditionally, PENNANT would have been perceived as a project based tool, would be used on a satellite program in Florida, maybe a naval program in Australia, perhaps a training program in The Middle East. The concept you need to take away from today's presentation is the business has developed a suite of software that can be deployed across enterprise level to manage all of these systems and complex assets for our customers. So how do we operate? Thanks, Phil.

5:46 So PENNANT goes to market or addresses its market through three key segments. And I think this will, again, will be a theme throughout the presentation. Taking each of those segments in turn, the first we've presented here is our software segment. Our software division comprises of three core products. The first is Genet, which is a data configuration tool that allows for tracking and management of subcomponents and assemblies for for complex equipment.

6:15 Secondly, our r four I tool converts data into technical or maintenance manuals for use, again, in the in the operation of that complex equipment. And then thirdly, analyzer the data analytic analytics tool that provides insights into spares optimization, cost trade offs, and repair scheduling. Our software products are sold either under perpetual license with associated maintenance contracts or or we hope increasingly so under under a subscription based per user model. These products are proven, they're established, and they're widely used in our end markets currently. Gross margins are very healthy, as you may expect, from a software segment in excess of of 70%.

7:04 Phil's gonna talk more about the software segment, in the coming slides and the efforts, the major efforts we've made in integrating those three separate elements or separate products into one into one single suite, which is a really important development for us as a business. Secondly, the technical services segment. It's our largest by absolute revenue. It comprises essentially of a global team of experts providing consultancy, training, or development services, usually under repeatable annual contracts across multiple sectors. Gross margins can range from 40 to 60%, and that is obviously contract dependent. And then last but not least, our training solutions division, which, again, we'll we'll we'll emphasize throughout this presentation is our heritage.

7:54 PENNANT manufactures physical or simulated replica training to support the operation and maintenance, again, of complex equipment globally, but usually in the defense sector. Over the last fifty years, PENNANT has established a really healthy installed base of equipment,

8:12 again, in in in in all major regions. We're gonna talk about the restructuring of this of this segment. We released an r and s earlier in the week that also addressed it. That really strategically is designed to make us leaner, more agile, and focus on on services and servicing that installed base through modifications, retrofits, and upgrades. This, we know will lead to an enhancement in gross margins, in excess of 50% from historic average of 30 to 40%. In the training solutions business, delivery tends to be over six to thirty six months. It's project based, and contracts tend to be milestone based, which obviously governs the profile of of cash and revenue. Last thing I wanna say on this slide before I hand back to Phil is that there are there's obviously synergies of operating these three segments.

9:01 Selling in one, operating one can lead to opportunities in another, and we see that on a daily basis. I'm gonna hand back to Phil now to talk through how we've been repositioning within these segments. Thanks, Darren. So as I said at the start, the real key message to take away from today's briefing is that this business has taken decisive action to shift towards a software and services model. The software and services segment, as you point out on that slide, is looking to account for 85% of our revenue. If you look back to this business twenty twenty twenty when this strategy was initiated when I became CEO, this segment only accounted for 30% of our revenue. It's all designed to drive better quality of earnings, improve our margins, reduce our working capital because the historic business in PENNANT was exposed to lumpy, heavy working capital cycles, and we've largely achieved that.

9:53 And we'll tell you a little bit more about what we've actually done on the next slide. But to Darren's point, training remains our heritage. The business credibility, our relationships are built off a long track record delivery on the on the training side. And the key point here is that we've realigned this business. If anyone's following the strategic defense review or looking at the global markets, spending on defense is not slowing down. However, spending on new platforms and new capability isn't happening.

10:22 UK defense seems to be focused on capability enhancements, upgrades, retrofits, and our business has now been realigned to serve that market. We have a installed base across the world of trading systems, and we're now well positioned for much leaner working capital profile and lower cost base to service customers. So I'd like to explain or get Darren to explain exactly what have we done.

10:49 Okay. Thanks, Phil. I think, yeah, in short, a lot has been done in in recent years to reposition towards that software and technical services segment. Firstly, we've invested over £7,000,000 in the auxiliary software suite and its integration, a large a large number, and one that is, is is bearing fruit already as those products are generating, circa 3,000,000 annual revenues from a global customer base. I think, crucially,

11:24 the team have done an excellent job in recruiting, training, and retaining a core team of talented software engineers who continue to build value for our end users. And we shouldn't overlook the fact that in 2020, a very successful strategic acquisition was made, that that brought the r four I product into the group, an extremely successful integration.

11:47 Phil and the commercial team have already begun to build, a partner led go to market strategy, which Phil, will will talk more about, in a short while. Winning, bidding, and identifying by identifying globally through, new intermediary relationships, giving us a wider and deeper reach into into all of our end markets. And, again, not to be overlooked, the the the operating model change that that's been made recently is to regionalize our business structure, put in three general managers in our three core regions, North America or The Americas, Europe, Middle East, and Africa, and then Asia Pacific with with ownership and accountability in those regions, but not losing the ethos of one PENNANT globally.

