Hardide plc (LON: HDD), the developer and provider of advanced surface coating technology, has today provided its results for the six-month period ended 31 March 2019 and also states that its Hardide-A coating has been selected as the replacement for hard chrome plating (HCP) on Airbus A380 compression flap pads.
Hardide-A has been developed specifically to meet the needs of the aerospace industry; it is a hard wearing, quality product, environmentally compliant with demonstrable long-term performance qualities.
Financial Highlights
· Record revenue for a first half-year – up by 9% to £2.35m (H1 2018: £2.16m)
· Gross profit of £1.05m (H1 2018: £1.15m)
· Group operating loss of £0.66m (H1 2018: £0.32m loss)
· EBITDA loss of £0.44m (H1 2018: loss of £0.14m)
· Successful fundraising of £3.60m (before expenses) in March 2019 to fund continuing investment and long-term growth
· Cash at bank at 31 March 2019 of £5.35m (£3.23m at 31 March 2018)
Operational Highlights
· Diversification of customer base continues – half of revenues in H1 attributable to customers gained in the last three years
· Sales to customers in North America increased by 32%
· Increased sales of 52% in flow control
· Encouraging progress being made in aerospace sector:
– first Airbus A380 component selected for Hardide coating
– numerous components for Airbus in final stages of evaluation
– first coated components currently in-flight testing on an Airbus A321 with a global MRO (maintenance, repair and overhaul) customer
– Leonardo Helicopters began process to make Hardide an approved supplier for flying parts
· Third coating reactor and large pre-treatment line installed in Martinsville
· Order placed for the first coating reactor for the new Bicester site
· Aerospace coating (Hardide-A) produced at the US facility for the first time
· Successful completion of ‘Innovate UK’ grant-funded project to produce an ultra-low temperature coating process
· Two National Aerospace Technology Exploitation Programme (NATEP) grant-funded projects started
· A new international PCT patent was submitted protecting the latest developments and improvements in the coatings
Commenting on the interim results, Robert Goddard, Chairman of Hardide plc, said:
“The Group is pleased to have achieved record sales revenue for a first half during this period. This was despite some short-term disruption with one customer and the unpredictability of larger customer projects, which have led us to now expect full-year revenues to be at the lower end of market expectations. More than half of demand in the period was from customers gained within the last three years. Customer and sector diversification are key strategic objectives for the Group and the Board is pleased with the progress being made.
“Indications are that demand will remain strong from customers in the oil and gas, flow control and precision engineering sectors and the Board is pleased with the advances being made towards production orders from aerospace customers in the UK and US. The announcement today with regard to our Hardide-A coating being selected by Airbus is particularly pleasing and a testament to the quality of our offering.
“We remain highly optimistic about the longer-term outlook for the business.”
CHAIRMAN’S STATEMENT
Introduction
The Group had record sales revenue for a first half in the six months to 31 March 2019, with more than half coming from new customers gained within the last three years. Customer and sector diversification are key strategic objectives for the Group and the Board is pleased with the progress being made.
Demand is strong from new and existing customers in the UK and North America. Sales to customers in North America increased by 32% compared with the same period last year and the US facility is operating well and producing an excellent quality of product.
Demand from some of our newly-established customers is heavily project-based. This means that we see large, discrete orders on unpredictable timescales, thereby limiting visibility over when revenue will be recorded. As the overall number of clients grows, so diversifying our revenue stream, the individual impact of any one project will decline. The medium- and long-term trends continue to look promising and we are very pleased to be attracting customers of this calibre. Certain customer orders that we expected in the first half are now likely to be in H2.
In H1, one of our significant oil and gas customers made adjustments to the design of the product that uses the components that we coat. They also changed the manufacturer of the parts. This has delayed the phasing of orders for these components from H1 to H2 2019. However, recently there has been a return of demand for these components and our customer expects this to continue throughout H2.
Financial Results
The Group is reporting H1 2019 revenue of £2.35m, an increase of 9% compared with the same period last year (H1 2018: £2.16m), with Group gross profit of £1.05m (H1 2018: £1.15m). Whilst revenue is up, gross profit was affected adversely by the impact of the product mix.
Overheads of £1.48m (H1 2018: £1.29m) increased, primarily due to a strategic investment in a new US‑based business development engineer and the planned increase in sales and marketing expenditure. In addition, there was a rise in operational costs at the US site due to the newly-installed third reactor, together with the annual pay award made to all UK and US staff.
