Source: Surface Transforms announcement

LIVERPOOL, U.K. — Surface Transforms (AIM:SCE) manufacturers of carbon fiber reinforced ceramic automotive brake discs, announced that it has been awarded a contract with a lifetime value in excess of £100m as a Tier-1 supplier of a carbon ceramic brake disc to an automotive company – previously described by Surface Transforms as “OEM 10.”

This is the single largest contract awarded by OEM 10 to date, but crucially sees Surface Transform discs replacing those historically provided by its main competitor, according to Surface Transforms.

Surface Transforms also provided a trading update for the year ending Dec. 31 (FY 22) and outlook for 2023.

Contract award

OEM 10, based in the United States, is one of the world’s largest automotive companies. This new contract is the second contract with this customer and Surface Transforms will be the standard fit, sole supplier of the carbon ceramic brake disc on two model variants covering front and rear axles.

The lifetime revenue on this contract is estimated to be in excess of £100m during its six-year term. The customer is currently estimating a start of production (SOP) date in 2024. For prudence, the company anticipates series production revenues will commence in the first half of 2025. Sales from this contract award are expected to be approximately £20m p.a., tailing off in the later years. The contract is priced in GBP.

The current variant of this contracted model is already fitted with carbon ceramic discs provided by a competitor. The customer’s decision to replace the incumbent with Surface Transform’s discs followed a searching technical evaluation.

The contract award raises the company’s lifetime contract value to £290m, across 11 contracted models, with an average contract life of five years.

Trading update

Surface Transforms further announces that sales for FY 22 will be lower than previously forecast at approximately £6.5m. This has primarily been caused by technical issues at OEM 8 unrelated to ST’s discs, which delayed the production ramp following the customer’s SOP and was more prolonged than the company originally anticipated.

This is clearly disappointing, but it should be noted that the total OEM 8 contract value remains unchanged at £100 million, and the impact is that the timing of the lifetime program has started a few months later than originally planned and, unless caught up in the meantime, will eventually finish, a few months later than originally planned.

The company has also had its own production challenges, now materially rectified, and whilst they were neither the reason for the ramp up delay, nor the bulk of the sales shortfall, have limited the Company’s ability to build a finished stock buffer. Given capacity constraints, it has meant that the company could not offer OEM 8 more than our previous commitments until the new £50m p.a. plant comes on stream in Q2 2023.

Nevertheless, the company has been able to partly mitigate OEM 8’s ramp delays through both a change in revenue mix which resulted in a higher than forecast gross margin and tight control of non-essential overheads. As a result, Surface Transforms expects that profit and cash will be around £3m less than previously guided. As OEM 8 volumes have now resumed, the Board anticipates that the Company will be profitable in November and December 2022.

Furthermore, this delay is fundamentally a few months timing difference, and, additionally, the company now has forecast additional income from the OEM 10 contract. Therefore, the company does not anticipate any working capital shortfall to deliver its new factory and short-term growth, in line with the statements given in its announcement on 28 September 2022 regarding its “Proposed Placing, Subscription and Open Offer”.