Philippe Odouard, chief executive of Xtek, says that the increase is 'significant', marking the government’s recognition of the industry and its potential for growth.
Tune in to the Defence Connect Podcast as Odouard discusses new opportunities for defence, how he plans to grow Xtek worldwide, as well as his thoughts on the accomplishments he’s achieved since his appointment to the role of CEO late last year.
Enjoy the show,
The Defence Connect team.
Listen to previous episodes of the Defence Connect podcast:
Episode 57: PODCAST: Fostering the future of defence industry, Margot Forster, Defence Teaming Centre CEO
Episode 56: PODCAST: Propelling Defence through advanced automation – Andrew Seal, Siemens head of defence and marine solutions
Episode 55: PODCAST: Exports key to the future of Australia’s defence industry, Richard Marles, opposition spokesman for defence
Episode 54: PODCAST: Mining boom to defence boom – Minister Paul Papalia, WA’s Defence Issues Minister
Episode 53: PODCAST: Gearing Victoria for growth, Greg Combet, Victoria’s defence industry advocate
Episode 52: PODCAST: Championing Australian defence exports, David Singleton, CEO, Austal
Episode 51: Pacific 2017: Future Submarine Supply Chain Briefing
Episode 50: Pacific 2017: RN officers on ASW and why they chose the Type 26
Episode 49: Pacific 2017: Raydon Gates, Margaret Staib & Mark Skidmore, QinetiQ Australia
Episode 48: Pacific 2017: Dale Bennett & Vince Di Pietro, Lockheed Martin
Phil: Well g’day everyone, it's Phil Tarrant here. I'm the host of the Defence Connect Podcast. Thanks for joining us today. Got an interesting person coming to the studio who's going to have a chat about a business which is in growth phase. I have Philippe Odouard from Xtek joining me. How you going Philippe, alright?
Philippe: Yes, good afternoon.
Phil: That was okay, I pronounced the last name correctly with my-
Philippe: Pretty close.
Phil: -very Australianised accent. Thanks for joining us. We were having a real quick chat off-air about your role within Xtek and some of the accomplishments that you've had so far since your appointment, I think it was in October of last year, as the CEO. How are you finding the world of defence business at the moment? Are you quite optimistic about what we have looking ahead into the months and years, in the Australian marketplace?
Philippe: I'm very optimistic, it's looking very good. The budget last week was announcing an increase of the budget to 2 per cent of GDP which we haven't reached for years and years now. That is very positive of course, it's an increase which is very significant over the next three years. In addition, it actually takes into account the fact that this growth is not only from imported products, it's also by including more value adding from the Australian industry on one side. Australian industry that can bring manufacturing into other products, but also very much the emphasis is on IP created in this country. So in terms of research and development, new products that are created through that particular thing, a lot of support from the government to get those new products and are indeed done, and a willingness to adopt those products into assets that are being used in defence, which we've never seen before. Before, when you had a product that was mandated onto a platform, it tended to be under US mandated whatever – weapon laws, whatever. Nowadays, with for instance this year, Radar in Canberra which is mandated on the new free it programme, it's an Australian product that is mandated, that is absolutely new and very welcome.
Phil: So in terms of the defence environment, Australia's obviously put its commitment behind its growth in defence spending, as stipulated in the budget last Tuesday, so we're literally five-six days after that. You also have Trump in the states who's also…they've signalled a major increase in defence spending moving forward as well, so across a global perspective, you have a lot more spend going into defence infrastructure and defence equipment. Can you tell us how Xtek sort of fits within that paradigm? So, as a business, you guys obviously manufacture your own products, but you also are a distributor for other people's products on a domestic level in Australia but also internationally – just explain how that works.
Philippe: So, traditionally, we were more of an importer of foreign products into defence here in Australia and we've done that for the past 20 years or so, the company has been operating. In the more recent past, we've actually started to develop our own products. The logic of it is there's a lot more value adding if you develop your own products, of course, and we've done it in synergy with the focus we had before. So we are operating in a number of areas and we are developing products which are in synergy with what we import. If we don't find the right import, we just develop it, depending on the needs of the customer. So that has been what has been pushing us in that direction. Now that we have a number of more mature products, we are seeking to sell them overseas. It's not good enough to sell it in Australia if you have something unique and that is very dated by the Australian market – it's very much a question of offering it to the world, and that's exactly what we're doing now.
Phil: And what percentage of products that you create would you sell domestically versus globally?
Philippe: Well the global approach is actually very new.