The Group made a loss before interest, tax, depreciation and amortisation of £0.44m (H1 2018: loss
£0.14m) and an operating loss of £0.66m (H1 2018: loss of £0.32m).
During the period, the Group raised £3.60m (before expenses) in a fundraising and undertook a share capital consolidation such that every 40 Ordinary 0.1p Shares in issue were consolidated into 1 New Ordinary 4p Share. Primarily, the proceeds will be used to fund the purchase of three more coating reactors and to move the Company’s facilities to new premises nearby where there will be double the floor space. An update on progress in deploying these funds is set out in the Operational Overview below.
Operational Overview
The demand from oil and gas customers continued, with sales being similar to those in H1 2018. The exception was the reduced demand from the major customer mentioned earlier, which was offset by sales of new applications for UK and US customers, and by the return of demand for Hardide‑coated industrial diamonds. Sales to flow control customers increased by 52%; a contributing factor being the specification of the Hardide coating on new product ranges for a US pump manufacturer following successful development work last year.
There was encouraging progress in the aerospace sector, with the first coated parts selected for the Airbus A380. These will be replacements for hard chrome plated wing compression flap pads. Numerous other components for the Airbus range of aircraft are currently in the final stages of evaluation prior to approval. A global MRO customer has put the first Hardide-coated components on an Airbus A321 for flight testing prior to approval. A US aerospace customer has also indicated its selection of Hardide for coating certain of their components. This will be the subject of a separate announcement once it has been formally approved by the customer.
The US facility in Martinsville is operating well and Hardide-A, the coating developed specifically for the aerospace sector, was successfully produced there for the first time as work continues to prepare the site for processing aerospace components following its approval to aerospace quality management standard AS9100 RevD in 2018.
Good progress was made in the development of a coating for turbine blades and this has been identified as a product with excellent prospects. Tests commissioned by our customer EDF Energy indicate that the coating can extend the life of steam turbine blades through significantly enhanced resistance to erosion by solid particles and high-speed water droplets. In March 2019, at a joint presentation by EDF Energy and Hardide Coatings to a meeting of the Steam Turbine Users Group, there was considerable interest from several turbine manufacturers. EDF Energy is now developing plans to begin field testing of Hardide-coated blades in a power station turbine. A new international PCT patent incorporating this application was submitted and if granted, will protect the latest developments and improvements in the coatings. This is a long-term project significant potential for developments of markets and of IP.
The Innovate UK grant for the project to develop and characterise the new, low-temperature Hardide coating process was completed successfully at the end of H1 2019. This widens the range of metals and applications that are suitable for Hardide coating and includes many steels used in the aerospace and oil and gas sectors. Hardide-T and Hardide-A, the two most frequently used coatings are now available in low‑temperature variants, Hardide-LT and Hardide-LA. A global leader in the energy industry has already ordered the first parts for low temperature coating.
Work started on two, 18-month long projects to apply Hardide’s new low-temperature coating in the aerospace sector and develop new finishing techniques. These have been part-funded by the National Aerospace Technology Exploitation Programme (NATEP) and are being carried out in collaboration with Airbus, Leonardo Helicopters and other industry partners. Working with NATEP is already presenting new opportunities for disseminating information about Hardide coatings to the wider aerospace sector.
Following the raising of £3.60m (gross) in March 2019, detailed plans are being developed for the move of the UK facility to a new, larger site nearby in Bicester. We expect costs in this regard to be approximately £200k in the second half. Planning is underway for a staged move, which is expected to be complete by September 2020.
An order has been placed for the first of three new coating reactors and design of the Group’s first larger‑capacity reactor has begun. This reactor and a new pre-treatment facility are being designed to accommodate bigger components, including turbine blades used in the power generation industry and various aircraft landing gear components.
Summary and Outlook
Indications are that demand will remain strong from customers in the oil and gas, flow control and precision engineering sectors and the Board is pleased with the advances being made towards production orders from aerospace customers in the UK and US.
Due to the project-based nature of demand from several large customers, prediction of revenue over the short term has always been difficult. Now that we have more project-based customers, sales forecasting has become even more challenging. In future, our increasingly diversified customer base will help smooth these fluctuations. Against this background, we expect revenue for the full year to be at the lower end of market expectations and for EBITDA to be broadly break-even for the second half (before costs associated with the move of facilities as set out above), dependent on the product mix and the phasing of costs associated with the move to new premises.
Accordingly, we remain highly optimistic about the longer-term outlook for the business.
Robert Goddard
Chairman
14 May 2019
