EBITDA breakeven performance driven by continuing revenue growth and improving gross margin
Hardide plc (LON:HDD), the developer and provider of advanced surface coating technology, has announced its results for the six-month period ended 31 March 2023.
Highlights
Financial
| · | Revenue of £2.9m (H1 FY22: £2.7m), a 9% increase over H1 FY22 |
| · | Gross profit of £1.3m (H1 FY22: £1.1m) |
| · | Gross margin improved to 47% (H1 FY22: 41%) |
| · | EBITDA breakeven achieved (H1 FY22: £0.2m EBITDA loss) |
| · | Available cash resources at 31 March 2023 were £0.7m (30 September 2022: £0.7m) |
| · | Selling price increases successful in mitigating input cost inflation |
| · | Profit and working capital improvement actions announced in December 2022 are running ahead of expectations and are now expected to yield £0.5m of benefit for the full financial year |
Commercial
| · Energy (representing 64% of H1 FY23 sales): total energy sales increased by 29% |
| · Industrial (representing 33% of H1 FY23 sales): revenue fell 17% mainly due to the timing of orders |
| · Aerospace (representing 3% of H1 FY23 sales): sales to the aerospace sector increased by 10% as production orders are now regularly being received |
Commenting on the results, Philip Kirkham, CEO of Hardide plc, said:
“The Group performed well in the first half, with revenues up 9% from H1 FY22 and 22% higher than H2 FY22. This reflected improving market conditions in the oil & gas sector, new project wins and the recovery of input cost inflation in selling prices. We were pleased to deliver an EBITDA breakeven performance for the period, bringing us closer to achieving our strategic milestone of becoming EBITDA and operating cash flow positive.
“The Board expects the positive sales growth to continue into the second half year. Therefore, whilst mindful of ongoing external economic uncertainties and headwinds, including further cost inflation, the Board anticipates performance for the full financial year to be in line with its expectations.
“More broadly, the Board believes that the Group will continue to benefit from significant growth potential over the short, medium and longer term from increasing market adoption of our unique patented coatings technology, which helps customers to improve operational efficiency, lower life cycle costs and reduce their carbon footprint.”
Hardide develops, manufactures and applies advanced technology tungsten carbide/tungsten metal matrix coatings to a wide range of engineering components. Its patented technology is unique in combining in one material, a mix of toughness and resistance to abrasion, erosion and corrosion; together with the ability to coat accurately interior surfaces and complex geometries. The material is proven to offer dramatic improvements in component life, particularly when applied to components that operate in very aggressive environments. This results in cost savings through reduced downtime and increased operational efficiency as well as a reduced carbon footprint. Customers include leading companies operating in the energy sectors, valve and pump manufacturing, industrial gas turbine, precision engineering and aerospace industries.
OVERVIEW
I am pleased to report that good progress is being made towards achieving the strategic milestone of the Group becoming EBITDA and operating cash flow positive.
Revenues in H1 FY23 grew by 9% to £2.9m (H1 FY22: £2.7m). The growth rate was softened by the delay of an expected large project order for the coating of turbine blades. This is now expected later in this calendar year. Revenue in H1 FY22 had benefited from an order of similar value; and excluding that order from H1 FY22 sales, H1 FY23 revenues would be 21% ahead of H1 FY22.
The increase in revenues allowed the Group to improve capacity utilisation and better leverage fixed costs which, together with good recovery of input cost inflation in selling prices, enabled a significant improvement in gross margin to 47% (H1 FY22: 41%).
The combination of revenue growth and higher gross margin enabled us to deliver an EBITDA breakeven performance for the period (H1 FY22: EBITDA loss of £0.2m).
EBITDA benefited from a net non-recurring property gain of £0.1m described further below. EBITDA in H1 FY22 benefited from £0.2m of Covid support.
The Group balanced its cash flows overall for the period, with £0.7m of available cash resources on the balance sheet at 31 March 2023 (30 September 2022: £0.7m). The cash balance has been relatively stable in recent months, reflecting the EBITDA breakeven performance. The Group is well invested and, in general, has sufficient operational capacity to support approximately double the current annualised revenue, depending on product mix, over the short to medium term without further major capital investment. Nonetheless, the Board continues to explore opportunities to further strengthen the balance sheet to build additional headroom and resilience.
The Group is making strong progress in commercialising new applications that have been subject to long and/or delayed test and development programmes. It is pleasing to note several first new orders, resulting from these programmes, from customers in the power generation, oil & gas drilling and aerospace sectors.
Revenue growth is expected to continue into the second half year, and performance for the full financial year is expected to be in line with the Board’s expectations.
STRATEGIC DEVELOPMENT
The Group is on track to achieve its initial strategic objective of becoming consistently EBITDA and operating cash flow positive, enabling us then to drive towards full profitability.
Good progress is being made on technical co-operation with other large coatings companies to develop mutually beneficial commercial opportunities; technical and co-operation agreements have been signed with two global companies.
COMMERCIAL AND OPERATIONAL OVERVIEW
Customers and Markets
In H1 FY23, end use market segmentation was:
| · | Energy (including oil & gas, power generation and alternative energy): 64% (H1 FY22: 54%) |
| · | Industrial: 33% (H1 FY22: 43%) |
| · | Aerospace: 3% (H1 FY22: 3%) |
Energy
Sales to energy customers increased by 29%.
Recovery from the oil & gas sector was strong with revenue increasing by 54% compared with H1 FY22. Nonetheless, recovery has been slower than expected due to ongoing material supply and labour shortages in the oil & gas supply chain. Indications from customers are that the situation is improving. We expect revenue growth from this sector to continue in H2 FY23. The first major order was received from a new customer for well stimulation components, and successful trials and developments are underway with customers in sand control systems, downhole drilling tools and other oil & gas components.