Philippe: I basically was taken into the company because of it. I've got a background where I did a lot of export in the past in global supply chains to the US and Europe in the past, in a very major fashion. So, my predecessor was not very much, and he was more focused on the local market. So the push is very recent, but it's looking pretty good. For instance, we have a particular technology to make ballistic plates to protect the soldiers and we've had that tested by the US DOD very successfully, so we're looking at ways to push into that market on the back of that.
Phil: Okay, and prior to Xtek, you were with Quickstep, which most of our listeners will know is involved in the manufacture of the F35 components, so obviously you've been skilled and experienced in connecting with our US counterparts in the global supply chain. What sort of lessons did you learn that Quickstep and building those components for their 35 that you can now translate in your new role to develop Xtek global markets – is there any one or two things that you're going to excel in because of that experience do you think?
Philippe: Well it's not new when I joined Quickstep. I used to work for Thales before, so I did a lot of international business anyway. What I did at Quickstep was even more interesting because it was a startup, it was even less developed than Xtek today, and we sort of had a bit of luck and a lot of hard work to get to that $700 million contract we had with STF 35 contortion, it was not directly it was located with them and then PA systems.
As a lessons learned, clearly it's not because you're small that you can't be successful on that sort of market, as long as you do your job properly and you're professional in the way you approach things and daring to go and talk to these people. Lots of small organisations are not- they don't understand how the big business works, and if you want the large contract typically, you have to go to big business or other defence organisations. And so, being able to understand how they work and what you can bring and be able to show that you have something to offer – it's not that complex, but if you don't know how to do it, it looks overwhelming-
Phil: It's a bridge too far.
Philippe: -and very, very difficult. It's actually not that bad, but if you know, it's fine.
Phil: So what is the secret to success to cracking the US DOD, is there anything that our listeners and other defence businesses in Australia can leverage off of your experience that they think that can get them started at least in some of the major defence projects in the US?
Philippe: Well start with a good product. That's fundamental. Something that is unique and that doesn't have a competitor, especially not in the US, because otherwise you'll go behind the US companies. But if you do, then you need to ascertain how the system works and if you want to sell directly to the DOD, it's different from selling to a prime contractor, but at the end of the day, it's similar. You need to identify who are the decision makers, is there a need, how is that need taken into account within the US defence, how you can bring value adding to the large guys or even smaller people that are connected into that market, and then keep at it. Basically, it's an attrition role. If you're kicked out from the door, you have to come back through the window and make sure your message is actually courteously but formally affirmed, and be patient. At the end of the day, it actually works if you have the right product.
Phil: So sounds like persistence is the key.
Phil: So what was it… So you joined Xtek as I mentioned in October of last year from Quickstep, and Quickstep has obviously been a great success story here in Australia, particularly not only the technology, and I know it's a lot of composite fibres and stuff like that, but actually winning the F-35 work and delivering on it and I think a lot of Australian businesses are quite proud that we've got Quickstep delivering some key components through to the F-35. But with Xtek, what was it about the job that really attracted you to go and join this organisation and obviously they probably use a listed business, so quite a lot of over signed, a lot of shareholders and stakeholders that you need to keep happy, but what was it about the role that really made you want to grab it and run with it?
Philippe: Well it is a combination of a number of things. First of all, it was defence related, so that's something I understand. Secondly it was listed, it was something I understand very well as well. Quickstep – god knows how many capital raising and different approach to shareholders is really important, but what really attracted me is the fact that the company had real products that were ready to be commercialised. Getting the right product fully ready to be commercialised can take years, and I learned it in Quickstep, it took us several years before the first product made with the new system was actually sufficiently advanced basically to put a machine onto the factory floor of someone else. Xtek has got a range of products that are fully ready to be commercialised. So it was sort of a gem, some of them were actually already in the inventory in Australia, others were really very advanced in terms of maturity and ready to go onto an international market, and when I saw the performance that they could deliver, I thought "wow, this is really, really interesting".
So that's how I took it, and don't get me wrong, I started as a non-executive director in there just to give some advice on international commercialization and when I dug a bit more as a non-executive director, it became obvious that the company had incredible products and potential, and when the CEO actually left, I was offered the position and took it because it was really exciting.
Phil: And your vision for the business, do you have a percentage in mind of domestic versus international revenue, where do you want to take it? I imagine it's obviously sensitive, a lot of this, because it is illicit business, but what's the goal?
