TIDMSCE
RNS Number : 4265H
Surface Transforms PLC
24 November 2022
The information contained within this announcement is deemed by
the Company to constitute inside information stipulated under the
Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK
domestic law by virtue of the European Union (Withdrawal) Act 2018.
Upon the publication of this announcement via the Regulatory
Information Service, this inside information is now considered to
be in the public domain.
24 November 2022
Surface Transforms plc
("Surface Transforms" or the "Company")
OEM 10 contract award and trading update
Surface Transforms (AIM:SCE) manufacturers of carbon fibre
reinforced ceramic automotive brake discs, is pleased to announce
that the Company has been awarded a contract with a lifetime value
in excess of GBP100m as a tier one supplier of a carbon ceramic
brake disc to an automotive company - previously described by
Surface Transforms as "OEM 10" - which is the single largest
contract awarded to date, but crucially sees Surface Transform
discs replacing those historically provided by its main competitor.
The Company also provides a trading update for the year ending 31
December 2022 ("FY 22") and outlook for 2023.
Contract award
OEM 10, based in the United States, is one of the world's
largest automotive companies. This new contract is the second
contract with this customer and Surface Transforms will be the
standard fit, sole supplier of the carbon ceramic brake disc on two
model variants covering front and rear axles.
The lifetime revenue on this contract is estimated to be in
excess of GBP100m over 6 years. The customer is currently
estimating a start of production ("SOP") date in 2024. For
prudence, the Company anticipates series production revenues will
commence in the first half of 2025. Sales from this contract award
are expected to be approximately GBP20m p.a., tailing off in the
later years. The contract is priced in GBP.
The current variant of this contracted model is already fitted
with carbon ceramic discs provided by a competitor. The customer's
decision to replace the incumbent with Surface Transform's discs
followed a searching technical evaluation.
The contract award raises the Company's lifetime contract value
to GBP290m, across 11 contracted models, with an average contract
life of 5 yrs.
Trading update
The Company further announces that sales for FY 22 will be lower
than previously forecast at approximately GBP6.5m. This has
primarily been caused by technical issues at OEM 8 unrelated to our
discs, which delayed the production ramp following the customer's
SOP and was more prolonged than the Company originally anticipated.
This is clearly disappointing, but it should be noted that the
total OEM 8 contract value remains unchanged at GBP100 million, and
the impact is that the timing of the lifetime programme has started
a few months later than originally planned and, unless caught up in
the meantime, will eventually finish, a few months later than
originally planned.
The Company has also had its own production challenges, now
materially rectified, and whilst they were neither the reason for
the ramp up delay, nor the bulk of the sales shortfall, have
limited the Company's ability to build a finished stock buffer.
Given capacity constraints, it has meant that the Company could not
offer OEM 8 more than our previous commitments until the new GBP50m
p.a. plant comes on stream in Q2 2023.
Nevertheless, the Company has been able to partly mitigate OEM
8's ramp delays through both a change in revenue mix which resulted
in a higher than forecast gross margin and tight control of
non-essential overheads. As a result the Company expects that
profit and cash will be around GBP3m less than previously guided.
As OEM 8 volumes have now resumed, the Board anticipates that the
Company will be profitable in November and December 2022.
Furthermore, this delay is fundamentally a few months timing
difference, and, additionally, the Company now has forecast
additional income from the OEM 10 contract. Therefore, the Company
does not anticipate any working capital shortfall to deliver its
new factory and short term growth, in line with the statements
given in its announcement on 28 September 2022 regarding its
"Proposed Placing, Subscription and Open Offer".
Progress on capacity installation
Deliveries of the Phase 2 equipment that will raise capacity to
GBP50m have continued. There are some project delays associated
with supplier supply chain problems (notably electronic components
and graphite). However, these are broadly covered by project timing
contingencies, and we still expect the planned Phase 2 doubling in
capacity to be operational in Q2 2023.
Planning and supplier discussions on the Phase 3.1 capacity
increase to GBP75m p.a. by mid-2024 and GBP150m p.a. by end 2026
continues apace. The increase in capacity as a result of Phase 2
and Phase 3.1, ahead of order requirements, will be a major
contributor to building spare capacity and increasing the Company's
resilience against any future SOP delays.
Outlook for 2023
Whilst the customer and all its suppliers want to swiftly catch
up the current delay, each supplier (including Surface Transforms)
has their own supply constraints, and it is therefore premature to
forecast increases beyond the previously agreed ramp. The new
agreed schedules are consistent with previous plans and therefore
the Company is not changing its guidance for 2023. The Company will
be profitable in that period.
The Company will provide the final FY22 sales number in early
January and will report Q1 sales in early April and Q2 sales in
early July.
Kevin Johnson CEO said "The OEM 10 contract is an extremely
significant strategic win, achieved against vigorous technical
competition. Moreover, it underpins the key message of our recent
fund raise on the need to be installing capacity in advance of
contract wins, thereby giving confidence to our customers of our
ability to supply. We greatly enjoy working with OEM 10 and look
forward to a developing relationship.
However, the separate combination of customer SOP delays and our
own challenges is frustrating. The general issue of delays in both
SOP and the subsequent production ramp has been previously reported
and was the reason for the substantial increase in timing
contingencies included in the recent fundraising guidance. Our
spare capacity will be an even greater requirement as our order
book grows and, therefore, reaching GBP50m capacity in Q2 2023 and
GBP75m capacity in 2024 will be major contributors to building and
ensuring customer and shareholder satisfaction."
For enquiries, please contact:
Surface Transforms plc
David Bundred, Chairman
Kevin Johnson, CEO
Michael Cunningham, CFO +44 151 356 2141
Zeus (Nominated Advisor and Joint Broker)
David Foreman / Dan Bate / James Edis (Investment
Banking)
Dominic King (Corporate Broking) +44 203 829 5000
finnCap Ltd (Joint-Broker)
Ed Frisby / Abigail Kelly (Corporate Finance)
Andrew Burdis / Barney Hayward (ECM) +44 20 7220 0500
About Surface Transforms
Surface Transforms plc. (AIM:SCE) develop and produce
carbon--ceramic material automotive brake discs. The Company is the
UK's only manufacturer of carbon--ceramic brake discs, and only one
of two mainstream carbon ceramic brake disc companies in the world,
serving customers that include major OEMs in the global automotive
markets.
The Company utilises its proprietary next generation Carbon
Ceramic Technology to create lightweight brake discs for
high--performance road and track applications for both internal
combustion engine and electric vehicles. While competitor
carbon--ceramic brake discs use discontinuous chopped carbon fibre,
Surface Transforms interweaves continuous carbon fibre to form a 3D
matrix, producing a stronger and more durable product with improved
heat conductivity compared to competitor products; this reduces the
brake system operating temperature, resulting in lighter and longer
life components with superior brake performance. These benefits are
in addition to the benefits of all carbon--ceramic brake discs vs.
iron brake discs: weight savings of up to 70%, longer product life,
consistent performance, reduced brake pad dust and corrosion
free.
For additional information please visit
www.surfacetransforms.com
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