Hardide plc (LON: HDD), the developer and provider of advanced surface coating technology, announced today its preliminary results for the year ended 30 September 2019.
Highlights
Financial
· Record revenues, up 10% to £5.1m (FY2018: £4.6m)
· Gross profit of £2.4m (FY2018: £2.4m) reflecting shifting sales mix / customer diversification
· Gross margin of 48% (FY2018: 52%); gross margin of 51% in H2
· EBITDA loss before exceptional items of £0.6m, including £0.1m costs relating to moving site (FY2018: loss before exceptional items of £0.3m)
Trading
Broadening of customer and sector bases continuing
· Over half of the sales were from customers gained in the last four years
· Sales to oil and gas sector down 9% overall but H2 considerably stronger at 22% up on H1
· 87% increase in sales to the flow control sector
· 40% increase in sales to the precision engineering sector
· 14-fold increase in sales of coated industrial diamonds
· Revenue from North American customers increased to 65% of total Group sales – Martinsville facility delivered maiden positive EBITDA contribution (excluding overhead marketing costs)
Strategic
· Hardide-A coating selected as the replacement for hard chrome plating on various Airbus aircraft components
· Three additional coating reactors currently on order – two for the UK (including larger capacity reactor) and one for the US
· On track for the relocation of the UK operation to a new facility by September 2020 – decision taken to increase investment in “future proof” equipment
Technology
· Innovate UK grant-funded project completed resulting in the launch of two new low-temperature Hardide coating variants
· Awarded grant funding towards two National Aerospace Technology Exploitation Programme (NATEP) projects
Post-period
· New patent granted by the UK Intellectual Property Office covering a water droplet erosion resistant coating for turbine blades and other components
· Hardide-A coating selected for use on components for the new Lockheed Martin F-35 Lightning II Joint Strike Fighter
Commenting on the results, Robert Goddard, Chairman of Hardide plc, said:
“Overall, this is a strong set of results. We are pleased to announce that Hardide has delivered a second year of record sales with a 10% increase to £5.1m. Sales grew across all sectors and an 18% rise in demand from North America means the region now accounts for 65% of Group sales. We are very pleased that the Martinsville facility (excluding overhead marketing costs) has achieved a positive EBITDA for the year for the first time since opening. Demand continues to be particularly buoyant in North America from the flow control, and oil and gas sectors. Of particular note is the selection of the Hardide-A coating by Airbus for a number of components on a range of aircraft.
“We are looking forward to the relocation of the UK business to the new site in 2020 and the increase in capacity and new opportunities that it will bring. We have made a very positive start to the new financial year and the Board is confident of continued growth.This is a strategic priority and we are prepared to invest in additional R&D and marketing to achieve this and to position the company strongly for the future.”
CHAIRMAN’S AND CEO’S REPORT
INTRODUCTION
The Group is pleased to report record full year sales for the second consecutive year of £5.1m – a 10% increase over last year (FY2018: £4.6m). Sector and customer diversification continued as we gained new applications. Over half of the sales were from customers gained within the last four years. The oil and gas industry remained our largest market. However, our sales to it suffered a 9% decline in revenue in the year. We expect this to be reversed in the current financial year as we saw a 22% increase in oil and gas sales in H2 compared with H1.
There were two significant corporate projects this year. The first was the fundraising of £3.5m (net) announced in February 2019, which has allowed us to continue our strategy to grow the business further by investing ahead of revenue in marketing, capacity and production equipment.
The second event was the signing of a 15-year lease on newly-built premises close to the existing site, to replace the current facility in Bicester. The building has double the available floor space and a greater roof height, which will allow the installation of larger coating reactors. Three new reactors have been ordered; two for the UK and one for the US. One of the UK reactors will have a larger capacity and enable the coating of components that are too large for the current reactors, such as turbine blades and some aircraft parts.
We are particularly pleased to report that our Martinsville site, opened in January 2016 with the benefits of the fundraising announced in August 2014, made an EBITDA profit (excluding overhead marketing costs) for the financial year for the first time.
FINANCIAL RESULTS
The Group generated record sales of £5.1m in the year ended 30 September 2019 (FY2018: £4.6m).
Direct expenses including production salaries increased by 20% due to the higher volume and mix of sales, together with an increase in production staff numbers ahead of the expected increase in activity.