Philippe: The goal is, we're not going to change the company overall in three days. I mean, let's be realistic. So the rule is to keep in the same businesses we know very well, that we've learned a lot through the distribution business in general terms. We have a team of experts that are really, really good at what they're doing, so capitalise on that, make sure that this basic business is actually bringing in enough revenue to keep the company running while we promote these new products on the overseas market. And typically that's what would happen in the next twelve to eighteen months. As we gradually sign up new agents overseas and get distributors or getting GV partners or whatever overseas, and then gradually the new business, our own business is going to take over. So it's a gradual thing, we have to be very careful not to try and say well nothing is being achieved before we start from 0, we don't. If you start doing that, it will take you, especially in defence, years and years to get there.
In terms of growth outlook, we put an investor update on the website last week, and so we expect around $8 million of turnover this year, and probably a growth of about 50 per cent per year from now on, if not more. So it's a very fast growth, underpinned by a number of contracts that we are very close to signing or have already signed, and technologies that we have shown in a real capability on the world market already.
Phil: So the opportunity for you is to be a creator of product rather than a distributor of a product, so that's where you're going to get your scarlet and your margin increases – and it’s very ambitious growth targets, but it can be realised, a market which we are lined is defence spending's on the increase, so there's plenty of contracts out there. I always hear whenever I speak with defence-based businesses, they always let me into about the challenge of actually getting a signature on a contract and getting that cash in to start generating the engine, the vehicles to actually produce these products. How do you find working within this Australian marketplace? Do you find it quite slow and labourious or do you think that we're getting better as an industry for moving faster and getting deals signed and getting companies working and making stuff – what's your thoughts on that? It's a bit of a tough one-
Philippe: No, it's not perfect. If you come from another industry, you'd say well this is taking forever, absolutely forever. But if you're used to working in that environment, you'd think it is actually – well I wouldn't say quick, but it's actually reasonably well mapped. I think that is one thing that defence does very well. There are a number of stages that you go through, they're fairly well mapped, they actually go within a general direction in terms of threat evaluation and the sort of products that need to come about. And so if you follow it, may take a few more years, more or less, more than less, typically, but you normally get there. So, it is relatively predictable, not fast, but predictable, which is very important.
That being said, when you're in a contract, the customer is fairly easy to deal with. They typically are very demanding and that's right – defence needs to get the best possible product. But when you deliver and you deliver what you're supposed to deliver, they pay you very quickly, you don't have too much of a cash issue. I've been operating in that environment for 25 years and I don't think I've had any substantial accounts beyond 90 days. So, it is a very positive way for a small company, it's so important, cash really is everything. So if you know you're going to be paid properly, that is very important. So if you're used to it, you sort of take all these constraints into account and you live happily ever after. If you're not used to it, that can come as shock.
Phil: You find that most businesses that work in defence also do something else, so they might be heavy industry, oil and gas, railways, other major manufacturing type of businesses and how they find themselves in defence and then they realise and understand the opportunity and push down that path, but often it's the same old story, the speed to market is often not as fast as some other industries, but I like the point that you've made, it is very predictable. There are rules surrounding the game and as long as you understand and abide by those rules and deliver value to the customer, the upsides can be considerable. It's a good market for people to operate within. And Xtek moving forward – what is the 'top sellers', and I say that in inverted commas on your inventory of product right now, what are you delivering mostly to customers?
Philippe: What is it that we deliver to customers, or what is it that we're going to deliver. That's a bit different.
Phil: Two very different things.
Philippe: The markets that we are very well entrenched in at the present time tend to be very much in the explosive and ordinance disposal robots and things like this. So we sell the robots to defence and the police forces, x-ray equipments to scan packages, you know, you don't know what that is so you better have a look before you get rid of it or explode it or whatever. So that is bread and butter, and we do a lot of that. That's traditional business, we do more of it, that's fine. The thing that we're getting into in a major way is UAV’s. So we've already delivered 14 small systems to defence, and we are the preferred tender for a much bigger contract for a much larger number. These are hand held UAV's that you launch by hand, retrieve landing in the rough, but will give you a visual over the hill or on the other side of the street or somewhere that is not visible at the present time.
We are the first company that is going to provide large quantities of those to the forces, and I'm talking about in general for UAV's, whether you talk small, big, medium. Defence has been thinking about the strategy of different layers of sizes of UAV's and that left on lots of trials but not very much of a fielding. So with the first one that is going to field some of those, we've gone through the trials of the 14 and we have a maintenance facility, we have a number of softer packages that go with it to be able to use the data that comes out of the UAV's in question, and that should give us an enormous presence on that market because we understand the client, we understand what they need and we value add to that client.