12:33 In the training segment, as already noted, and and I'll again refer you to the RNS that we put out earlier this week, A lot of work has been done to restructure the cost base, and we can now we can now kind of disclose that that that we've achieved 2,000,000 per annum of savings from that restructuring exercise alone. That restructuring exercise continues as we as we rationalize the footprint. And here in The UK, we're in the process of of of of reducing our our own footprint here in the Cheltenham HQ. Phil and I have alluded to the fact that that that this exercise really repositions us to be a leaner, more agile business capable of of of servicing that installed fleet. And that's gonna mean leading on our trusted network of outsourced production partners here in The UK.

13:28 And, again, crucially, retaining that key talent in terms of design engineers and project managers.

13:35 Thanks, Aaron. So we've done a lot, but still still work to be done. So moving on to the second segment of this presentation, we've given you an overview of PENNANT, what what we've been doing, who we are. I'd like to spend a little bit of time actually explaining OXILIUM software. So for those of you who don't know, OXILIUM, I should have done a a poor competition on this, is a is a Latin word that means to support and assist. And everything we do at PENNANT is about supporting and assisting our customers, their people, and most importantly, their critical equipment and assets. So that is Axillium.

14:13 Darren mentioned earlier, Axillium is bringing together three proprietary proven products that have been in the market for twenty years and bringing them together into a single vendor.

14:24 We believe we are the first software that combines the support analysis work of Genas, the analysis optimization work of analyzer, and the publication standard all into a single toolset, all brought together into common data repository. Although this name's new, I mean, we've mentioned it a couple of times now, this prod these products individually have been servicing the global defense market for well over twenty five years, and we've invested significantly to bring them together. The key point of this is efficiency of data, integrity of data, alignment of standards. By adopting this approach, we can ensure traceability of assets, integrity of data, and compliance with regulation standards, which is a critical factor in the regulated markets we operate.

15:17 I'm not a technical person, but I'll have a quick go at explaining exactly what we've done from a database technology perspective. If you look across the market, you look at our competition, and you look at PENNA historically, the way these applications of tools have been deployed have been in modular database platforms. These have been interfaced, not integrated. Data exchange, therefore, requires data to leave one system and enter another system, which could be time consuming. It it implements or into it causes a level of data risk and can be inefficient.

15:52 What PENNANT have done is bring the three core applications together into one common database. What that means is data's in data's entered once, once only, and that data can propagate the whole system be used multiple time. Product number is a product number in a configuration. It's the same product number in a technical documentation. It's the same product number in analysis. At the moment, this is a hugely inefficient process, and this is we're the first people to bring this type of solution to market. So I've got a lovely picture here of a type 26 frigate. Just just to take a step back a second, what is our mission as PENNANT?

16:34 Our mission is to ensure that critical assets are where they needed, when they are needed, and most important, that they work. And this toolset is designed to support that process. This is the Canadian surface combatant. This could be the this could easily be the hunter cast frigate in Australia or type 26 in The UK. These are global platforms. Complex assets have millions of parts of data. This is actually an asset we support in in North America. But what what do we actually do? So I'm gonna give you two very simple examples to explain how this system could would would would help in this process. If you if you take a very well known case recently in the UK defense department, the HMS the Queen Elizabeth aircraft carrier, flagship flagship vessel for our carrier strike group, was both supposed to join, war games in Estonia. It was stuck in the dock for four weeks.

17:31 If you follow the press and read what happened, there was a small part that wasn't available on a maintenance perspective for the turbine, which mean the ship couldn't sell. This system would ensure that those assets, those spares, that maintenance had been done and was available. You'd no longer take. You could not afford in the current climate for that vessel to be stuck in the docks for four weeks if we were in a military confrontation. So these systems are absolutely critical. Another good example would be something like a coast guard or emergency services. You cannot fail to to fly a coast guard helicopter if someone falls overboard on aircraft. You need to ensure a 100% availability. So what do you need to do to do that, and what's that going to cost you? And that is what our tools actually do.

18:19 So why auxiliary, Darren?

18:21 Thanks, Phil. When I look at this slide, I think the the top section talks about why auxiliary, and the bottom section talks about why PENNANT. In terms of the product itself, Thor's already talked about kind of the global international standards and specifications that that kinda define our industry and our end markets. Auxiliary obviously helps our end users, our customers comply with those industry regulations and standards. That's absolutely fundamental. But in doing so, it can support those customers in reducing costs and minimizing downtime. In more ways than one, actually, the operation of the Auxilium software and the functionality of it is designed, as we alluded to earlier, through Genus, alpha Ryan analyzer, to help manage the operation of the units through reducing spare parts, inventory costs, and optimizing where resource is used and how time is allocated. But also in in in the fact that you've got an integrated piece of software that means that you don't have to use a fragmented suite of software and different services.

