TIDMSCE
RNS Number : 4511I
Surface Transforms PLC
20 June 2017
The information communicated within this announcement is deemed
to constitute inside information as stipulated under the Market
Abuse Regulations (EU) No. 596/2014. Upon the publication of this
announcement, this inside information is now considered to be in
the public domain.
20 June 2017
Surface Transforms plc
("Surface Transforms" or the "Company")
Operations, Customer and Pre Close Trading Update
Surface Transforms provides the following updates on operations,
progress with potential OEMs, and pre-close trading update for the
year ended 31 May 2017.
Customer and Operational Highlights
-- Knowsley factory: move is now fully completed, albeit with
certain production interruptions incurred during the move. Except
for the ceramic furnaces, all the new equipment is on order, at
prices broadly in line with budget. Deliveries start late June and
will continue over the next year.
-- Aerospace: continuing delays on commencement of aerospace
revenues originating from the airframe manufacturer; management
discussions with immediate landing gear customer for a commercial
response to offset the consequences of this airframe delay.
-- German OEM 3: now expected to introduce the Company's
products earlier than expected - on racetrack cars - in 2018.
However, extended testing of road cars means volume sales delayed
by one year.
-- German OEM 5: confirmed programme for introduction in late
2019 and continues to test with positive feedback.
-- Engineering work on the Aston Martin order (won in the financial year) continues to plan.
-- British OEM 1: delayed first models understood to be due to
challenges they are having with brake system integration -
unrelated to the discs. Accordingly, management has substituted the
Aston Martin Valkyrie for the first model of OEM 1 in its planning;
with minimal impact on total sales.
-- VDA 6.3: first "trial run" of VDA 6.3 quality approval
standard resulted in an agreed shortlist of outstanding items to
address before approval will be granted, expected by Q3 2017.
-- Phase One cost reduction programme: will complete when all
new equipment delivered. In addition, further significant cost
reductions identified from the new Combined Heat and Power Plant
and increased purchasing power on gas supplies.
Financial highlights
-- Sales for the year at GBP702k, were lower than expected, as
during the period of limited capacity, management took the decision
to switch saleable parts into test parts for the extended OEM 3
test programme.
-- However, these sales have not been lost, at 31 May 2017,
total firm orders and customer commitments are for sales of GBP889k
in the new financial year, the highest visibility of future sales
the Company has ever had.
-- Cash at 31 May 2017 was GBP1.53m. In addition to which is an
expected R&D tax credit of over GBP450k (receivable December
2017) and claimed but not yet received grants of GBP118k
(receivable Q1 of the new financial year).
Progress with potential OEM Customers
Since the last update on 13 February 2017, the Company has met
with most of its potential customers confirming continuing progress
on the fundamentals but with changes in the expected profile over
the next three years.
The significant developments are:
German OEM 3: The Company is pleased to announce the customer is
now expected to introduce the Company's products earlier than
anticipated - now in 2018 - albeit on a limited edition race track
only car. Contractual details are in final discussion, and one
relatively straightforward regulatory approval test remains to be
completed (note: the Company has already passed this particular
test on other cars for OEM3, as well as many other customers).
Revenues from this car are expected to be GBP500k in the 2018 race
season - which typically runs from March to October. The customer
is able to accelerate this introduction because the product
requirement, testing and quality accreditations are different for
track cars than road cars. The Board considers this decision
further validates the customer's confidence in the core Surface
Transforms product.
In respect to the road car, the Company and the customer are now
planning a revised introduction route to the previously announced
mainstream, volume, vehicle range. The vehicle range is unchanged
but the introduction variant is different to and later than
previously announced. This has the effect of giving the Company a
further six months to complete and replicate the outstanding
product testing which moves volume revenues (excluding race car)
back twelve months. However, as this is solely a different entry
point to the same model range it does not impact medium term
sales.
Testing on meeting the product requirements is on going and the
Company believes it can meet the customer's requirements by Q3
2017. However the Company and customer have agreed that Surface
Transforms needs to replicate these results and this could take
until the end of the calendar year - consistent with the new road
car nomination date.
British OEM 2 and German OEM 4: OEM's 2, 3 and 4 are sister
companies in the same group. German OEM 3 has re-iterated that
their testing programme covers the requirements of other group
companies. Completion of product testing with OEM 3 will therefore
complete testing for OEM's 2 and 4.
German OEM 5: This is a different German automotive group. The
customer's testing is going well; they have slightly different test
requirements to German OEM 3 although the Company believes that it
can also meet these. The customer has re-iterated the target model
with a 2019 start of production date with mature run rate volumes
of GBP2.5m per year.
British OEM 6: In the year, the Company won an order with Aston
Martin - now described as OEM 6. Engineering work on the Aston
Martin order continues to plan and the launch date of January 2019
is unchanged with development revenues for the Company expected
before that date.
British OEM 1: Delay with the first model for OEM 1 is
understood to be due to challenges they are having integrating
their brake system and unrelated to the discs. The customer's
solution appears to have been to ask the Company's competitor for a
holistic caliper and disc system offering. As a result, this latter
project has been deleted from the Company's internal forecasts and
replaced by Aston Martin. The net effect of these changes is
minimal. The Company continues to include the second model for OEM
1 in its planning as it will be offering a joint caliper, disc and
pad solution to the OEM, replicating the success of Aston
Martin.
