Surface Transforms plc (LON:SCE) Chief Executive Officer Kevin Johnson caught up with DirectorsTalk to discuss their new pre-production (technology development) agreement with a leading German performance car manufacturer
Q1: Now, I see the announcement that Surface Transforms has signed a new pre-production agreement with a leading German performance car manufacturer. Kevin, it sounds quite exciting, can you tell me what this agreement represents to Surface Transforms?
A1: Well I agree with you, we think it’s very exciting and it’s a fantastic endorsement of the company and its products and our world-leading propriety technology but more importantly the first formal agreement with a global major car manufacturer stating their intent to put Surface Transforms bakes on their cars so we see this as really game-changing for the business. The initial volumes are in the tens of thousands and equates to about £10-£12 million revenue per annum so that revenue alone is transformative for this business but we shouldn’t forget that this is, if you like, the early adopter stage for our technology and the potential market for carbon ceramic brakes we estimate at £2 billion so there’s plenty of market to go as well.
Q2: Could you tell us more about who the vehicle manufacturer is?
A2: Yes I’d love to, myself and my colleagues get asked this all the time, but our customer is very sensitive about its commercial activities and at this point in time wants to keep it very confidential, particularly in relation to its competitors, it doesn’t want its competitors to know what it’s doing. So for this reason, I can’t tell you who it is, all I can tell right now is they are a leading car manufacturer with a very very wide global reach, reputation and brand.
Q3: So why is the vehicle manufacturer adopting Surface Transforms’ product and how will the adoption happen?
A3: Well, at a very simple level it’s about products, quality, supply chain and price. Our customer’s been conducting some very detailed studies and testing to understand our capabilities for series supply, what do I mean by ‘series supply’, series supply is effectively volume manufacturing by standardised processes. Their conclusions are clear in this agreement really, they believe Surface Transforms has the superior technology, has an advanced plan which is underway to build a pilot scale factory which has the capability to deliver product at their volumes at the right quality and the right secure supply chain. Now, in the short term, how does this mean we can get adopted? Well again you won’t be surprised, they’re very clear and defined processes and we know the model of car which we want to be on, the next step is nomination with the car manufacturer and then they can do their system integration. System integration normally takes about 2 years before it enters series supply and then once it’s series supply it’s typically lasts for 6 years in terms of a revenue stream so we know right now that we’re going to be going into system integration in the near future because we know that the start of production for the car is 2019.
Q4: Now, obviously Brexit came along and it stirred up things for a lot of new companies, how does this affect the company?
A4: Yes, I mean at a very broad level it affects everyone as we know in terms of Brexit but for ourselves there are probably two main issues, tariffs and the increased volatility in exchange rates. In terms of tariff, at a very top level we think it’s unlikely to see tariffs in our industry, we’re a very integrated industry the automotive industry so I can’t see Ford in Germany having tariffs for importing their own engines from Ford UK for example. However if there is a tariff we know that probably the worst case tariff would be for most favoured nations and that’s at approximately 3.7% of the tariff so around 4% and right now that’s offset, or more than offset, by the exchange rate and the change in exchange rates between the pound the and euro. So in the very short term we see it as very neutral, in the longer term we don’t control exchange rates so there might be a marginal change if you like in our competitors but we’re not overly concerned.
Q5: What does it mean in terms of activities for Surface Transforms?
A5: Well again just thinking short term, there’s a number of engineering tasks we have been able to start and are on plan to complete, these are really focussed on product refinement and the environmental durability of the product. The tasks are well under way, we understand them very well and the testing is in progress, now like all testing you can never say it’s a sure thing until you’ve completed it but as I said we know what we’re doing and our hope and belief is that the testing will be a success and will be concluded and allow us to progress as we plan to. Alongside that our customer, as I mentioned earlier, is very keen on quality, to be a costumer-approved supplier we’ve committed a spend of £200,000 to effectively upgrade our manufacturing processes so it’s a one-off cost and at the end of that programme we’ll be compliant to German automotive standard VDA 6.3 and without that you can’t effectively become a series supply or become a supply to the vehicle manufacturer. The third point in our short term goal is during 2017 we will be bringing the new factory on spring and this is another key requirement for our customer, progress is good, it’s on plan and as I say once completed it’ll have approximately 20,000 disc capacity which for these guys is pilot plan but with it being the first step in our progress towards volume production and we’ll need that for the system integration during ’18 and then into ’19 series supply.
Q6: Ok, now you mentioned the factory’s new capacity, how is this affected by the programme?
A6: The factory’s capacity as I say is 20,000 initially but we’re designing it as a cellular system and that investment in the first cell has been made. Now as you’ve heard, this customer is a major customer and the majority of that 20,000 would be taken up by their first programme, this first car so we already believe that we’ll need further cells in the future, now that’s the reason for doing it as a cellular design. The new building we’re going into, and we’ll be entering that new building shortly, in the next few months, can accommodate up to 4-5 cells so should give us the capacity to grow and build capacity between 80,000 – 100,000 and this is important again because not only for our customers to see that we have the capability to grow our capacity but it’s also important for our other game-changing opportunities as well.
Q7: What about other Surface Transforms customers and programmes, how are they progressing?
A7: If we cast our minds back, this agreement is not dissimilar to the agreement with have with our aerospace customer in 2014 which was a pre-production agreement and again, that was considered by ourselves a game-changing opportunity and announcement, again it endorsed the company’s product and technology. That deal in particular allowed us to state that in 2018 when that comes on stream, the company would become cash generative rather than burning cash to do development in both the market we work on. The big different of course between the aerospace and the automotive is scale, the aircraft deal was worth about £1.3 million per annum and as I’ve mentioned the revenues for this deal in series production are between £10-£12 million per annum and then of course we shouldn’t forget that we have four other game changing automotive opportunities we’re working on and those are going well. So we’re very excited with this one and we’re very excited about what other activities are going on in the business as well.
