Chesterfield Special Cylinders Holdings (LSE:CSC) — Interim Results

0:02 Good morning, and welcome to the CHESTERFIELD SPECIAL CYLINDERS HOLDINGS PLC investor presentation. Throughout today's recorded presentation, attendees will be in listen only mode. Questions are encouraged and can be submitted via the q and a tab situated on the right hand side of your screen. Before we begin, I'd just like to submit the following poll, which I kindly ask you to submit your responses to. I'd now like to hand over to CEO, Chris Walters. Chris, good morning. Thank you, Jack, and good morning, everyone. Welcome to the online presentation of our 2026 interim results for the six months to the March 28, including an update on the strategic progress we're making in key markets and the outlook for the business. I'm Chris Walters, Chief Executive, and I'm joined by colleagues Sally Millan, Director of Finance and Chris Webster, Chief Operating Officer. Before we begin, I'm required to refer you to our updated disclaimer and note that the presentation includes forward looking statements based on current expectations that are subject to risks and uncertainties.

1:03 I'm pleased to present our highlights for the first half of twenty twenty six, where trading was broadly in line with our expectations and reflected the phasing of Defense newbuild contract milestones weighted heavily towards the second half. We continue to make good strategic progress in the defense market, and our order book was strengthened by Key's overseas submarine newbuild contract awards in the first half and early in the second half. We also made good progress with our qualification to supply the US Navy's extensive submarine newbuild program. Following record full year performance in FY 'twenty five, some UK naval integrity management deployments originally expected within this year have been postponed into FY '27 due to delayed fleet docking schedules.

1:52 However, we were pleased to secure first ever integrity management contract for overseas naval submarines in the first half, with European deployments starting early in the second half. We're also pleased with the continued growth in life cycle services as a proportion of our overall revenue. The continued slippage of hydrogen projects under the UK government's first hydrogen allocation round has been frustrating and disruptive, and any contract wins under this scheme will be too late to impact our FY 'twenty six results. However, a robust defense order book underpins a strong and profitable second half and expected full year performance at similar levels to FY '25, with revenue of around £17,000,000 and adjusted EBITDA of around 800,000 So first half trading broadly in line. Delays to UK Hydrogen and postponement of UK Naval Integrity Management, while good strategic progress in defense and a robust order book underpin the second half outlook.

2:59 Here's an overview of today's presentation. In the first section, Sally will cover the FY 'twenty six interim results and financial highlights. Chris and I will then provide an update on the strategic progress we're making towards our midterm targets in defense, life cycle services and hydrogen. We'll then summarize and provide an outlook for the full year. Sally, Chris and I will then be pleased to answer your questions, those submitted, in advance and during the presentation. I'm now going to hand over to Sally to cover the financial highlights. Thanks, Chris. This slide presents the interim financial results for CSC and Central PLC functions comparing with the FY twenty twenty five first half results on a like for like basis. CSC delivered revenue of £6,400,000 up £1,000,000 compared with the prior year.

3:50 This first half performance reflects the phasing of defense contracts weighted heavily towards the second half of the year. Adjusted EBITDA loss of $600,000 after central costs was $700,000 better than FY 2025, and the loss before tax was GBP 1,100,000. Central costs were GBP 400,000, comparable with the prior year. Operating cash outflow was GBP 700,000, slightly behind FY 2025. The cash balance was $1,100,000 and net cash after finance and right of use asset liabilities was 600,000 This slide presents revenue by market sector for the half year compared with the FY twenty twenty five first half results.

4:38 5,000,000, 78% of total revenue, came from sales into the defense market, a similar proportion to the prior year. Hydrogen sales were GBP 900,000, slightly up from the prior year, reflecting in factory support services for static storage and road trailers. The remaining GBP 500,000 of revenue came from industrial and offshore services customers. Included within these sector revenues is GBP 3,000,000 of life cycle services with GBP 1,300,000 from institute integrity management and GBP 1,700,000 from in factory retesting services. This slide presents the P and L comparing with the first half and full year results for FY 2025.

5:24 The adjusted trading EBITDA performance of CSC was a loss of GBP 200,000, an improvement from the prior year loss of 900,000. Central costs were $400,000 comparable to the prior year. Overall operating loss before tax of $1,100,000 was significantly better than the prior year loss of 2,500,000 This slide presents the balance sheet at March 26 compared with March 25 and the prior year end September 25. Tangible assets have fallen to $6,300,000 due to depreciation charges as there was minimal CapEx in the period. Net working capital was higher at $2,500,000 predominantly reflecting the improved performance compared to the prior half year.