19:27 So it optimizes cost in terms of the product and in terms of how the product is utilized. And as we've alluded to, the utilization of the product should maximize a user's operational efficiency, reduce unexpected breakdowns, and and reduce the lifetime cost of ownership of the underlying assets.

19:45 It's gonna help people make intelligent data driven decisions that, again, optimize and inform support strategies for products over the life cycle. But why PENNANT? We have competition. You know, that goes without saying. We have global competition. But PENNANT has got a proven proprietary software tool slash tools. As we've as we've alluded to several times in this presentation already, these are proven products that have been used in mature markets for many years. And they're integrated. So, again, you're not swiveling chairs. You're not trying to kind of move data and move information around different product suites. You have an integrated date database, which means processes are streamlined, and data maintains its integrity throughout that internal, cycle.

20:37 I talked about the significant cost savings of PENNANT being the only kind of go to market with that fully integrated suite, and we see that as a huge, a huge benefit to our customers. And we've also had great feedback about the user experience of using our software and using our tools. It has a mod interface. It's fully configurable, and it has that integrated data analytics component. And and we can see great feedback from customers about the user experience around our products. Great. And I'll just add, Darren. That, you know, for those who are not aware, 80% of the cost of an asset is through life. 20% of the cost is the capital acquisition. So spending 5,000,000,000 on a fleet of aircraft is great, but it's gonna cost you 20,000,000,000 to support them over their life. The other point on cost saving is because we're one vendor, our competition are integrating four or five different software suites together.

21:28 So you're dealing with multiple vendors, multiple suppliers, multiple installations. There's a real efficiency and time for IT departments and IT licensing. So we believe we've got a really powerful prop proposition. So that is a bit of flavor of Xilium. I'd like to move on to the outlook now looking forward in terms of what the next step will hold. And I'm gonna hand back to Darren to give you a bit of a update on the financial position.

21:56 Okay. Thanks, Phil. So I wanna give you a quick overview of our our key financial performance metrics for the three years 2024 to 2026. It goes without saying that these these figures presented are forecasts, and more importantly, they represent the consensus view of our analyst community. And and, again, for the point of context, I'm gonna mention that RNS that we released on Tuesday that updated on the ongoing restructuring activity, largely within the training systems division, and that educates some of the trends that you can see here on screen. The announcement talked about reducing our headcount by 30 globally and being in the process of selling our Cheltenham located operating properties as we move to to to an outsourced model of production in the training system segment.

22:43 These actions will save us 2,000,000 per annum in operating costs and through the sale of the properties, generate a further 2 to £3,000,000 of one off cash inflow from those sales.

22:55 Again, importantly, and it's asterisked at the bottom bottom there, the the net debt projection there does not include any of those cash proceeds from the sale of property. So to the numbers on the screen then. So the 2025 revenue number that you can see there is paced by lower demand in the training systems division. This was, however, anticipated, the resulting restructuring exercise means that gross margins will show significant improvement year over year. And a positive profit before tax will be achieved, as you can see on the screen there, at £300,000. £200,000. My apologies. Software and technical services segment segments will show healthy revenue growth.

23:42 And the increased mix of revenue coming from those more profitable segments are also a contributing factor to that that positive PBT of £200,000.

23:54 Following the restructure, we can be we can be confident as well of returning a strong cash flow performance in 2025, which encourages Phil and I greatly. And even before property disposals, we're expecting a reduction in net debt per the analyst consensus there, reducing 2.7 to 2.0. We expect to convert all EBITDA into cash. And after investing a further circa £1,000,000 into completing the auxiliary integration, we should see a net cash flow between 0.5 and £1,000,000 as is identified on the screen there.

24:30 I've already mentioned the property sales. We'll provide increments over and above that. And if, as is anticipated, all properties are successfully closed in q one of twenty twenty five, then we anticipate ending 2025 in a net cash position, which would be the first time, I believe, since 2018 for PENNANT as a business. And then quickly looking further ahead to 2026, per the analyst consensus, the expectation is to leverage that lower operating cost base, meaning that a revenue growth of 16% across all of our segments will drive a much healthier PBT of around around £1,000,000,000,900,000 is presented on the screen there. And on current shares in issue, an EPS of between 2 to 2.5p.

25:16 Again, something that would please Phil and I greatly. Cash generation would be will continue to be

25:21 strong as the working capital cycle reduces. Phil alluded to that, with a higher proportion of revenue arising from software and technical services, as well as the level of software development expenditure reducing following successful launch of Xelimian 25.

25:37 Okay. I'll hand back to to Phil. Thanks, Darren. So what are our priorities as a business? So this slide here looks to set out some of the things we're looking to achieve. What's next?