The delayed order from the existing power generation customer is now expected later in calendar year 2023. Following extensive testing, it is expected that our first order will be received in H2 FY23 from the second largest global industrial gas turbine (IGT) producer, for sets of gas turbine vanes. The coating is also in trials for coated blades and vanes with other large IGT manufacturers.
Testing of the coating for both EV battery and hydrogen applications continues to progress and all tests have been successful and productive. Customer testing by a major European company in the hydrogen production and distribution sector is underway. The Henry-Royce Institute’s grant-supported project with Cranfield University to investigate ‘green’ hydrogen production produced very promising results. Further grant applications are being made to take the project to the next stage.
Industrial
Revenue from our industrial customers fell by 17% primarily due to phasing of demand. We expect this revenue to recover this in the second half of the year.
Aerospace
Sales revenue from aerospace customers increased by 10%. Momentum is building as production orders are now being received regularly for the coating of wing components for the Airbus A320, A330, A380 and A400M aircraft with other parts for these aircraft currently in test. Of particular significance is a new approval received for high volume components for the Airbus A320 where the Hardide coating is replacing a competitor’s coating. Orders are due to commence in H2 FY23. Further orders were received for parts for Lockheed Martin’s F35 Joint Strike Fighter. Following Leonardo Helicopters’ approval, orders are now being received for the coating of transmission system components.
Profit and cash improvement plan
In December 2022 we announced an initiative to improve profit and cash flow by £0.3-0.4m by summer 2023. We are pleased to report that this initiative is now anticipated to exceed initial expectations and bring an overall benefit of c.£0.5m for the full financial year, comprising:
· Cost savings of £0.2m
· Grants to offset development and testing costs of £0.1m
· Selling price increase / cost inflation recovery of £0.1m
· Working capital improvements of £0.1m.
FINANCIAL REVIEW
Income statement
Revenues for H1 FY23 were £2.9m, an increase of 9% from H1 FY22 and 22% higher than the prior half year of H2 FY22. This reflects improving market demand, particularly in the oil and gas sector, increasing customer adoption of our unique coatings technology, and price increases to offset input cost inflation.
This revenue growth enabled us to improve capacity utilisation and better leverage fixed costs, driving a 6 percentage point increase in gross margin to 47% (H1 FY22: 41%). Together with good control of overheads, the increase in revenues and improvement in gross margin enabled us to deliver an EBITDA breakeven performance for the period (H1 FY22: £0.2m EBITDA loss).
The EBITDA breakeven result benefited from a net £0.1m non-recurring gain relating mainly to the purchase, sale and leaseback of our facility in Martinsville, USA, in December 2022. The EBITDA loss in H1 FY22 benefited from £0.2m of COVID-19 US Government support.
There were no significant changes in depreciation or financing costs compared to previous periods. The loss before taxation was £0.6m (H1 22: loss of £0.8m).
Cash Flow, Going Concern and Financing
Overall, the Group balanced its cash flows in H1 FY23, with available cash resources at both the beginning and end of the period of £0.7m. Excluding the one-off cash flow benefit of £0.5m from the new Martinsville leasing arrangements and adjusting for period-end timing differences relating to supplier payments, the underlying net cash outflow in the half year was circa £0.2m.
The Group’s cash balance has been reasonably stable for the last few months. This illustrates, alongside the EBITDA breakeven result, that the Group is now very close to achieving its key strategic milestone of becoming operating cash flow self-sufficient. The Group is very well invested, has sufficient spare operational capacity to support significant revenue growth and therefore we do not currently anticipate any need for further large amounts of capital expenditure.
Gross debt at 31 March 2023, comprising Coronavirus Business Interruption Loan Schemes (“CBILS”) and asset finance arrangements, but excluding lease obligations reported under IFRS 16, was £1.0m (H1 FY22: £1.2m). Of the amount outstanding at 31 March 2022, £0.3m is repayable within one year. Net debt at both 31 March 2023 and 2022 was £0.3m.
Lease obligations reported under IFRS 16 at 31 March 2023 were £2.3m (31 March 2022: £2.0m), the increase being due to the new 10-year property lease agreement entered into in Martinsville in December 2022.
Therefore, having reviewed cash flow forecasts and associated sensitivity analysis, the Board has concluded that the Group has sufficient financial resources to meet its needs for the foreseeable future and accordingly has prepared the interim financial statements on a going concern basis.
RISK REVIEW
The Board confirms that the risk assessment disclosed in our 2022 annual report remains relevant for the remainder of the current financial year. The risks and uncertainties relating to macroeconomic and geopolitical factors, and the precise timing of customer orders on revenue realisation are those currently judged by the Board as being the most relevant to delivery of current financial year performance expectations.
BUSINESS DEVELOPMENT
Our operational capacity is sufficient to produce a sales revenue of approximately £10m (depending on product mix). With average current utilisation of this capacity running at around 60%, there are adequate resources available to achieve our aim of maximising utilisation of this spare capacity over the next few years. We aim to do this by new developments including c. £1m in the oil & gas sector, more than £1m in power generation and up to £1m in aerospace. We should achieve EPS positive results at approximately £7.5m-£8.0m revenue.
OUTLOOK
The Board expects the positive sales growth seen in H1 FY23 to continue in H2 FY23. Therefore, whilst mindful of ongoing external economic uncertainties and headwinds, including further cost inflation, the Board anticipates performance for the full financial year to be in line with its expectations.
More broadly, the Board believes that the Group should continue to benefit from significant growth potential over the short, medium and longer term from increasing market adoption of our unique patented coatings technology, which helps customers to improve operational efficiency, lower life cycle costs and reduce their carbon footprint.
Philip Kirkham
Chief Executive Officer
17 May 2023
