Surface Transforms revenue increased by 34% to £1.2m

Surface Transforms

Surface Transforms plc (LON:SCE) manufacturers of carbon fibre reinforced ceramic brake discs, has announced its half-year financial results for the six months ended 30 June 2021.

Financial highlights:

· Revenue increased by 34% to £1.2m (H1-2020: £0.9m)

· Cash at 30 June 2021 was £17.2m (H1-2020: £2.0m)

· Gross profit increased by 27% at £0.7m (H1-2020: £0.6m)

· Total administrative expenses rose by 35% to £2.9m (H1-2020: £2.1m) as a result of increased customer testing costs, headcount and depreciation in anticipation of the commissioning of Production Cell One

· Loss before tax increased to £1.9m (H1-2020: £1.2m)

· Capital expenditure on property, plant and equipment was £0.8m (H1-2020: £0.3m) to which a further £3.7m of capital equipment purchase orders were contracted in the period

· Successfully raised £19m of new equity (after fees) in a heavily over-subscribed fund raise

Sales and Operational Highlights:

· Series production commenced for the Aston Martin Valkyrie

· Post balance sheet date, contract wins announced with a new customer, now described as OEM 10, of £20m and a follow-on order with an existing customer, OEM 5, of €5m

· Bringing our overall lifetime value, OEM order book to circa £70m sales

· Good progress on both commercial discussions and ongoing successful product testing with several other new and existing customers

· Production Cell One will be ready for the ramp up in sales forecast in Q4-2021

· Significant revision to the Company’s manufacturing strategy which, inter-alia, is expected to: save £10m in the subsequent equipping of the Knowsley site; provide £50m of annual sales capacity in early 2023, an increase of £15m from previous capacity forecast (without new capital expenditure); and reduce our projected carbon footprint

· Strengthened the Board with the addition of two independent non-executive directors

Outlook

The Company now expects to enter a period of high growth, partially, but not solely based on a lifetime value OEM order book of circa £70m. Indeed, we repeat the statement made by the Chief Executive in the manufacturing strategy announcement of 1 September “at the time of the fundraising we said that we thought there could be sufficient demand to fill the Knowsley factory by 2025 (£75m sales), albeit these projections are still uncontracted…we have now concluded that we may want this capacity by 2024.”

However, the immediate 2021 outlook is driven by the background combination of customer start of production dates (“SOP”) and the subsequent “ramp” of production from SOP to mature manufacturing volumes. In neither case can we be totally certain of the customers’ projections. It is not uncommon for SOP dates to be delayed and the ramp varies both by customer and is specific to each individual customer circumstances.

These uncertainties are impacting our view of the outlook for 2021. Sales in the last quarter are dominated by the forecast SOP for OEM 8. As described below the SOP of our model derivative has slipped into Q1 2022, but as the customer’s supply chain will always require our parts before the customer’s SOP, the impact on Surface Transforms in the final months of this year is unclear. Discussions are continuing; however, in the extreme position of parts not being required until Q1 2022, this would shift approximately £2m of budgeted 2021 sales to a future date.

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In contrast to these short-term uncertainties, the forecast for 2022 has become more robust. There are no major forecast SOPs in the year and the issue of the ramp for OEM 8 is offset by the commercial success of the car, demonstrated by the customer’s higher than originally forecast order book. Nonetheless, using our policy that we only provide guidance based on firm contract awards we make no changes here and now to our 2022 revenue expectations.

However, we reiterate our previous statements, that we expect to be profitable in 2022.

Summary

The Company continues to announce contract wins with new and existing customers and is working on a significant number of unannounced projects. All these customer R&D projects are either going to plan or exceeding expectations.

The hard, detailed work of commissioning Cell One has continued, and the cell will be ready for production when needed to satisfy the budgeted ramp up of sales. Additionally, as part of the process for installing Cell Two, the Company has reviewed and subsequently adopted a new manufacturing strategy which will lead to the change from the Knowsley plant’s modular plan to a single site, single production line concept. The implementation of this plan will provide £50m of annualised sales capacity in 2023 and if needed and with further capital expenditure, £75m of annualised sales capacity in 2024, shorter lead times with lower cash need and reduced projected carbon footprint.

There are some short term 2021 outlook concerns over the precise SOP date for the OEM 8 model and the shape of its subsequent production ramp, but these concerns cover a short period in the context of a sales opportunity that is increasing in size with the customer.

The Company continues to ascribe the highest priority to underpinning its strong Environmental, Social and Governance credentials. In the period, actions included strengthening the Board, incorporating a reduced carbon footprint as a key criterion for furnace selection, installing emission measuring equipment that exceeds regulatory requirements, increasing employment in a deprived area of the country and continuing to build our relationship with the local community.

The regulatory discussions and lobbying to include brake dust regulations in the new Euro 7 regulations accelerated in the period. There are no certainties to this process, but enhanced brake dust regulations would be beneficial to all carbon ceramic (“CC”) disc suppliers.

Finally, I would like to conclude by recording the Board’s appreciation of the outstanding contribution by all members of the team. Thank You!

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