25:49 The first bit I'm gonna focus on is organic opportunities. So as we've alluded to a number of times through this presentation, PENNANT has a proven established proprietary software product that's used in some of our core markets. Traditionally, our go to market strategy has been to sell pro direct in in regions where we have a physical footprint, I e, Canada and Australia. We're very we're looking as a business, and we've been working on this for some time now, to expand our reach, working with resellers, partners in key territories to look beyond our existing market and also to change our approach rather than go direct, go indirect. So we've already signed up a reseller in Japan partner in Japan. We're looking to add in other strategic partners across the globe to help us access new territories.

26:37 The other point is whilst the product and the software is fantastic, and I would say that, we want to enhance that support functionality around that product. We wanna have excellent customer service. So we're investing in our tool set, whether that's licensing system,

26:51 support portal, and our technical services into the training demos to build that customer experience so it can really scale this business up globally as we take advantage of the opportunities that face there. In terms of opportunities, Darren, do wanna cover these?

27:07 Yeah. Yeah. We see we we do see, whether that's in short course or or medium term, opportunities across the industry of adding coverage to our to our existing coverage of global standards within our within our software tools. We see opportunities as well out there to add upstream and downstream products that that that in that are capable of integration into our product suite, but also enhance our our offering to customers in terms of the services we provide at the front end, all the ease of of of of of of of working on our platforms at the back end.

27:45 We also see huge opportunities actually in adjacent territories and adjacent markets. When we say adjacent, adjacent's to defense our core markets. And some of those opportunities are actually are actually with with already existing and embedded customers. So, yeah, plenty of opportunity out there for for the business on top of focusing on on those organic organic opportunities and priorities. Yeah. And not forgetting the training business, having implemented the reposition exercise, we've got a much lower cost base. We have extremely healthy pipeline. We've meant we announced an r and s six weeks ago about PENNANT being DANG selected or the MOD announcing a notice to award a contract to PENNANT. We have now got in a position where we're ready and lean to service our installed base.

28:33 And with our new outsourced relationships and lower cost base, we can drive good cash generation and profitability from our training business as well over the next period, which will complement what we're doing in the other part of the group. Just to bring all this together in terms of you know, what does the next period hold, I'll start at the bottom, and I'll I'll get Darren to cover the numbers. So, crucially, number one, for PENNANT, we need to launch the fully integrated Xilium suite. That is scheduled to release on the March 31 this year. We've already in in released the first two aspects. As I mentioned, all three of these products already exist, but the full integrated suite will be coming to market at the end of March. We've already sold this product to a customer in North America and get making good traction with the customers.

29:21 Alongside that, we're implementing our new go to market strategy, building partners, building resellers in key territories to expand our reach so we can leverage the opportunity we have across the globe. And what that means is, from a financial perspective and I'll let the CFO talk. Yep. Thanks, Phil. Again, you you've seen from the the analyst consensus, but now you're hearing from from from Phil and I here that we're expecting a return to a positive, albeit modest, profit before tax following the completion of the restructuring exercise. And we very much expect to to to post a strong conversion profit to operating cash next year. Our software and technical service segments will show growth, will show healthy growth in 2025. And we know that the training segment revenue will reduce the market environment as well as the fact that we successfully completed on a three year Apache program that's that contributed to our '23, 2022, 2324 revenue numbers, and that that last unit, left, left Pennant, in in q four of twenty twenty four.

30:31 We feel confident about the revenue numbers, the profit numbers, because of, not only, but because of that order order coverage that we've got there. We we go into the year with with a strong order book and strong order coverage for 2025, currently estimated at just over £7,000,000. Thanks, Darren. Joe, can I hand back to you, see if any questions? Yes. Thank you very much. So we've had several submitted already. And if I could ask investors to keep submitting them, that'd be great. We'll kick off with David a, who asks, basically, who are your competitors? And if I could roll in a couple on that on the competition point. What gives the board confidence that customers will move to Axiliam when their existing solutions likely sit in a already complex workflow?

31:21 And then, also, once you've won your customer, what's the requirement of the client to move to the Axilium solution from a competitor's system? Fine. Okay. I'll I'll I'll have a go at that, Joe, in the three constituent parts, but you might need to give me a nudge if I miss something. So core competition in our market, it comes in the form of some very small organizations like Raytheon. So Raytheon, a huge global defense OEM, has a product called Eagle. They would be our prime competitor. We have all to each of the three applications, there are different competition. The point I would make is that none of our competition have the breadth of capability we have. So there's a European German company that to compete with us on the technical documentation.

32:07 There's a US company who would compete with us on the analyzer tool. But our competition are partnering with three or four different applications to try and achieve the power that we've got in our suites. Actually, if to go one step further, one of our biggest competitors is Excel. So in particular, North American market, a lot of a lot of operators use Excel to capture their data and use their data. The thing that's changing from a global point of view is the fact that the standards and specifications that govern data data management, data interoperability are changing. And defense organizations, in particular, are mandating that the data is provided in these forms. Therefore, Excel doesn't work. So the real driver for me, particularly in some of our core markets, is the fact that historic systems like Excel won't comply with the global standards.