Aerospace: As previously reported, testing has been completed
and the only outstanding issue is formal sign off by US Naval Air
Command and the aeroplane manufacturer. However, this "sign off"
continues to be delayed, for reasons the Board believes to be the
result of the aeroplane customer wanting to "package" a number of
changes at the same time. The Company is in discussions with its
landing gear customer with regard to the financial implications of
this airframe delay, as the launch date was a fundamental feature
of the original commercial agreement. These discussions include
continuance of development income if production income is delayed
for reasons within the customer's responsibility.
Operational Update
Knowsley facility: The previously notified problem with the gas
supply has been resolved although this distraction did result in
certain production delays. However, the Company is now in full
production, on all processes, at Knowsley. The new site, (five
times the size of the old site) has been designed using "lean
manufacturing" principles and is now, after initial start-up
problems, performing better than the old site. The Company fully
vacated its old Ellesmere Port facility on 30 April 2017.
The current capacity of the new site is sales of GBP4m in two
cells: Small Volume Automotive Production providing GBP2.5m and
Aerospace providing GBP1.5m. When the current investment programme
is complete, total capacity is expected to be GBP16m, although
given the site footprint GBP50m sales could be achieved, albeit
this would require additional capital expenditure. This GBP50m
sales target reflects the pipeline of the current customer
discussions.
VDA 6.3: All German customers require this quality standard. At
the Company's request, OEM 3 recently completed a "potential survey
analysis" aimed at evaluating our progress and calibrating the
Company's perception on the closeout actions needed before final
approval of VDA 6.3. The survey achieved this objective and the
customer confirmed Surface Transforms is close to being approved.
An action list with a relatively small number of items has been
agreed and management expect to address these by Q3 2017. This
timeline is consistent with the new road car nomination date.
Racetrack cars however do not require VDA 6.3 approval.
New capital equipment: The new equipment is on order at prices
broadly in line with budget. Delivery of the new equipment starts
in June 2017, a three month delay but with no impact on any
internal or customer critical path milestones.
Changes to the production process from meeting the further
product requirements of OEM 3 (the testing issue noted above) could
require up to a further GBP750k of capital equipment on automation
of the process and additional ceramic furnaces. The Board are
currently evaluating the necessity for such capex including the
potential return on investment and were the Company to proceed with
the capex, financing options available.
Production cost reductions: The Phase One cost reductions were
always in two parts, those associated with detailed engineering
changes and those associated with the new equipment. The former is
now almost complete; the latter are on target for completion as the
new equipment is delivered. There have also been cost increases
arising from currency movements on imported materials and
sub-contracted processes but these will be more than offset as
processes are brought in house.
Additionally, further cost reductions have been identified from
both the establishment of a Combined Heat and Power Plant on the
new site and increased purchasing power on gas supplies.
Grants and loans: At 31 May 2017, the Company had expended
GBP2.5m of its capital expenditure and thus triggered the final
release clause on the GBP500k grant and loans. GBP382k has now been
received leaving GBP118k expected in June.
Impact on Trading Results
2016/17 financial year: As part of the process of securing the
race track and road car business with OEM 3, the Company has spent
approximately GBP350k on extra development costs which will impact
FY16/17 results, partially offset by an increase of GBP120k in the
R&D tax credit expected to be received and credited to the
income statement in FY17/18. Additionally, the combination of
switching capacity from revenue generating product to test parts
together with the problems with establishing gas supply has reduced
expected sales in the year to approximately GBP700k.
However, these delayed sales have not been lost. At 31 May 2017,
the Company had retrofit and near-OEM customers orders of GBP770k
and customer commitments for sales for delivery in the new
financial year for GBP119k. This GBP889k total pipeline is the
highest visibility of next year sales the Company has ever had (31
May 2016: GBP427k).
Future years: The new race track business is a welcome short
term boost to revenues but the uncertainty over aerospace revenues
and the later starting date for the OEM 3 road car could
potentially delay total planned revenues by a year, each year, for
the period to financial year 2020/21 returning to the previous
notified run rate thereafter.
Year-end cash: The Company cash balance at 31 May was GBP1.53m
to which can be added an expected tax credit of more than GBP450k
in the first half of the new financial year and the above-mentioned
outstanding grants and loans of GBP118k (claimed but not yet
received).
Summary
Kevin Johnson, CEO, said: "We are serving a potential GBP2bn
market where a monopoly competitor has current sales of over
GBP100m. Our customers want us to succeed in providing a second
source supply to the industry.
Against this background it is encouraging to report the
completion of the factory move with continuing cost reductions so
we can now focus fully on securing VDA 6.3 and, perhaps above all,
that OEM 3 is advancing the introduction of the Company as a
supplier, initially on their race car products.
The ongoing delay of the aerospace contract and extended testing
on the road car are frustrating, but these programme delays are
typical of the industry which are not fully in our control and do
not change the end game.
We continue to look forward with confidence and providing
further updates on the fit out of the new cells at the Knowsley
facility, VDA 6.3 and progress with OEMs, in both the automotive
and aerospace sectors."
Enquiries:
Surface Transforms plc
Kevin Johnson, CEO +44 151 356 2141 David Bundred, Chairman
Cantor Fitzgerald Europe (Nomad & Joint Broker)
David Foreman, Michael Reynolds (Corporate Finance) +44 20 7894 7000
Mark Westcott, Alex Pollen (Sales)
finnCap Ltd (Joint Broker)
Stephen Norcross, Richard Chambers (Corporate Broking) +44 20
7220 0500 Ed Frisby, Giles Rolls (Corporate Finance)
For further Company details, visit www.surfacetransforms.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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