LIVERPOOL, U.K. – Surface Transforms yesterday announced it would not meet the market’s profitability expectations for for fiscal year 2023 due to technical issues which stretched from the end of 2022 into the first quarter of 2023.
The company went on to further report that despite the issues of Q1, which it reported have been rectified, Surface Transforms would return to profitability in Q2.
The company issued the following report:
Production, Capacity, and Trading Update
Surface Transforms plc (AIM:SCE) manufacturer of carbon fiber reinforced ceramic automotive brake discs provides the following update on previously reported technical issues, capacity installation, first quarter sales and its outlook for 2023.
Resolution of production technical problems
The Company is pleased to inform shareholders that the production issues (previously reported on 11 January 2023) have now been resolved. There are more than twenty complex production steps in the overall production process and all sub-processes are now achieving their individual Q1 2023 daily production targets.
As previously reported, one furnace issue in particular, significantly affected output over the past six months, exacerbated by industry-wide supply chain problems for furnace insulation. The Company has subsequently made changes to that process in Q1 2023, including, but not limited to, use of more readily available materials. These changes were successful, and that sub process has now run, at target rates, for over a month. This was the last major impediment to meeting ongoing daily customer requirements.
Progress with capacity increase
Over the last 18 months the Company has been installing capacity to support contracted sales from £2m p.a. in 2020, to over £30m p.a. in 2024. Installation of this capacity increase is on track, with installed revenue capacity of £50m p.a. in place by September 2023.
This increased capacity will be sufficient to meet Surface Transforms’ growing customer demand for at least the next 18 months. This additional capacity also being required to provide resilience, “catch-up”, capacity if any further technical problems were to arise. The lack of this resilience, preventing the Company catching up lost production, has compounded the technical problems over the past six months.
Q1 Trading Update
The production issues that negatively affected turnover, production costs and operating loss for the financial year ended 31 December 2022 (“FY 2022”) continued into Q1 2023. As a result January and February production volumes were lower and scrap costs were higher than planned. Cautious March loading rates have resulted in Q1 2023 sales being £1.4m, and the quarter loss making. Although the furnaces were trouble free in March, the Company initially adopted a low-risk strategy on individual furnace loading. Therefore, the overall total output for the month of March did not fully reflect the underlying dramatic improvement in yield and furnace availability achieved across the month.
Outlook for 2023
The technical issues are now resolved, and demand remains strong. We are now ahead of the run rates required in Q1 and the Board remains confident that the Company will be profitable in Q2 2023 and thereafter. However, given the issues experienced in Q1 2023, and the ongoing production ramp in Q2, our overall profitability during FY 2023 is expected to be below market expectations.
While the Company and its supply chain will have the capacity to over produce against the original planned H2 2023 production, our OEM customers and their supply chains have their own constraints. Accordingly, it is premature to assume that these delayed sales will all be caught up in the year. Customer discussions are continuing, and we will update the market as appropriate in due course.
Accordingly, the Board is planning its cash needs on the prudent assumption that delayed Q1 sales are not recovered in the short term. Despite this, the Company will have sufficient cash to continue its extensive three-year capital expenditure program and working capital required as sales increase through the year.
Notice of Results
The Company will be reporting its results for FY 2022 on 17 April 2023. The Company will also provide the opportunity to hear from, and ask questions of, the Chief Executive on both this announcement and the full results for FY 2022 on a webinar to be hosted by Hardman and Co on Friday 21 April. Shareholders who wish to join this webinar should follow the link:
The Company will provide an update on its Q2 2023 sales on or about the time of its Annual General Meeting, currently expected 27 June 2023.
Kevin Johnson CEO said: “We regard the progress made on resolving all the production technical issues to have been a major strategic breakthrough for Surface Transforms. In combination with the progressive implementation of the capacity increase, we are now confident of the timing of ongoing profitability. In our cash flow forecasting we have assumed that the shortfall in the first half of 2023 cannot be recovered in the second half. But even with this, hopefully prudent, assumption we are still expecting to have the cash to maintain the momentum of our three-year capacity installation program, and to fund our 2023 working capital need.
“During the strains of recent months, we are particularly pleased that our customers have understood the issues we have been facing, noted the progress and have continued constructive discussions on future programs. The expectation of both parties, throughout this period, has been that we would fix the problems, which we have now done and install the capacity, which we are doing. Our order book (£290m) and prospective contract pipeline (£300m) are unchanged.”