32:59 And then the competition that does exist doesn't have the breadth of capability that we have. To move on to the second bit of that question, Joe, why why does the board have confidence what that the customers will move to Xilium and and about complex work flow flows? Well, I I I tackle this in a couple of ways. There's a couple of things to think about here, and and the themes are quite consistent what I've just said and said earlier. The first point to make is the Axilium software suite. Whilst it's a proven based on proven proprietary technology, the development of the integration and the development of the new capability has been done in conjunction with a team of partners. Those partners are also customers and large OEMs from around the world. They're partners in North America, partners in Europe, partners in Australia.

33:45 They've been actively contributing to develop the product to make sure that when we release what it meets their needs, and these are the people that are asking for us to us to release the product because they know it's gonna work for them. The second point to make is the solution is modular. Customers don't need to throw away everything they've got. Now if you've got thirty years of historic data on a particular asset, you don't have to migrate in one go. You can do it in a controlled process. However, the auxiliary solution ensures that the data can be invalidate can be validated and drawn to the system. So it's almost a data validity check to ensure integrity of data. So they can continue to operate their legacy systems, and they can move in a controlled basis into a system that will give them a much more power, align with standards, ensure data integrity.

34:30 But, probably, the most important factor that we need to that will drive the demand for Xilium and from our customers is that the the process you mentioned, you're right, is very complex. An OEM with Defense Prime will be well established at managing that process, but they will do that from anywhere between four to 10 different systems. They'll have a they'll have a a sparing system with one company. They'll have a life cycle costing system with another company. They'll have a publication software with another company. The power of Xilium to draw those altogether into one solution is unique. We're offering that complete solution for one vendor. And the fact that we've built it conceptually on an integrated database in ensures the data integrity. We shouldn't really underestimate the compliance aspect in regulated sectors like defense, like commercial aviation, like rail, is becoming increasingly important. In fact, it's become mission critical.

35:27 So we our our product is is aligned with that need. So, really, in simple terms, the solution's a streamlined, efficient process. It's robust. It avoids any need to introduce any data risk by taking data in our systems or moving things around. It reduces number of suppliers, which means the number of installations you make, and, ultimately, it will drive better decisions and operational efficiency. So we think it's gonna be a very attractive proposition for our customer base. And sorry, Joe. You got to remind me the third part of that question. It was actually about what's required of the client to move on to the Xilium solution. Yeah. The the software itself is built on Microsoft SQL. It's very agnostic in terms of operating platform or operating system.

36:17 Most customers will hold SQL licenses. To install the system takes about twenty five minutes from downloading the software key to installing it, and it can be up and running within half an hour. It's it's can be cloud hosted. It can be remote stored inside of installed someone's firewall. It's a very simple process to get the system installed up and running. Thank you. So you've been aiming to transform the business for a while now. Can you talk about what the drive behind that was and then also comment on how complete the transition is now? Thanks, Jay. Great question. I'll start with that, and, Darren, feel free if you wanna chip in something afterwards. So if you just take a step back a moment, this this has been a strategy that was put together in 2020.

37:04 When I became CEO of this business, I developed a plan to move this business away from its traditional project based training revenues towards a software and service model. The the real drive for me was to reduce the exposure or the reliance, if you want, to lumpy contracts, wanna secure more predictable revenues, and ultimately, reduce working capital, improve our margins and profitability. I mean, you've heard today decisive action has been taken to achieve this objective, and we're making very good progress. But I would I would stress that, actually, we're on a journey. The journey did start in 2020. We've been good for some time, but and it started with the acquisition of the r four I product that Darren alluded to earlier.

37:49 That was critical because it gave us access to a new software tool to enhance our capability plus access to The US market. We have a US capability and a US entity. At that time, the training business was accounted 80% of our revenues, and we talked about earlier the fact that the training business is accounted for 15% of our revenues going forward. We're also in the in the position now where we have a new board, an enhanced board, an experienced board. We have supportive shareholders. We have a macro climate that is favorable to this technology and these mission critical assets. But we're still very much in the reposition phase, phase one. In my opinion, I expect this journey is gonna take us another two to three years to fully execute, but we've made really good inroads this year to accelerate the strategy.

38:38 Great. More of a financial question asking Ben has asked what kind of visibility you have on orders for 2526. And then if you could also comment on how confident you are being able to forecast correctly into the future. Yeah. Okay. Thanks, Joe. I'll take that one. I kind of come back to the fact that two of our operating segments, software and technical services, provide us with recurring and repeatable revenue streams. That obviously supports or is friendly towards Phil and I and the rest of the business forecasting '25 and '26 numbers, albeit any any any future revenue trends.