Group gross profit was the same as last year at £2.4m (FY2018: £2.4m). However, H2 showed a much-improved performance over H1, with sales revenues 15% higher and a better mix of sales. Gross margin recovered from 45% in H1 to 51% in H2, giving an overall gross margin for the year of 48% (FY2018: 52%). The first half gross margin suffered from an adverse product mix, as previously reported in the Interim results.
Overhead costs including the extra costs associated with the lease on the new building rose by 12% (8.4% excluding these costs), including the full year cost of an additional US Business Development Engineer.
The Group’s EBITDA loss before exceptional items was £0.6m including £0.1m of costs relating to the new building in Bicester (FY2018: £0.3m loss before exceptional items). The EBITDA loss in H2, excluding new building costs, was a much reduced £0.1m compared with a loss of £0.4m in H1. Grant income amounted to £0.1m in the year.
On the balance sheet, net assets at 30 September 2019 were £7.7m (30 September 2018: £5.1m). This included a cash balance of £4.8m (30 September 2018: £3.3m). Inventories increased substantially as we took the opportunity to purchase a considerable amount of gas at a discounted price (also reflected in trade payables), while the similarly substantial increase in trade receivables resulted from particularly strong trading towards the end of the year.
OPERATIONAL OVERVIEW
Customers and Markets
Revenue from flow control customers increased by 87% and from precision engineering by 40%. Demand increased sharply during the year from a global player in pumps, one of our longest standing US customers, as they expanded their use of the Hardide coating from their premium range to several new models. This resulted in a 93% increase in sales to this customer compared with the previous year. We are in discussions with the same customer about using the Hardide coating on more products in the year ahead.
Aerospace
In the aerospace sector, Airbus selected the Hardide-A coating as the replacement for hard chrome plating on compression flap pads on a range of aircraft types. Qualification of other components is also nearing completion and we are in detailed discussions with Airbus’ tier 1 suppliers about production orders, expected to commence in 2020. Hardide-coated parts have been flying for evaluation by a major MRO (maintenance, repair and overhaul organisation) for over 4,000 hours on an Airbus A320. Subject to examination at servicing, production orders are expected in the current financial year. Other development work for European and North American aerospace companies is continuing. In November 2019, post year-end, we announced that Hardide-A has been selected to replace HVOF (high velocity oxy-fuel) thermal spray coatings on components for Lockheed Martin’s new F-35 Joint Strike Fighter. This follows an extensive test programme and is another example of the potential of Hardide’s coatings to replace the most widely used tungsten carbide coating, HVOF, in severe service applications. The testing of components at Leonardo Helicopters was successful and the parts are now incorporated into a full transmission assembly ready for the final test. Full approval is expected in 2020. We are also in technical discussions with a number of other significant companies in the aerospace and defence industries and early stage trials have commenced.
Recent independent tests showed that the Hardide-A coating increased the fatigue life of components, rather than it being decreased, as in the case of most other hard coatings. Not surprisingly, this has attracted the interest of many engineers. We are very pleased with the technical performance of the coating and confident that announcements of supply agreements will be forthcoming in the near term. The progress in securing aerospace production orders has been much slower than we would have liked, although this is a common feature of the introduction of a new product to the aerospace industry.
Oil & Gas
Activity remains generally buoyant in the oil and gas sector, although the phasing of demand from two customers contributed to a 9% year-on-year fall in sales. One customer changed its manufacturer of the components that we coat and this caused an extended delay to their supply of components. This began to be resolved in the second half and a normal rate of supply has now resumed. In addition, the Canadian oil industry has been experiencing restrictions on pipeline capacity and this has resulted in a slowdown of demand from the second customer.
