VEEM: The boat that didn't rock

Mark Miocevich is the Managing Director of VEEM which is a manufacturer of marine technology. VEEM has had a very solid 2020, its share price is up 33 per cent year to date and a lot of its momentum has come from the demand for its gyrostabilizers, which are pretty much devices used to maintain the equilibrium of a ship so it doesn’t roll and make people sea-sick or uncomfortable on luxury yachts for example. They’ve already sold $4.1 million dollars’ worth of these gyrostabilizers in the first six weeks of the 2021 financial year, compared to $4.8 million dollars’ worth of them for the full 2020 financial year, so things are looking pretty good already.

They have committed to paying a dividend of 30 per cent of net profit after tax. They also sell a range of other marine technology outside of gyros, so I discussed that with Mark too. They’re still a small company, capitalised at $88.4 million dollars, but an interesting one nonetheless.

Here’s Mark Miocevich, the Managing Director of VEEM.

Table of contents:
Cash position
VEEM's marine technology
Demand for gyrostabilizers
Gyrostabilizer price and sale method
New gyrostabilizer facility
Damen Ships agreement
Propulsion products
Profit forecast
Dividend commitment
Share price performance

Mark, I thought we could start by talking about cash. Your annual report released at the end of August said you had a cash balance of $3.6 million dollars, is it still around that mark?

Yes, it is. We’ve managed it fairly carefully so we’ve got plenty of cash for growth in the foreseeable future as we gear up for production of gyros to a higher level.

How has COVID impacted the business this year? Because there seems to have been a bit of a hit to revenue, enough to trigger the JobKeeper payments.

Yes, there was. For us, it was mostly April and early May is when we noticed – and it was more of a local downturn. The international work was still there, however, some of the orders were delayed because the ship building facilities were temporarily closed.

I thought it’d be best to let you explain the marine technology that VEEM sells. You could start with the gyrostabilizers and then explain the other products too?

Sure. The gyrostabilizers followed the natural progression for us from our advanced propeller range. When we developed the world’s most advanced propellers, we then looked for something which had longer legs, because whilst propellers were very exciting we felt there was a limit to what we could do globally. There’s a lot of competitors and a lot of boats that are very slow that don’t require highly sophisticated propellers, so we looked around and said, what can we manufacture which utilised the network of customers and our agents and distributors we can sort of ride on the back of that, and then expand our business – it had to have long legs.

We looked for a product which had long legs which would have a high barrier to entry, had good cash flow coming from it and fitted within our scope of knowledge and we could sell to our same customers. We found a node of expertise in Western Australia on gyrostabilizers, which was a technology which had been tried in the 1920s and then abandoned. A gyrostabilizer is a large spinning flywheel, like a spinning top, and we’re using a very big one – the smallest flywheel we’d use would be nearly a ton and the biggest one would be six and a half tons. That produces a gyroscopic force and it acts in accordance with Euler’s Law of Gyroscopes. As a vessel tries to roll, the flywheel tries to rock in its bearings and as it rocks in its bearings, it produces a counteractive or resistive torque. It’s quite extraordinary because it all does it by nature and we end up with an imperceptible operation of a stabilisation device and the boat just doesn’t move. It takes nearly all of the roll out of a vessel. We found this was being developed by a couple of entrepreneurial naval architects in Perth and we selected one that we really liked. We liked the concept of what they’d been doing and where we felt it could go and we invested.

We purchased that business, which was a one-man business. We purchased all of the IP and we also struck up a long-term relationship with the owner of that business who held the technology and he still works for us today and he will benefit financially substantially by the arrangement, which we felt very strongly about is that we had the power to develop this technology, but we also felt the originator of the modern technology should also receive part of those benefits. We started off about eight years ago and we moved into the larger space of gyrostabilizers which is, in our range we’ve chosen to stay between vessels of about 70 tonnes to about 3,000 tonnes, which represents a market of approximately three quarters of a billion dollars a year of gyro sales if we captured all of it.

I know luxury yachts are a big market for you, but is that across other markets as well?

Yeah, the luxury market is certainly a good part of it, but not the majority. There’s the super yacht market, as they call it. There’s also the commercial market which is broken up into subcategories of ferries, supply vessels, seismic survey. There’s a wide range of anything basically that ventures offshore is a candidate for us that is a monohull, and that’s important to note. There’s also the defence market and police market, which is very large and in fact, particularly beneficial for that market due to their operating requirements. Gyrostabilizers work extremely well on monohulls.