39:25 We think going into 2025 that we've got about well, we know we've got about 7,000,000 of of of order coverage measured against analyst consensus numbers. That gives us, obviously, in and around 60% of order coverage going into next year. But I will point to the fact that that doesn't include the award of a training systems contract that is also driving some of that forecast revenue numbers into 2526. Phil, I think, mentioned that award earlier that we expect to be contracted maybe midyear next year. So that will benefit the certainty around those revenue numbers that little bit more as well. And even going out into 2026, the recurring and repeatable nature of, of some of our, software and technical services contracts gives us confidence in around 40 to 50% of those revenues, that you saw on the screen from our analyst community into 2026 as well. So I think I'd kinda summarize with kind of we do have what you'd call kind of sticky work in those two divisions that gives us certainty over future certain amount of certainty around some of those future revenues. And we think about, 60% of coverage into '25 and about 40 to 50% of coverage into '26.

40:42 Thank you, Darren. Looking now at your markets, could you just talk about your go to market strategies for new territories? And then it'd probably be helpful if you could add some color to the macro outlooks for each of your core regions. Phil, do you wanna kick that one off, and I'll I'll check-in? I can kick that one off. So we we we talked about it earlier. I mean, historically, our our go to market approach has been direct with teams on the ground in our core market, being Australia, Canada, and UK, where we actually have a physical fit footprint. That's been the plan. I think Darren alluded to earlier, we've changed our regional operating model. We've moved towards accountable and responsible individuals in each region that have accountability for business winning and operational delivery. But each of those regions, as you might expect, have slightly different characteristics.

41:39 They have different levels of example might be they have different levels of maturity around the adoption of standards and specifications, Very, very different between UK and Japan, for instance. But just just to make the point, the overarching driver for these standards and specification is interoperational capability. So when you look at the consider the global macro backdrop, you think of NATO, you think of Taiwan, you think of Eastern Ukraine. Interoperability of asset systems is becoming absolutely mission critical for government defense organizations. And how do you ensure that data is it can transition between systems? Well, you align to the standard specifications, but I'll come back to the regional backdrop in a moment. In terms of our three core regions, trying to a little bit of color, The York the European UK market, as you might expect, is is is is a mature market when it comes to processes for managing assets and critical assets.

42:37 That said, it was the European market that has driven these global standards and specifications, which the rest of world are adopting. So the adoption of these standards in Europe, and they are leading the way in some respects, is really driving opportunity. There's you know, if you if you follow this sector closely, and it's quite a niche sector, I appreciate. It gets quite technical. But the Dutch MOD have recently launched their flagship submarine program, and the Dutch MOD have mandated for the first time these data standards for the requirement. Whoever wins this contract, whoever provides the solution, has to comply with these data standards for their project. This is a multibillion pound program. Nobody has the capability to offer the full capability standards yet, but we are very close to launching our product in March.

43:24 If you move across to other parts of world, North America, it's an established market, but it's slightly different to The UK and Europe. Canada for us is a mature market. We're well established in Canada. We've been in Canada for twenty years, but The US market is relatively new. It's clearly the most significant market for us, and it's a huge opportunity. In the past, The US has adopted its own standards, its own data standards, but, actually, The US has very much indicated through the defense university, through the congress and PENNAGAN that they're looking to move to these data standards. You've gotta look at the AUKUS treaty on submarines. You've gotta look at NATO and the NATO ALP ten group. They've appointed representatives from The US in all of these industry bodies to help influence the standards because The US are looking to adopt the standards within the next two years.

44:13 The adopters of these standards create significant opportunity because there isn't solutions out there that can meet the standards. We're one of very few. We're the only one who's got the full breadth. So for us, The US market is incredibly important and exciting. If you then move across to our third region, Asia Pacific, I I I probably argue that Australia is is front running on the standards globally. They they really have embraced the standards and really implement them at pace. PENNANT is actually supporting defense with the implementation of these standards, particularly documentation standard. But I I would argue the wider region, I consider more of an emerging opportunity. This is just my view. I'm sure other people won't agree, but the approach to this area is not as mature in Asia Pacific as the rest of the world.

45:02 The principal driver for this is exports. Countries such as Japan, South Korea have aspirations to sell their capability outside of their home country, so they have to comply with global data standards and interoperability. The same reason we talked about the macro picture, interoperability of data is really important. So countries, particularly Japan, South Korea, are looking at closer closer collaboration with their allies. They need to invest in this capability. So from a from a regional perspective, that gives you a flavor of the regions. The global picture macro picture is is incredibly the backdrop for us is incredibly favorable. If you look at what happened in Eastern Europe, in in the road Kiev with the Russians, that long armored column of vehicles progressing toward Kiev that stopped, felled, and had to be abandoned, Wrong tires, not the right logistics, not enough fuel, infrastructure in place. That's exactly what our system is designed to prevent.

