Surface Transforms Plc (LON:SCE) Chairman David Bundred caught up with DirectorsTalk for an exclusive interview to discuss increased revenues, furnace problems, game-changing contracts and increasing capacity.
Q1: News out yesterday, could you tell us what was in the announcement?
A1: Yes, at one level it was just a normal update on trading in the first half of our financial year which we always put out this time of year but I’m pleased to say that it actually contained a pretty decent list of good news that was in there. We were able to say that we’ve largely put our furthest breakdown manufacturing problems behind us, we were able to recover the lost sales that we made at the back end of last year but actually, arguably more important, we were able to draw shareholders attention to a comparable 60% growth in retrofit car sales and a 20% growth in near OEM sales. Perhaps the best news of all, admittedly helped by the R&D tax credit, we were pretty close to operational cash break-even and within that, we haven’t got the final number yet but the flash is very much improved over last year.
Q2: Excellent. So are the furnace problems behind you now?
A2: Almost but not quite. The furnace is now reliable but the adjustments we made to get it reliable have reduced capacity which is ok for now, because we don’t need capacity right now, but it needs sorting out. So what we’re doing is we’re taking it out of production in the next week or so and over the Christmas break and early January and we’re implementing a pretty significant upgrade, it’s a cost of £160,000 to sort it out once and for all.
Q3: Before, we’ve spoken about game-changing contracts, what’s the progress on the new automotive game-changing contracts?
A3: Well that’s the issue we rightly and properly always talked about isn’t it, the RNS repeated the comments that our Chief Executive Kevin Johnson made at the AGM. Firstly, the aerospace productionisation phase is on track, there are no significant issues and we’ll be going into mainstream OEM aerospace production in 2017. In respect of the automotive business, as Kevin said in the AGM, there are five separate testing programmes and contract discussions with five separate companies albeit a few of those have the same ultimate parent company and they behave for these purposes as separate companies. There’s a lot of very very good progress, our frustration is that our customers won’t let us talk about what they consider to be their commercial product plan secrets, even taking this into account. Even taking what our customers will or won’t let us say, I can put some flesh on that bone; the way the industry introduces cars into production is that you pass through certain formal gates as the car product is developed, one key gate for us is component selection. I can say that the process of component selection is finished at one British OEM and they’ve now moved into system integration work and what they do there is optimise the pad/disc interface, program the anti-lock etc., they’re only working on our product at that as we’re through the product selection, they won’t repeat this work with our competitors’ products. That’s why I frequently say that in auto industry process the way the industry works, but I fully accept not contractually, we won this business and that particular contract would start in mid-18, initially around a million sales a year, building up to 6 million as the product range extends and that’s just one customer, arguably the smallest of the five we’re working with. I could go through the others line by line but Kevin’s already done that, it’s on the AGM presentations on the site. In summary, the testing seems to be taking forever but we’re advancing on a wide front, there’s more progress than our customers will let us talk about but these contract awards will happen.
Q4: How are you getting on with increasing capacity?
A4: Well, as a reminder we don’t need more capacity for the aerospace contract and we just about have capacity for that plus the continuing retrofit and OEM sales growth. We can be profitable with our current capacity but we don’t have capacity for true OEM volumes and if we’re looking at mid-2018 production, we have to have the site selected and the plant ordered in early 2016, you just count back in time it takes to get the plant built and get it working and optimised etc. It’s tight but we’re on target, we’re announcing a few new factory sites we like and negotiating that between ourselves and the local authorities on grant support. Getting certainty on this is a top priority for us, second only to getting the contracts signed.