The roll period is what we’re looking for, we want the boat to have a roll period of between about two and eight seconds. Catamarans wouldn’t be a good candidate because they move very quickly and violently. But some trimarans with particular design features can fall within the roll period that we require and of course, a trimaran has got a very wide deck so, for load carrying, it can be very valuable. America runs a whole bunch of trimarans manufactured by Austal ships.

In terms of the demand for these gyrostabilizers, your sales tripled from 2019 to $4.8 million in the 2020 financial year, then you released that announcement that in the first six weeks of financial year ’21 you sold $4.1 million dollars’ worth of them already. What’s behind that sudden spike in demand?

We’ve been watching – some years ago, in fact, a little after we started our research, a company popped up in America making small gyrostabilizers and we studied their growth curve and it’s been doubling year on year, so we fully expect our sales to double year on year and that’s what we’re seeing now. It takes a few years for the market to understand the technology and accept it and of course, with big boats there’s a lot of money involved so they necessarily have to be risk averse. That’s taken time to break down those barriers. But what will fuel us in the short-term is the frame agreement that we signed with Damen Ships in the Netherlands and it’s probably worth pausing for a moment to look at Damen Ships.

Damen Ships are the largest small ship builder in the world. They build 200-odd vessels, small ships, a year. They are the second largest ship builder in Europe. For us, they will most likely be our largest customer ever and it is conceivable that they will use somewhere between $50 and $100 million dollars’ worth of gyros a year just by themselves.

Could you explain, just before we get more into Damen, how you’re actually selling these, at what price and the margin you’re getting for selling these gyrostabilizers?

We use a series of agents that we chose out of our existing network of distributors for our propellers and shaft lines, people that were suitably placed and suitably equipped with staff to represent us. We still do all the final pricing and manage the contract, the contracts are all placed on VEEM from our customers. We use a slightly different structure for propellers, where many of our propellers are distributors who buy our product and on-sell. Whereas, gyros we use agents because there is a lot of engineering and there’s liability issues of course as well we need to manage, so using an agent model works much better.

The people are very well connected in their industry, so that’s what we’ve chosen to use and we’re slowly moving around the world and we’ve recently signed up an agent in South America and we’ve got them in Asia and Europe and North America – a couple in Europe, because there’s north and south of Europe that are building a lot of vessels, so we’ve sort of carefully placed – and we continue to develop not only sales agents, but we’re also developing more service agents. We have service agents, for instance, in Croatia and then also down in Greece where a lot of the boats end up operating.

How much are you selling them for typically?

The smallest gyro we make, in US Dollars, would be around USD$250,000, and they go up to as much as USD$1.5 million for the biggest size we’ve got.

And how much of that will go straight to VEEM?

There is a small commission structure, but the bulk of that goes to VEEM and the way we’ve been working – and obviously this is early stages for operating our new production hall for gyros, we believe that the GPs will fall in line with the rest of our operations. We believe it’s necessary to sustain the product and develop it into the future, so we’ve been quite careful in having those targets set and we’re well on the way with a couple of the models already. In fact, one of the models has achieved our target, the second model is close behind and we’ve still got one of our models, we’ve got some development to go on our supply chain to be able to achieve our target. But, in early days, we’re very happy with the progress so far.

You’ve also got a new gyro facility, could you tell us about that?

What we found is, when we started off we simply incorporated the assembly into our existing facilities, which meant the gyros had to be assembled on a one on one basis, so it was a jobbing arrangement. All the components had to be brought to each individual gyro and it was not an efficient process but necessary for the stage of development we’re at. This year, we completed and moved into a 4,000 square metre assembly hall and three-quarters of that assembly hall is dedicated purely to gyros and it has three production lines, one for each frame size and the operators don’t have to move more than 1.5 metres to obtain the part they require, very much like a production line for cars.

For many other items, but on a slower scale because the rate of production is lower than a car. But it does give us room to be able to speed up production and based on our estimates, that facility should be able to turnover up to $100 million dollars’ worth of stabilisers a year.

There’s a quote from you from your AGM that said, “Within 10 years, every new vessel built will have gyro stabilization.” Could you explain what that means?