46:06 The whole concept of the PENNANT system originated from the Gulf War to enable the flight the the the completion of mission sorties. So this is really much aligned with no. I don't like global uncertainty personally, but from a the business point of view and the opportunity point of view, the macro picture is particularly favorable for us at the moment. Phil, I'd I'd just add to to to some of the things you were saying there. I mean, a, PENNANT is set up for that global reach now. So we talked about regionalizing the business, and that means we've got software developers in each region. It means we've got business development teams in each region. We have Pennant experts in each region ready to take advantage of some of these opportunities. And I'll just emphasize, I think, something that Phil alluded to earlier, which is actually kind of one of the biggest opportunities for us, is where ILS or IPS, as we call them, integrated product support tools, aren't actually in place and and and markets are immature. And we see Asia Pacific as a as a really great opportunity for us there in terms of that emerging market.

47:09 And so that's why having that base in Australia and that ED team in that region, we see as advantageous. Thank you. You spoke about some of the nuance around The US market and the importance of it. It's notoriously quite a tough market to crack for non sovereign companies. What's your approach been so far, and how do you see it evolving? Great question, Joe. Yeah, and clearly, The US defense market in particular. And we we talk a lot about defense because defense is 80% of our business, but we also operate in commercial aviation, rail, shipping, other sectors, but defense product is a prime sector. But from a US perspective, their movement towards adopting the standards and specifications provides a massive opportunity. I alluded to a short time ago. We're really well placed. There isn't anyone in The US market currently that has the capability or breadth we have, and it's such a large market. Then, actually, there's there's plenty to go after. But just just to address one of your points around sovereign capability, the PENNANT does have an established US entity.

48:16 The acquisition that, Darren mentioned earlier around a the Absolute Data Group in 2020 provided us with a US footprint. We have a we have a PENNANT America an established business in America that has a history track record, and most importantly, has customer base, which we've building upon. So we are we are we are considered a sovereign capability in country. Obviously, it's developed globally, the product, but we we are a local provider. That said, the scale and the size of The US market means that, you know, having a simple direct model is never gonna work. So what we've been working on in developing is a partner model. We're working on several strategies, several relationships that will enable us to access the market beyond our traditional approach, whether that's reseller as a plug in to a major system integrator, whether that's servicing a client base through a major OEM. But we are looking to access The US through a different go to market partner model.

49:16 Thank you. You you spoke about the macro environment quite a lot, but Ben asked specifically what impacts do you think you'll see on the business, following both the election of Trump and the implied impacts on spending in defense, and then also The UK defense spending review. Great question. We can both have a go at this. So I I made the point earlier that actually most of our work comes in the in service support phase of an asset's life. So whilst we can be involved in the in the design, we are, in the development, in the construction, in the in the purchase, and also disposal, 80% of support cost comes in the in service support phase, which is where we're aligned. And if you look at some of the defense review in The UK, the defense review is very much focused upon capability enhancements, extending the life of existing assets, enhancing their operation, which really much aligns to the business we're developing from training systems point of view and from a software point of view.

50:24 Trump, who knows? I mean, I I if if anyone's got a better view on Trump, then please please please let me know. But, ultimately, global defense spending is going up. The uncertain world we live in means that having available assets now moving towards a war footing is critical. I used the example of HMS, Queen Elizabeth earlier that couldn't sell. We we cannot afford as NATO as a a global alliance, and NATO is predominantly our customer base for assets to be sat on the ground if they're needed. So these types of systems and the investment in these systems are critical because they'll save costs, ensure availability, and crude efficiency. I think the danger is that people don't invest invest in these systems. We end up in a position we've been in recently where we can't get things up and running. Is there anyone to add on that, Darren?

51:11 I I I'd just echo what you've said, Phil. I think close to home here in The UK, I think the PENNANT team, and I can't take any credit for this, has has done well at turning a a problem into an opportunity. I think the MOD has talked about repair, not replace, and I think that that can now be serviced and plays into the strategy on the on the kind of heritage hardware side of our business, as Phil's alluded to. And then, yeah, Trump, I mean, I think it's just gonna it's only gonna liberate kind of defense procurement agencies globally, to to spend more on the tools that are required, to to seemingly keep the world safe. And I think, you know, our our tool, plays a role, in in that infrastructure. So I think it can only yeah. From a PENNANT perspective, it can only be beneficial. But I think I'm just echoing exactly what you've said, Phil. Yeah.

52:03 Thanks. Probably quite a quick question actually, for you, Darren. What share, do you think of revenues will the defense sector make up going forward? It's probably helpful to say what it is now. Yeah. Easy easy to say what it is now, Joe, and that's that's 80% of our revenues. Going forward, I I think short term, it will continue to represent that kind of size of our revenues. Our core market, it's where we it's where our order book lies. It's where we see most of our opportunities and most of our partnerships. But that being said, you know, Phil and I would both like a nice surprise and see see other adjacent sectors take more share of our of our book of business. But I think that's gonna take time. I think within the next two years, I think we'll continue to see defense in that 80% mark as a as a percentage of our revenue as we kind of, I guess, I guess, start to work those those adjacent partnerships in those adjacent adjacent industries, commercial aerospace.

