# Surface Transforms production issues now resolved

- Link: https://www.directorstalkinterviews.com/surface-transforms-production-issues-now-resolved/4121113130
- Published: 2023-04-03T07:18:56+01:00
- Author: Emily Johnson

**[Surface Transforms](https://www.directorstalkinterviews.com/company/surface-transforms-plc/sce.l)
plc** ([LON:SCE](https://www.directorstalkinterviews.com/company/surface-transforms-plc/sce.l))
manufacturer of carbon fibre reinforced ceramic automotive brake discs has provided
the following update on previously reported technical issues, capacity installation,
first quarter sales and its outlook for 2023.

**Resolution of production technical problems**

The Company is pleased to inform shareholders that the production issues (previously
reported on 11 January 2023) have now been resolved. There are more than twenty 
complex production steps in the overall production process and all sub-processes
are now achieving their individual Q1 2023 daily production targets.

As previously reported, one furnace issue in particular, significantly affected 
output over the past six months, exacerbated by industry-wide supply chain problems
for furnace insulation. The Company has subsequently made changes to that process
in Q1 2023, including, but not limited to, use of more readily available materials.
These changes were successful, and that sub process has now run, at target rates,
for over a month. This was the last major impediment to meeting ongoing daily customer
requirements.

**Progress with capacity increase**

Over the last 18 months the Company has been installing capacity to support contracted
sales from £2m p.a. in 2020, to over £30m p.a. in 2024. Installation of this capacity
increase is on track, with installed revenue capacity of £50m p.a. in place by September
2023.

This increased capacity will be sufficient to meet Surface Transforms’ growing customer
demand for at least the next  18 months.  This additional capacity also being required
to provide resilience, “catch-up”, capacity if any further technical problems were
to arise. The lack of this resilience, preventing the Company catching up lost production,
has compounded the technical problems over the past six months.

**Q1 Trading Update**

The  production issues that negatively affected turnover, production costs  and 
operating loss for the financial year ended 31 December 2022 (“FY 2022”) continued
into Q1 2023. As a result January and February production volumes were lower and
scrap costs were higher than planned. Cautious March loading rates have resulted
in Q1 2023 sales being £1.4m, and the quarter loss making. Although the furnaces
were trouble free in March, the Company initially adopted a low risk strategy on
individual furnace loading. Therefore the overall total output for the month of 
March did not fully reflect the underlying dramatic improvement in yield and furnace
availability achieved across the month.

**Outlook for 2023**

The technical issues are now resolved, and demand remains strong. We are now ahead
of the run rates required in Q1 and the Board remains confident that the Company
will be profitable in Q2 2023 and thereafter. However, given the issues experienced
in Q1 2023, and the ongoing production ramp in Q2, our overall profitability during
FY 2023 is expected to be below market expectations.

While the Company and its supply chain will have the capacity to over produce against
the original planned H2 2023 production, our OEM customers and their supply chains
have their own constraints. Accordingly,  it is premature to assume that these delayed
sales will all be caught up in the year. Customer discussions are continuing, and
we will update the market as appropriate in due course.

Accordingly the Board is planning its cash needs on the prudent assumption that 
delayed Q1 sales are not recovered in the short term.  Despite this, the Company
will have sufficient cash to continue its extensive three year capital expenditure
programme and working capital required as sales increase through the year. 

**Notice of Results**

The Company will be reporting its results for FY 2022 on 17 April 2023. The Company
will also provide the opportunity to hear from, and ask questions of, the Chief 
Executive on both this announcement and the full results for FY 2022 on a webinar
to be hosted by Hardman and Co on Friday 21 April. Shareholders who wish to join
this webinar should follow the link:

[https://us06web.zoom.us/webinar/register/WN_dGojxPYZQ6yAebGhfx3eow](https://us06web.zoom.us/webinar/register/WN_dGojxPYZQ6yAebGhfx3eow)

The Company will provide an update on its Q2 2023 sales on or about the time of 
its Annual General Meeting, currently expected 27 June 2023.

> **Kevin Johnson Surface Transforms CEO said**: “_We regard the progress made on
> resolving all the production technical issues to have been a major strategic breakthrough
> for Surface Transforms. In combination with the progressive implementation of 
> the capacity increase, we are now confident of the timing of ongoing profitability.
> In our cash flow forecasting we have assumed that the shortfall in the first half
> of 2023 cannot be recovered in the second half.  But even with this, hopefully
> prudent, assumption we are still expecting to have the cash to maintain the momentum
> of our three year capacity installation programme, and to fund our 2023 working
> capital need._
> _During the strains of recent months, we_ _are particularly pleased that our customers
> have understood the issues we have been facing, noted the progress and have continued
> constructive discussions on future programmes__.. The expectation of both parties,
> throughout this period, has been that we would fix the problems, which we have
> now done and install the capacity, which we are doing. Our order book (£290m) 
> and prospective contract pipeline (£300m) are unchanged.”_

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