6:15 On the May 6, we announced that we'd successfully renewed the lease on three acres of land adjacent to our existing freehold site in Sheffield. The lease renewal provides long term security for the company's manufacturing operations and has resulted in a revised carrying value of land and building assets from £2,600,000 to £4,900,000 This slide presents the movement in the cash balance over the six month period from September 25 to the end of March twenty six. The cash balance at the start of the financial period was GBP 2,100,000. With the half one adjusted EBITDA loss of GBP 600,000 and factoring in small working capital movements, CapEx and the repayment of leases in the period, the cash balance at the end of March was £1,100,000 That concludes the slides covering our FY 'twenty six interim results. I will now hand over to Chris Webster to introduce the strategy section.

7:17 Thanks, Sally. This section of the presentation covers our strategy in key market sectors and the progress we are making in FY 2026 towards our midterm FY 2028 targets. I'm going to take you through the defense and life cycle services before handing back to Chris, who will cover hydrogen. Firstly, on defense. Mission critical systems manufactured by CSC are installed on the submarines and surface ships of more than 25 NATO friendly navies worldwide, delivered through long term relationships with the well known defense contractors and shipbuilders. Defense revenue of $5,000,000 reflects the phasing of defense contracts weighted heavily towards the second half of the year and integrity management naval deployments.

8:05 Completion milestones for The UK Dreadnought submarine and Type 26 frigate newbuild programs were delivered during the first half of the year. Technical preparation also commenced for the SSNA AUKUS astute replacement program to enable early contract milestones delivery in FY 2027. Progress continued during the first half with the delivery of contract milestones for overseas defense customers, including Australian, Canadian, Spanish and French naval submarine and surface ship newbuild programs. Initial product trials were completed in the first half of the year for U. S. Navy supplier qualification, with the manufacturing stages on track to commence in the second half of the year towards first product delivery in 2027.

8:56 Good strategic progress has been made in defense, where the order book was strengthened by key overseas submarine newbuild contract awards in the first half of the year and early in the second half, including the previously announced order from French prime contractor, Naval Group, for the Scorpion class submarine program. Our midterm outlook is underpinned by a robust defense order book and strong pipeline of opportunities across The UK and overseas submarine and surface ship newbuild programs. Our life cycle services cover the mandatory inspection, testing and recertification of safety critical pressure systems, which we carry out through in factory processes at our Sheffield facility and in situ at customer sites for our integrity management services team.

9:48 Following a record year performance in FY 2025, some U. K. Naval deployments originally expected this year have now been postponed into FY 2027 due to delayed fleet docking schedules. However, we were pleased to secure our first ever integrity management contract for overseas naval submarines in the first half, with European deployments having commenced last month in April. Benefits are being realized from recent investments in our workforce skills and the capability, supporting our growth both in in situ and in factory life cycle services. We expect to achieve life cycle services revenue above 40% for the full year FY 'twenty six, which is ahead of our midterm target.

10:36 I'll now hand you back to Chris to update you on our progress and outlook in hydrogen. Thanks, Chris. CHESTERFIELD SPECIAL CYLINDERS has a world leading reputation and over one hundred years experience in the design, manufacture and life cycle support of safety critical high pressure hydrogen storage systems for industrial and energy storage and transportation applications. Hydrogen revenue of 0.9 in the first half primarily reflects in factory life cycle support services for static storage and road trailers. The continued delays to the rollout of projects under the UK government's Hydrogen Allocation Round schemes are frustrating and disruptive for CSC and for the wider supply chain.

11:23 Some background for anyone not familiar with the schemes. The UK government launched the first hydrogen allocation round, one, in July 2022 and approved funding for 10 projects in April last year. Of these 10 projects, two required large scale hydrogen storage systems, and we had previously expected an order for the first half of this year. However, final investment decisions and therefore procurement stages of the projects have been delayed. Under the second allocation round, HAR two, the government shortlisted 27 projects in April last year. We identified around a third of these projects requiring large scale storage systems and had previously expected an order within this year, but the government funding approvals have been delayed and procurement stages are unlikely to commence before 2027.