As I say, we do a lot of development in terms of tactical imagery that is taken from the video streams that are coming from these UAV's, to do mosaic mapping, so it gives you a virtually instant map of the area you're going to with your UAV, and like this, you can map it every 15 minutes or 20 minutes and you see if there is a new truck coming in half a dozen trucks coming in. Of course you won't attack the place with one truck or 15 trucks, it's important to know that in real time. So that's the kind of value adding that we would propose. A lot of suppliers, our supplying platforms, what we supply solutions to a large extent. So that is going to be very major for us in the future.
Our technology in terms of plates, in particular is -
Phil: So ballistic plates?
Philippe: - ballistic plates, yeah. Also has an enormous potential. We can supply plates using that particular technology, which can be up to 30 per cent lighter than a similar plate which stops the same ballistic threat. 30 per cent is enormous when you think of people having packages on their back which weighs up to 30-40 kilos. You save them a couple of kilos, it makes a big difference.
Phil: And how do you feel about your ability to attract and keep quality engineering, manufacturing staff, are you concerned about access to those people to help you grow as a business or do you think that there's a ready source of talent and capable manufacturing team that can help you realise this business growth.
Philippe: That's a good question. We have a very good team, very good expertise at all levels, whether it's an operational level and we have a lot of ex-defense and ex-police people that brings us the understanding of what the business is all about, and be able to propose products that are meeting requirements, so that is essential in our business, but help us as well develop the products that are not available and where you can actually bring value adding. So we understand the world market, what's available on the world market. We don't do up things that already exist because we know what we're talking about there, and we understand what the customer wants, this is really very central. We have, as well, a very large scientific team that does a lot of work in terms of developing those new technologies. Very good, as well, in terms of understanding what we're talking about, and more and more maintenance team as well, people that can offer the maintenance and the training that is necessary in those kinds of industries. More and more in terms of manufacturing as well, we're developing that activity as well as we go as well.
So very diverse force of staff, but whether it's easy to fund them, no. Whether it's easy to keep them, well get them motivated and they'll stay.
Phil: Well keep them engaged, keep them… What I always hear is that the people that work within defence space, they like to think that they're hard work and their manufacturing talents into the equipment they're creating actually has a lot more use than a typical manufacturers. It’s actually changing the way in which we can develop our military and giving the guys that go to the field a greater capability, so it's an important thing for a lot of workers.
Philippe: That's one aspect of it, but it's also working in the small companies is also quite good for the morale of the staff. They have more visibility on what is done, a lot more latitude in terms of what then can do or not do, whereas in a big company, and as I said before I worked in large organisations before, they don't have that possibility to expand your views and give you a more exciting perspective onto the business, and that keeps a lot of people interested and focused and working hard to make sure that you deliver something of interest.
Phil: People involved in entrepreneurships have their ideas and can make it all the way through to the CEO and it can actually help develop new products and create more jobs and create a better outcome for the business. A lot of people get satisfaction out of that.
Philippe: Yeah. And most of them are doing it more so because they understand that there is a need out there and they say well if we did that, these guys would be safer, these guys could do this and that, and so there is a lot of satisfaction in terms of saying well hey, these guys have got a problem, how can we help? So, if you maintain that interest and curiosity into what it is that the market needs and then create a product that actually delivers it, this is so exciting. So it keeps people very loyal to the organisation.
Phil: That's good. Philippe, we've run out of time. It's gone so fast, it's like 25 plus minutes, so I'm getting the nodding of the head from Adam here who looks after our multimedia. I've enjoyed the chat. I think that you've got an interesting path ahead of you in terms of, you've had your feet under the desk now for nine odd months, and you're taking Xtek down a path to a deep, in not only its manufacturing capabilities and the products its creating, but also expanding it out to a global footprint. So interested to see how all that happens, I'll now be watching your share price with interest to see how the market responds to the success of the business and the work that you're doing. But it sounds like you're poised for really good things ahead and the attitude and the aptitude to go out there and create products which are new for markets that need it, is not a bad business basis. So all the best with it all, and thanks for coming on.
Philippe: Well thank you very much for your time and your interest.
Phil: It's good. Remember for everyone to check out defenceconnect.com.au today for everything that's happening in defence at the moment. We are creating market intelligence on a daily basis so make sure you do check us out. Thanks also for tuning into our podcast, there's plenty more on iTunes or on the website here wherever you listen to it, so just search around and you'll find plenty of great stories from quality operations and businesses in the defence space. So we're on all social media channels, you can find us there to keep abreast of what we're doing. If you'd like to follow me on Twitter, @PhillipTarrant. If you want more information about Xtek, you go to, what's the Xtek website? Philippe?
Phil: Okay. That's pretty simple. Nice one.
Philippe: So Xtek – x-t-e-k.
Phil: .net. Thanks for joining us, and we'll see you next week. Bye bye.