53:06 And, of course, rail. We already operate in rail, but we see global opportunities within our within our product portfolio in that transport sector. Phil, is it is it anything you'd add to that? No. I don't think so. I think you summed that right thing in the short term. Defense is gonna be primary focus, but we're already selling into commercial aviation. We're already selling to rail. We've we're selling to shipping. Any sector that has is in has high is highly regulated, has industry specifications, complex assets. The system works, but clearly defense this is this has been born from defense, and defense have embraced this process. So defense is where the short term focus will be. Okay. You've you've mostly, answered my next question, which was about what relevant sectors there are for your software.

53:56 Maybe you could just say what the primary target would be in the adjacent sectors. Yeah. Okay. I mean, I'll just go back a step because I sorta, like, touched on it, but didn't fully answer it. So for for for us, Joe, the types of customers or industries that require our capability normally have a couple of attributes. Is it a couple of core attributes? So firstly, you want them to build large complex equipment, has lots of systems, lots of parts because that makes that data management really important. Secondly, you want the equipment to have a long life, that minimum of ten years so that you can actually show the value proposition in terms that you can save money. You normally put portable configurations of equipment and heavy maintenance cycles, but overarching all that, you want industry specifications, barriers to entry, highly regulated. So for us, the sectors that would beat that would be defense, clearly, we've talked about defense, commercial aviation, space, rail, and shipping. These would be the five sectors.

54:55 But based on our track record, our customers, where we sit, For me, commercial aerospace would be the primary market after defense. Yeah. Thank you very much. Could you please talk about your current headcount and how this will evolve moving forward and help achieve your strategic goals? Yep. Phil, do want me to take the lead on that? Yes, please, Aaron. So I think when we look at average headcounts globally, we're gonna be moving from a 140 in 2024 to something like a 105,110 on average in in in 2025, which, I guess, speaks to the the, I guess, deliberate reduction, in workforce globally of 30 heads, as well as as well as some attrition in the first half of next year. But but Phil and I are obviously keen, not to, not to continue to cut our labor force globally. And I think as we as we begin, the second half of next year and going into '26, there are projects coming online.

56:04 There are areas of growth coming online that will require us putting some some resource back into the business. So we like where we're positioned at the moment, lean, agile, with some outsource in that in that training system segment of the business. But Phil and I stand ready to to add resource as and when it's needed to service our customers and make sure that customer experience is is as good as it as good as it can be. Phil, would you would you like anything? I agree with that, Darren. And and, fundamentally, the business has changed. So if, for instance, the business will secure a major training contract in the near future, historically, we'd gear up with headcount and production staff engineers. We've moved to an outsource model. So other than one or two key personnel to manage that process, it doesn't exist. Also, on the go to market strategy, as as we move away from our direct selling approach into more of a partner model, we don't need the number of footprint. So, yes, there will that that we will invest in key roles, key positions, but we're not gonna see the growth in the employee numbers we've had in the past where we've been up near 200, two twenty. We're not gonna need to get anywhere near that number of headcount.

57:08 Yeah. Thank you very much. Conscious of time, could I please ask you both for some closing comments? Yes. I'll take that. So just a couple of final comments and thoughts for me, and we've covered a lot of this as we've gone through today. I think I said right at the start of this presentation, the one thing I want people to take away from today is that PENNANT is not the same business they thought they knew or did know. As a team, we've taken decisive action to move the business towards a highly scalable software and services model. We've got proven proprietary app applications. This is not new product, and the launch of Oxelion in March really presents a huge opportunity to move this business towards an enterprise solution model and access lots of new territories and markets.

57:57 This has been mentioned a few times today. We've got a new board. We've got a new CFO. We've got an experienced board. We're also lucky we've got a supportive shareholder base and a really maturing go to market strategy. So I think we're really well positioned, and I believe we're well to take advantage of this opportunity now. But I'd just like to say, finally, none of this is possible without the PENNANT team. We've got a really committed, hardworking, resilient team who are absolutely set on delivering the OXILIUM solution to the market and supporting our customers. So very excited about what 2025 will bring for this business. One final thought for me. Please do take time for feedback on this session. This is our first time we've used the IMC, so I'd be keen to develop our messaging. So if anything you've not liked, anything that's been unclear, anything you'd like to see, please feed it back to us. And I'd just like to say thank you for attending, and we look forward to updating you final results in '25.

58:53 Thank you very much, both of you, and thank you for updating investors today. Could I ask that investors do not close the session, as you'll be automatically redirected, for the opportunity to provide that feedback? If anyone has any further questions or would like any information further to this, please do get in contact with [email protected]. And thank you again for attending. Thank you. Thank you. Merry Christmas to all.