12:17 Public engagement on the third allocation round, HAR three, was due to be launched by the government in January this year, but this is now expected to coincide with the delayed release of the updated hydrogen strategy later this year, most likely in the autumn. So although the UK government continues to affirm its commitment to domestic green hydrogen production over the longer term, the delays to hard projects reflect this ongoing policy and regulatory uncertainty. Developers are also facing inflationary pressure on project economics due to high energy prices and borrowing costs, grid connection constraints and the slower than anticipated progression of customer offtake agreements. Uncertainty, therefore, remains around the rollout of UK hydrogen projects included within our midterm growth targets.

13:10 While hydrogen contract awards are still possible in the second half of this year, they will be too late to benefit our FY 'twenty six results. We remain actively engaged with our hydrogen customers and operationally prepared to undertake large scale hydrogen storage projects. In the meantime, cautious cost management measures are in place to help mitigate the impact of these delays, and further cost management steps are available if the delays continue. So to summarize, we still anticipate a profitable second half supporting full year performance at a similar level to 2025, with revenue at around £17,000,000 and adjusted EBITDA at around £800,000 Uncertainty remains around the rollout of UK government backed hydrogen projects included in our midterm growth targets, although hard contract awards are still possible within this financial year.

14:09 Strong progress continues with overseas naval customers for newbuild and integrity management services. And overall, we have a robust defense order book and a strong pipeline of opportunities across UK and overseas submarine and surface ship newbuild programs, underpinning the outlook and prospects for the company. That concludes the presentation. Thank you for listening. Chris, Sally, and I will now take questions. That's perfect. Thank you for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions via the q and a tab on the right hand side of your screen. For your reference, recording of today's presentation will be available on the investor meet company platform shortly after the meeting's ended. But for now, guys, as you can see, there are number of questions which have been submitted. Can I please ask you to read out the questions and give your responses where appropriate to do so, and I'll pick up from you at the end?

15:03 Yeah. Thank you, Jack. So we've got some questions a question related to the property property. How significant is the lease renewal to the company, Sally? Would you mind Yeah. Sure. Picking that up? Yeah. So we were really pleased to successfully renew, our lease on part of the property here in Sheffield, just this month on on attractive terms. And so the new lease the new long term lease of a hundred and twenty five years provides security for our manufacturing operations, and it results in a revised valuation of the property from 2,600,000 to 4,900,000. The lease strengthen strengthens our collateral position, and it'll support our ability to raise debt facilities against the property if required in the future.

15:50 So yeah. Think so. Yeah. Yeah. Good result. Very good. Thanks, Sally. Also got a question about the the US Navy contracts or the progress there, Chris, with the with the qualification. Could you pick that one up? Sure. So I'd say that our relationship with the prime contractor that we're working with, General Dynamics Electric Boat, is a good strong relationship. We have been working well with them in terms of developing our qualification. I would say that the qualification is a comprehensive process. And actually, once we've completed that, it's a key barrier to entry, which is probably why all those haven't taken the step that we've we've managed to take so far. So I think once that's open, then the opportunities are really quite great on both the Columbia class and potentially the Virginia class submarines that we can then take forward. We're moving into the manufacturing phase in July, and then we can move that forward. So it's looking positive. Very good. Thanks, Chris.

16:51 A question related to the first half, second half weighting of performance. We've had a similar question in the past. Why is performance weighted towards the second half of the year? Again, Sally, could you pick that up? Yes. So this is this is something I think we've we've we've of answered this before. So we're not a seasonal business, and new build revenue is driven by contract milestones, which do vary in size and timing. So it's the timing of order placement and production delivery requirements that typically controlled by the customer, which can result in significant fluctuations, and we do see this this lumpiness. So over the longer term, recurring revenue from our life cycle services in the factory and in integrity management should help work to smooth that working capital and and that p and l.

17:42 But the lumpiness is a feature of large defense new build programs, and obviously, that's significant within our business. Yeah. Okay. Thanks, Sally. A question, related to hydrogen. How confident are you that growth in hydrogen will materialize given the uncertain outlook, you have described? Your target is 9,000,000 by 2028. Is that, still realistic? Why? We've we've, you know, we've set out some of the uncertainties today, factors very much outside of our control related to government policy that is that is also itself uncertain, and we've also got the uncertain outlook in terms of energy costs. So at the at the moment, it it's difficult to see how the timing and the rollout of UK government backed projects will will play out.

