Surface Transforms (LON:SCE) manufacturers of carbon fibre reinforced ceramic automotive brake discs, has provided the following pre close trading and operations update for the year to 31 December 2022.
Trading update
Revenue for FY22 grew 113% to £5.1m (2021: £2.4m). This is less than previously guided, reflecting some highly specific, but cumulatively significant, production issues at the Company in late November and December as volumes were ramped up. The problem furnaces are now operational but management wish to see several weeks of consistent output before being comfortable to confirm that the issue has been permanently resolved. In parallel, and as back up, the Company is accelerating additional capacity for these furnaces with the capacity on this process expected to double in the next three months. The Company is also implementing a number of increased resources, operational changes and developments to facilitate the Company’s expansion plans, including the recent appointment of a Chief Operations Officer.
Whilst the Company was profitable in November, these production issues resulted in the Company not being profitable in December.
Gross cash as at 31 December 2022 was £14.9m (30 June 2022: £6.7m). Other interest-bearing loans and asset finance totalled £1.2m (30 June 2022: £1.8m). The previously notified £3.1m letter of credit to a furnace manufacturer, has now been satisfied and is no longer a liability.
The Company’s final results for FY22 will be reported in April 2023 together with its Q1 2023 revenue. Q2 2023 revenue will be announced in early July.
New capital equipment update
The Company repeats the statement made on 24 November that it expects the planned Phase 2 doubling in capacity to £50m sales p.a. to be operational in Q2 2023. The increase in capacity is progressive and we expect some critical bottlenecks to be relieved earlier than this. The implementation of Phase 3.1 capacity increase to £75m p.a. sales is also on plan, with over £3m of equipment orders (with deposits) placed since the fund raising and the remainder of the project at advanced stages of commercial discussions.
Outlook for 2023
Whilst acknowledging the significant impact these production issues had in December, management are encouraged by production levels in recent weeks and consequently, the Company is not changing its guidance for 2023 and will be profitable. Management has repeatedly emphasised its need for and focus on having production resilience. In the first half of 2023 the Company will be capacity constrained, not demand constrained. Furthermore, Surface Transforms’ customers are fully engaged in the actions we have taken both to resolve the recent production issues and our planned capacity increases and remain supportive.
Kevin Johnson Surface Transforms CEO said: It is most frustrating to again be reporting a production problem impacting our previous guidance. The core issue is not the technical problems themselves, but the lack of capacity to provide headroom when they occur. Technical problems are part of the learning curve arising from a tenfold increase in production rates, the key is to ensure that we have spare capacity to recover the lost production after the problem has been solved. The installation of Phase 2 capacity by Q2 will enable the Company to get ahead of the continuingly strong customer demand and then, with completion of Phases 3.1 and 3.2 capacity increases in the following two years, to stay there.”