Demand is now returning to previous levels and we saw a 22% increase in sales to oil and gas customers in H2 compared with H1. We expect further growth in demand from oil and gas customers in the year ahead. During the period, sales more than doubled to one of the world’s largest oilfield service companies, placing them among our top three oil and gas customers. We worked with them to develop a coating for critical components on a ‘breakthrough’ directional drilling tool and this is now being deployed by operators around the world. This tool also uses Hardide‑coated industrial diamonds. A high volume of production orders continued to be received under our supply arrangement with a very large global oil and gas operator. This is for components of complex design that presented considerable technical and production challenges. Due to its production-enhancing benefits, these components are of high value to the customer. The technology has been deployed in deepwater fields in the Gulf of Mexico and shortly off the coast of West Africa. The coating of these parts is being carried out at our US facility. As a result of this technical success, shortly we will begin testing with a European manufacturer of a similarly complex part which is used extensively in other industries. Demand for the coating of industrial diamonds for oil and gas customers rose significantly (14-fold) as the drilling market resumed growth, and sales of these products increased considerably. We continue to have many new and potentially high-volume applications being developed with customers in the oil and gas sector.
Power Generation and Precision Engineering
Significant advances were made with our long-term project to develop a water droplet erosion resistant coating for blades and vanes used in turbines in the power generation industry. Post-period, a UK patent was granted that incorporates and protects this and other applications. An application for an international PCT (Patent Cooperation Treaty) patent is in progress to cover many other countries. EDF Energy plans to start field testing Hardide-coated blades in a power station turbine during 2020 and we are at various stages of progress with several other power engineering customers on the testing of coatings for turbine blades. We see this as an important market for Hardide coatings in the future and one that will continue to grow.
There was regular demand throughout the year for our coated components for the high‑speed X-ray baggage screening machine. We expect demand to grow as this customer achieves greater market penetration and increases their rate of manufacture.
Marketing
During the year, we exhibited at several highly-targeted aerospace and oil and gas events, both in the UK and the US. These have resulted in new leads and contacts and fully justify our decision to exhibit in 2020 at the Singapore Airshow and Farnborough International Airshow.
Raising awareness of Hardide’s capabilities remains a priority. Through conference presentations in person and via webinar, Hardide’s Technical Director has successfully extended awareness among new audiences internationally.
The performance of our online presence is monitored continually and so we know that our website is used extensively as a technical resource. As a novel technology with no direct competitors, the website is a vital source of accurate information and data about Hardide’s coatings and their applications. Next year will see a new Hardide website. This will provide updated content and functionality for technical and investor visitors.
Production, Technology, Research & Development and Accreditations
A third reactor for our US site was installed in November 2018, together with a second and larger pre-treatment line. This enabled the transfer from the UK of complete lines of product for several US customers and the processing of larger components. In turn, this has increased the range of products for US customers who prefer an ‘in-country’ supplier. The Martinsville facility was particularly busy in the second half and has been fully utilising all three coating reactors. A fourth reactor was ordered for the US site, and this is due for delivery in spring 2020.
The move to the new UK site will result in a more modern and efficient production environment with further improved environmental performance. Investment in equipment and technology to reduce emissions and improved filtration systems is being made alongside two new coating reactors and a second and larger pre-treatment line. These will enable bigger components to be processed, including turbine blades and some aircraft landing gear components.
The project, partly funded by Innovate UK, to develop and characterise a new low-temperature Hardide coating process was completed successfully. As a result, the Group has launched two new low temperature coating variants – Hardide-LT and Hardide-LA. These open up new opportunities for the coating of a wide range of metals commonly used in the aerospace, and oil and gas sectors. Production orders for them are now being received.
Work continued on two, 18-month projects to apply the new low temperature coating to additional substrates in the aerospace sector and to develop new grinding and super-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.
The quality management systems at the Bicester and Martinsville sites were recertified in February 2019 to aerospace quality management system AS9100D/ISO9001:2015, thereby confirming approval for coating aerospace and space industry components. In July 2019, within two years of first being accredited by NADCAP (National Aerospace and Defense Contractors Accreditation Program), the Bicester site was awarded NADCAP Merit Status for its superior performance and commitment to continual improvement in aerospace quality. The Bicester site was also recertified to environmental standard ISO14001:2015 in September 2019. Plans are underway to achieve NADCAP accreditation for the US site by the end of 2020 and Airbus production approval at that site is being planned for 2021.
Brexit
The Group has evaluated the potential effects of a variety of Brexit scenarios and is not expecting to be affected in any material fashion due to the low level of transactions with other EU countries.
Intellectual Property
The IP committee met quarterly to review the IP portfolio. In October 2019, shortly after the full year end, the UK Intellectual Property Office granted a patent on the further-enhanced Hardide coating and its new applications, particularly in power generation. This is an important achievement. Fundamental research continues into the development of new coating variants and applications that will further strengthen and widen the Group’s IP portfolio.