18:34 We've spent the last three years positioning very positively with potential hydrogen customers, the developers of of of projects. We we spend a lot of of our time also engaging closely with the Department for energy security and and net zero to understand the policy the policy timelines. So we're doing our very best all the time to understand the outlook and the potential timing for for for the rollout. We've qualified some very competitive products, both for static storage and and for road trailers. So we're well positioned. If the timeline becomes clearer and and and progresses and accelerates as per the government as as the government has said they would like to see, then, of course, we would have confidence around those twenty twenty eight targets that that we've set ourselves. But we're flagging at the moment, I think, some caution over those midterm targets just given the the current uncertainty.

19:33 Okay. You mentioned cautious cost management in in the presentation and options for further action, should they be necessary? Can you please elaborate? I think will those, of course, relate to integrity management, Chris, also the hydrogen delays. Do you want to pick that one? Yes, sure. I think that's in relation to the, as Sally was describing, some lumpiness in terms of our order book. Chris has just described some uncertainty associated with hydrogen in terms of when that's coming. Can we continue to hold on to our cost base whilst a revenue stream is then coming on at some point in the future? So clearly, you're managing any business, we need to make sure that we are looking after the cost and matching the cost of the revenue streams.

20:19 So that's exactly what we are doing. And we've we've clearly had we we set off in this year with some significant opportunities for growth. We've invested in our integrity management team. Yeah. And we are absolutely committed to that because we are convinced that that order book is going to pull through. We've seen that in the fact that we have seen a soiree into the European overseas market, which has been a great success to us and that enables us to then smooth out our revenue stream and not be so reliant on the on The UK. So we've done that well, but equally on other aspects of growth, we've held that back in terms of investment in some more people, and we've been cautious with our spend in terms of our equipment maintenance.

21:08 And as Sally really described in the cash slide, then actually, we've held back on some CapEx developments that we wanted to undertake until we get absolute certainty that that, that revenue stream is gonna come online. Thanks, Chris. There's a related question here concerning skills. Can you retain and attract the right skills for the business? Yeah. So, I mean, we're here based in Sheffield, and it's a it's it's a great hub for manufacturing. And in fact, it's actually growing in in intensity as it grow all the way around the area. So, I mean, I'm personally linked in with many suppliers and producers of of product in the in this area. And we've got the Sheffield College. We've got the Rotherham College. We've got AMRC.

21:54 Well, that's where we get our apprenticeships from. We've got another two apprentices in September taking us to a total of seven apprentices. So in in now, whether they be current apprentices or previous, then about 20% of our workforce is coming from the apprentice schemes. So that's going well, and I think that absolutely we can get the right skills of of what we need. Great. Thanks. Thanks, Chris. Got a a question related to the current global conflict in Iran or Ukraine and whether that drives more opportunities in defense. And can you focus on this instead of hydrogen, which seems to be very uncertain? I think that it's important to say as much as, you know, we we do have a a strong focus in defense markets. And at the moment, defense markets, in general, are are considered to to be stronger as a result of some of the ongoing conflicts in the world. The the programs that we're involved with have a very long development time in terms of the design of of submarines and then the procurement program for for for for the for the cylinders and pressure systems that that we're manufacturing.

23:06 So we we don't see any net any ink any increase within our midterm target range at the moment as a result of these ongoing conflicts or the geopolitical situation, but but we do expect that government budgets will will continue will continue to, to to stay high and that the pressure for on time delivery of the submarine programs that will also will also maintain, which, you know, which helps us in terms of the the the predictability, of, of the programs and the and the milestones for those for those programs. We've got a question related to outside of defense and hydrogen. This is a question related to industrial and offshore services, noting lower revenues in those services. Is there any reason to think that sales in these areas may improve to make a difference to overall revenues?

23:57 I think in in terms, for us, industrial and offshore services markets are are are far more competitive and don't necessarily present the growth opportunities that that we have seen in in defense and in and in and in But they are nevertheless for us in terms of life cycle life cycle services for the periodic inspection and testing of of established systems. It it is an active market for us, but they're not seen as as as growth markets or or large markets as we as we sit stand today and nor do we see those markets as as growing. Offshore services is a good example. There is, you know, significant oversupply in offshore services at the moment, offshore supply vessels, drill ships, offshore cranes tends to be a significant oversupply in that market. So newbuild programs are not in our horizon for for midterm for midterm goals.