I can. I’ve got the benefit of being on boats with gyros for some years now, we have a test vessel that has one installed, and I simply won’t go on a boat without one. Once you’ve been on a boat with a gyrostabilizer, there is no choice. It is significantly better than any form of stabilisation that man has ever developed before. It provides a platform which is stable and it provides stability at all speeds, from rest right through to flat-out, and it can be used in all weather conditions. You’ve got a situation where a sea state five, for instance, which is pretty wild weather out in the ocean, would feel more like a sea state two, which would be relatively mild.

You’ve still got to deal with the pitch of a vessel, which is a lot slower and more comfortable, and heave obviously of the ocean, up and down, but it’s the roll that really is the problem on boats. The roll is quite severe and it does generate sea sickness. What we find is by reducing the roll, not only is it more comfortable but you find that you have a dramatic reduction in sea sickness. In fact, we’ve been running our boat for 10,000 hours now, which is quite a long time, we’ve never ever had anyone on board with sea sickness and we’re out testing with clients all the time. We make a point of making them feel a little unwell by turning the gyro off, then we turn it back on and that ill feeling goes away. We think we’ve really achieved some great success.

In the terms of military, of course, you’ve got a very stable platform for patrol boats to come alongside vessels that they have to board. They can launch and recover their vessels that rest. At the moment, if it gets rough they have to launch and recover inflatables off their patrol boats at speed, which is extremely dangerous. But also, a gyro stabiliser gives them a very stable platform to operate their light weapons on, which in effect is a force multiplier. So there’s some incredible advantages that this can provide and I simply can’t see why anyone would buy a monohull boat even now without a gyro stabiliser. To me, it’s inconceivable because I’ve experienced them for so long.

Could we go back to Damen Ships, which you were talking about earlier and your relationship with them? Because I’m trying to understand – I was reading through announcements and there’s a three-year agreement and you’ve already sold a few orders to them. What is that relationship?

It’s what we call a frame agreement, and that is when we’re working together with Damen Ships to be able to ensure that we can meet their needs as a ship builder. You can imagine, when a new technology this significant comes into the marketplace, someone like Damen Ships that builds up to 200 vessels a year, is looking at it saying, look, this technology can really benefit all of our platforms, but how do we ensure that we can obtain this technology when we need it to enhance the performance of our boats and therefore, our company. They’ve been very astute and they’ve worked very fast to lock in a supply agreement so that they effectively have priority supply. We are working with them to work out their vessels and their build program to ensure that we can forecast their needs in advance to be able to meet them as their customers decide to take up the option of a gyrostabilizer.

It’s really very much about meeting their needs as a manufacturer. I think they’ve been quite clever – they’ve been very important, they’ve done extensive testing of our big gyros in our test cells and that encouraged them to place additional order for the second big gyro we have and the second big gyro is going, it’s on its way to the Gulf of Mexico and will be installed in a supply vessel and tested probably early February. That will be the first running large gyrostabilizer we have, these are a 20-tonne machine and these vessels are all 700-800 tonnes. It’s a terrific development for us and we think that these big units will be extremely popular.

You also sell into propulsion and that area as well, which in that presentation I was discussing before is described as an area of innovation for VEEM. Could you explain what your focus is on in the propulsion area?

I don’t know whether people realise – perhaps it’s not the sort of thing that pops up in conversation – when you’re looking at boats, before we came along all propellers were built the same way they were built 100 years ago. They were all hand profiled, made off wooden patterns and they were all extremely inaccurate and the limit of speed for these traditional propellers on boats was around 35 to 38 knots. If you wanted to go faster than that, you really needed to move to water jets or a specialist propeller called a surface piercing propeller, which is a design that runs only semi-submerged and they’re very expensive and there are complications with that.

What we developed is, we brought modern technology to propellers. First of all, we don’t use any wooden patterns. We robotically form all of our moulds – we have a patent in process – which enables us to have an infinite design of propellers instantly at no additional cost. We don’t have to build a wooden pattern to manufacture them. The design availability to us has just become exponential – it’s infinite, we could design whatever we wanted and manufacture it in a heartbeat at no cost. That enabled us to really work on good design. We then decided to start machining propellers over every square millimetre using computer-controlled machinery. With the same program that we develop the moulds, we could then machine the propellers so they became accurate within microns.