Site relocation
The project to relocate the UK operation to a new building in Bicester is advancing well. Contracts have been placed and, at the time of writing, the building is now being fitted-out internally and a larger capacity electricity supply is being installed to cope with power requirements. As detailed planning of the move proceeds, the decision was made to take the opportunity to “future proof” and improve the operating capabilities of the Group by investing in superior new equipment rather than transfer dated equipment, notwithstanding that the costs of such are expected to be slightly ahead of the Board’s previous expectations for the relocation project. The Board is exploring the most effective means of financing these incremental costs and has provisionally secured a first line of asset finance attached to a new reactor. The new production equipment will start to be installed in March 2020. This has to be operational before the transfer of work and equipment from the existing facility can begin. Two new coating reactors are on order for the site, as well as other items of key processing plant. The project is on schedule for full operation at the new site in September 2020.
STRATEGY
Hardide’s technologically advanced surface engineering coatings help solve complex and difficult technical problems and frequently convey considerable commercial advantage to users. Our coatings provide a unique combination of valuable mechanical and chemical properties that cannot be achieved by any other type of coating. In recognition of that, Hardide has joint application developments underway with three major coating companies, each of which has a strong international presence. We expect that cooperation of this kind will develop further.
Another form of industrial cooperation that has already proved to be highly beneficial is the relationships that have been developed with major end-users of Hardide coatings, rather than with customers directly. These end-users currently include Airbus, Leonardo Helicopters, EDF Energy and major US oil and gas companies. By cooperating with such large end-users, not only is awareness improved greatly, but more importantly, there will be ‘end-user pull’ on their tier 1 suppliers. The Group is aiming to increase the number of end-users with whom we have close cooperation.
Over the past year, very good progress has been made in diversifying the customer base, but we continue to strive to diversify further. As a result, we are on the threshold of meaningful sales to aerospace customers and there has been very encouraging development of our coatings for the power generation industry – potentially a very large market for Hardide. A new patent has been granted recently for this application.
The Board retains its positive view of Hardide’s potential for growth and is investing further in expanding production capacity, marketing, business development and R&D (note that R&D costs are not capitalised) to help drive this. In the short term, further spending on these activities is not profit-maximising, but the Board is confident that spending of this kind will maximise shareholder value. The Group does not have any material borrowings and its asset base is attractive to providers of asset finance. The Board is exploring this as a financing option to manage efficiently the cash costs of expansion and investment.
We were very pleased to have been able to lease a new and considerably larger facility nearby in Bicester. To maintain production capacity during the transition to the new site, all Hardide’s UK activity will be moved progressively, and the Group will be operating from the new site by September 2020. In addition to being more efficient, the new premises will assist in enabling the Group to improve continually its environmental performance. Many of Hardide’s employees have unique skills and so minimising staff turnover as a result of a move is very important. A new and much more agreeable location close to our existing one will help retention and create a much-improved working environment.
In North America, further progress has been made in diversifying and expanding the customer base. To meet the resulting further growth in demand, an additional reactor will be installed there in spring 2020.
EMPLOYEES AND STAKEHOLDERS
Hardide benefits hugely from its loyal, able and dedicated staff, both in Bicester and in Martinsville. They have again worked hard to deliver record sales and achieved many technical successes this year. The Board thanks our staff for their commitment. We also thank our shareholders and other stakeholders in the business for their continued support and confidence in the future for our business.
OUTLOOK
The start to the new financial year has been strong and the Board is confident of continued revenue growth and business diversification in the coming year. The Board expects gross profit margins to remain at levels comparable to the second half of FY2019.
The project to relocate the business to a new site is on-track and we are looking forward to operating from the facility in autumn 2020 and to the increase in capacity this will provide. This move will enhance efficiency and open up new business opportunities, as well as presenting a modern facility to our blue-chip customer base and investors. The costs of the project are being monitored closely and are expected to be borne in the current financial year. The Board aims to ensure that the asset base of the Group matches its needs for the future and will invest further to deliver this.
Robert Goddard Chairman
Philip Kirkham CEO
9 December 2019