24:57 Some years ago, you had a hydrogen deal in France. Is it realistic to think in terms of hydrogen sales outside of The UK? That's a very good question. Of course, we launched our hydrogen strategy in twenty twenty twenty back when the European market was seen as the growth area for the rollout of smaller hydrogen refueling stations as the European government implemented its infrastructure regulations requiring the the the the rollout of refueling stations across Europe. As much as we're frustrated with The UK, the government's rollout of projects, those delays in Europe to the expansion of refueling networks has been even more protracted and and politically difficult.

25:42 And we have had sporadic orders from established customers who themselves, unfortunately, they were facing worse delays than than we've seen here in The UK. But we stay connected with that market. We've got very competitive products for that market. And actually, we do service European customers for life cycle services, both in terms of road trailers and and static and static storage. So it's definitely a market to to keep watching, but but we don't anticipate significant growth for newbuild within our midterm within our midterm goals. What do you what do you think about the recent government funding granted to ITM Power? And are you able to obtain a similar funding for hydrogen? So this this question is a is a good question. It's related to the recent equity investment by by GB Energy of £40,000,000 into ITM Power, our Sheffield our Sheffield neighbors, and grant funding by Desnets of £46,000,000, so a total of £86,000,000.

26:54 You know, what what do we think about that? We think it's very positive for ITM Power. You know, we're very pleased to see them getting at that level of funding, which is to support the establishment of a new manufacturing facility for their electrolyzers. I think for us, importantly, it demonstrates the government's long term commitment to the rollout of of green hydrogen towards net zero targets as frustrated as we are by the delays to hard programs. Nevertheless, that level of funding, which is very significant indeed for IT and Power, undoubtedly, you know, says the government has a long term overall commitment to hydrogen, and we're we're we're pleased we're pleased to see that.

27:44 So clearly, the company's current size is far too small, a statement here. Organic growth will not solve the problem. So what steps do the board intend to take to change this? I think it's a question related to do we have an intention for inorganic growth and and potential acquisitions, and that's not, at the moment in our in our in our strategy. We've you know, we spent the last couple of years, is reestablishing a clear focus for growth and development of CHESTERFIELD SPECIAL CYLINDERS and its target markets in defense and and hydrogen, and that's our immediate focus at the moment is to demonstrate those those growth demonstrate growth in in those in those markets. We we accept the point about being being very small, and and perhaps that's in relation to our our central cost.

28:33 But but as but as revenue grow revenue grows from 2027 and 2028, those central costs will become a decreasing proportion of our overall costs. So question here related to the naval submarine programs. What's the approximate value for per boat for submarine contracts? We give a range, Chris. Of course, there's a very wide range of submarines. Do want to tackle that one, please? Well, I'm not so sure necessarily that I want to declare in terms of what that is. Yeah. In terms of for for for commercial reasons. But needless to say that, actually, it's our it's clearly our most profitable business that we have and that we deal with.

29:21 And we continually work hard at making sure that we don't take that for granted, and we can improve our efficiencies in terms of the way that we want to produce that that product. So need need needless to say that developing developing our overseas market and developing our launch into into into the US Navy is absolutely the right profitable thing to do for us as a business. Great. Yep. Super. Thank you, Chris. Well, that I mean, that's the the end of the of the questions, so I'll hand back to Jack. Brilliant. Thank you guys for answering those questions. Before we ask investors to share their feedback, which I know is important to you, Chris, if I could just ask you for a few closing comments to wrap up with, that'd be great. Yeah. Sure. Thanks, Will. Thanks, Jack.

30:07 Thanks, everyone, for your time today and for your questions. I think while the delays to UK hydrogen projects and postponed naval deployments outside our control have been frustrating, the fundamentals of CHESTERFIELD SPECIAL CYLINDERS remain strong. Our first half financial performance was broadly in line with expectations, and a profitable second half keeps us on track to deliver full year results similar to last year. While there's some uncertainty around the development of UK hydrogen market, our outlook is underpinned by a robust defense order book and a strong pipeline of overseas naval submarine and surface ship opportunities. We're successfully winning these contracts, making solid progress towards our midterm defense targets. Thank you again for joining us. Have a good day. Perfect. Thank you, guys, once again. Ladies and gentlemen, I could ask that you don't close the session just yet as you'll now be automatically redirected to a page to give your feedback, which helps the company better understand your views and expectations.

30:59 On behalf of the management team, we'd like to thank you for attending today's presentation. I wish you all a good morning.