What we found is, by good design and advanced manufacturing and extremely high accuracy, we can build propellers now and instead of running 35 to 38 knots, we’re now running 54 knots, which means that there’s a whole range of speeds that are available to propellers that were never available before. It means that you can do these speeds for high speed crew boats, high speed ferries, patrol boats, without having to move the expense and complication and weight of water jet. We also found that the volume that we could produce by using advanced machinery was really valuable.

We’re able to mass-produce these propellers and fully machine them in a building which now operates 24 hours a day, seven days a week, lights off. It’s a fully automated factory and in fact, we operate the world’s most advanced propeller manufacturing facility for fixed pitch propellers, for vessels in our range. We’re talking about vessels that have inboard engines, so boats from 12 metres through to 150 metres. It’s meant that fuel economy’s enhanced and vibration levels are much lower, the noise is lower… What we find is, also, the reliability of the output. By incorporating sophisticated propellers it means that the probability of having to lift your vessel to adjust your propeller so that it revs at the correct revs for the engine manufacturers to warrant the engines, it means that it’s much easier to achieve.

In addition to that, we’ve developed patented technology which allows us to adjust or tune a propeller under water. It’s a very clever device that slides into the trailing edge of a propeller blade which acts like an aileron on an aircraft wing or flap on an aircraft wing. So, we put this strip in and the strip sits above the surface of the propeller blade and we can take that strip out and change it for other strips that all sit at different heights and that effectively gives you a different effective pitch. That means boats don’t have to come out of the water. One of our major clients, we have saved them in lifting and tuning costs more than they spend on our propellers, so they effectively got them for free.

Mark, I just wanted to move onto your financials and your normalised profit after tax was $1.9 million dollars for the 2020 financial year, which was down from $2.5 million in the last financial year. Is that decline just attributed – it mentioned there were tax expenses, are they one-off and are you therefore forecasting profit back around that $2.5 million dollar mark next year?

It’s a very interesting year because research and development can vary from year to year and that does have an influence on our tax bill every year. We found that our R&D was down last year and our tax bill went up accordingly. But in operational terms it was quite similar to the previous year, which is a little down from where we normally live. However, we had the effect, a little bit of COVID last year which certainly didn’t help. We also were investing heavily in establishing our new facilities for the gyros. There’s enormous costs in establishing a new product globally and getting the operational side of it correct. You’re always investing ahead of where you are initially with people and setting up facilities, so a lot of labour involved in that. That’s largely behind us. What we’re seeing is the profitability should now start to rise accordingly and we’re very happy with how it’s progressing this financial year.

You also paid a final dividend based on that normalised profit after tax, is that something you’re anticipating might increase going forward as well in line with that profit increase?

Yeah, the board set an objective when we floated to – the desire was to distribute 30 per cent of the net profit after tax and we’ve always believed that it’s important to have a dividend and also to have share growth and business growth, and we’re sticking to that plan. We do fully anticipate to distribute 30 per cent after tax every year going forward.

Just looking at your share price as well, it’s been a pretty good year, all things considered. Your share price today is up around 33 per cent year to date. What do you think the market is seeing and what confidence do you think they have in VEEM?

I think the market has recognised that we’re really at this inflection point with gyrostabilizers and the market is huge. To reach that inflection point, we had to have four factors in order. We had to have the engineering complete and proven, which we’ve done; we needed to have a sales network that was functioning correctly; we needed to have a proper production facility that could meet the needs of the business going forward; and we needed to have an established global supply chain, which we had and we’ve been running for some years. When you reach that inflection point, people go, look, everything’s lined up and ready to go and the sales are now doubling, so we’re absolutely at an inflection point and there should be a significant growth story going forward that we’re very excited about.

And just finally, could you explain what’s in the pipeline for the next 12 months and heading into the new year?

What’s really exciting, early in the new year we’ll have the first trial results from the big units and we know there’s a lot of enquiries that we’ve had on the big units that we’re waiting for the operational feedback, so we’re very excited. We’ll start to see Damen start requesting gyro deliveries for their vessels during the year. The exciting thing for us is sales have continued to grow and we’re starting to see that rise. So all the plans we’ve put in place are now coming to fruition.

Thanks very much for your time, Mark.

No worries, Alex, nice talking to you.

That was Mark Miocevich, the Managing Director of VEEM.