Surface Transforms, (AIM:SCE) manufacturers of carbon fibre reinforced ceramic (CFRC) materials, has given DirectorsTalk its half-year financial results for the six months ended 30 November 2015.
Financial highlights:
-- Turnover increased to GBP782k (2014: GBP623k)
— EBITDA loss, including tax credits and excluding share based payments decreased to GBP27k (2014: loss GBP165k)
-- Total comprehensive loss reduced to GBP124k (2014: GBP254k) -- Loss before tax reduced to GBP430k (2014: GBP471k) -- Cash at 30 November 2015 was GBP525k (2014: GBP132k)
Financial review
Revenue for the period was GBP782k (2014: GBP623k) being approximately 26% higher than the corresponding period last year. The increased revenue was attributable to a catch up in sales delayed in the previous year following the furnace break down in May 2015 including approximately GBP107k from increased aircraft customer revenues. Within the core automotive customer base, it is encouraging to note that there was a 60% increase in retrofit car sales and a 20% increase in near OEM car sales, equivalent to an increase of approximately GBP100k in aggregate between the comparable half year periods. The increase in retrofit car sales reflects new customers, while the increase in near OEM car sales is due to sales to existing customers.
The increase in sales resulted in increased gross profit of GBP447k (2014: GBP293k), an increase reflecting both volume and improved percentage margins, being 57% in the period (2014: 47%). However, as signaled in previous announcements, and in line with budget, R & D costs increased to GBP590k (2014: GBP427k) as a result of increased activity on the game changing contracts. Nonetheless, the company was able to substantively offset this cost increase by both grant income of GBP61k (2014: GBP9k) and an increase in the R&D tax credit to GBP306k (2014: GBP217k). This all contributed to the reduction in EBITDA loss to a near break-even loss of GBP27k (2014: loss GBP165k).
Cash was GBP525k at the half-year end (2014: GBP132k and GBP829k at the year ended 31 May 2015). However, net current assets excluding cash increased by GBP203k in the period and will convert to cash over the next few months, demonstrating the business being close to operating cash break-even in the first half. Without the R& D tax credit, the Company will use cash in the second half, including capital expenditure of GBP168k on furnace modifications.
Loss per share was 0.23p (2014: 0.60p).
Outlook
Historically the Company’s second half trading pattern is for higher revenue in the second half of the year, however as explained above, the first half benefited from the one-off effect of catch-up sales. Accordingly, the Board expects the second half revenue performance of the current financial year to be comparable to that achieved in the first half.
In the second half of the year, the key issue for the Company will be the advancement of the game changing contracts where the current status is as follows:
Aerospace: We have been notified that our customer, the aircraft brake systems supplier, has received technical sign off and “go ahead” approval from their customer, the aircraft manufacturer. All that remains is final test flights and qualification. The programme is on schedule and, as previously notified will have a minimal contribution to this financial year and the next but is expected to commence production in the middle of the 2017/18 financial year, reaching mature sales of GBP1.3m per annum in 2018/19.
Automotive: The Company is in detailed discussions with five mainstream automotive manufacturers:
German OEM One: The customer has successfully completed the first phase of testing, and has identified a small number of optimisation opportunities to be completed over the next six months. This has led to the customer informing the Company that completion of these tasks would lead to a mid year contract award on a named new model programme (already shared with the Company) which is expected to commence production in mid 2018 generating sales for Surface Transforms of up to GBP4m per annum on mature volumes in the following year. The Board believes that the six-month optimisation timetable is tough but achievable.
German OEM Two: This is a sister company of the above customer, they are sharing information with “German OEM One” and effectively following in their wake. Sales with this customer could therefore begin in late 2019 generating sales for Surface Transforms of up to GBP4.2m per annum for the supply contract on which discussions have to date been based.
German OEM Three: This customer completed a product and factory audit of Surface Transforms in December and was complimentary about the technology, process capability and plans to provide for their capacity requirements. Their testing continues. They have informed Surface Transforms of the target car which would potentially fit the Company’s product, which is expected to commence production in mid 2019 and generating sales for Surface Transforms of up to GBP2.8m per annum on this initial model.
British OEM One: This customer has satisfactorily concluded testing, informed us of their intention to purchase the Company’s product and shared its Surface Transforms product introduction programme with us, by model type, over the next few years. This contract is expected to commence in mid 2018 generating sales for Surface Transforms of up to GBP1.6m per annum rising to GBP4.7m in 2020 as later models are released. The Company expects to be able to formally announce this contract award when the model itself is launched during this calendar year.
British OEM Two: This customer has seen the benefits of using Surface Transforms’ product in both reducing cost on adjacent components and reducing their variety of sub systems. This has had the effect of delaying start of production from mid 2018 to mid 2019 but, paradoxically, improved the chances of them adopting the Company’s product. If this programme goes to plan, the Company expects to generate sales in 2019 of up to GBP1.0m per annum.
Progress on the new plant and grant funding: The consequence of the above progress with automotive OEMs will require new capacity, which in turn requires additional floor space. The Company plans to bring the capacity on stream over the next 18 months in time for commencement of car production in mid-2018. The task is to build a plant that would initially have capacity for GBP15m sales as the first step towards our medium term goal of sales in excess of GBP50m. To this end, after a difficult start to negotiations, the Company is pleased with recent progress on grant discussions with local authorities. Additionally the Company has now identified a preferred site for the “pilot plant” and is in negotiations with the site owner on rental terms. An announcement providing further details on both these points is expected in the very near future.
These are encouraging first half operating results which have been achieved against the background of considerable management time and effort also being devoted to the longer term strategic development of the Company.
The Board has been able to provide greater detail on the game changing contracts, reflecting the increasing confidence of the Board in the outcome of the customer testing programmes. The testing is going well and the customers are being supportive, all of which provides the Board with an increased confidence of being able to announce automotive contract awards during this year.
David Bundred
Chairman
