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

0:01 Good morning, and welcome to the CHESTERFIELD SPECIAL CYLINDERS HOLDINGS PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today and publish responses, which is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like

0:33 to hand you over to CEO, Chris Walters. Good morning to you. Thank you, Alex, and good morning, everyone. Welcome to the online presentation of our 2025 interim results for the six months to the 03/29/2025, including an update on the strategic progress we're making in key markets and an outlook for the business. I'm Chris Walters, Chief Executive, and I'm joined by colleague 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. I'm pleased to present here our first half highlights, noting that this is our first investor presentation as CHESTERFIELD SPECIAL CYLINDERS HOLDINGS PLC, reflecting the company name change from Pressure Technologies in March and following the successful sale of the PMC division last October.

1:32 Financial performance in the first half of the year reflects the phasing of new build contract milestones for defense and hydrogen projects, which are weighted heavily towards the second half of the year and the deployment schedule for our integrity management services. However, strong intake during the first half of the year since March supports a strong second half revenue of more than double first half performance and a return to full year adjusted EBITDA profitability. Several strategically significant orders were secured from overseas defense customers in the first half across surface ship submarine newbuild programs for the Royal Canadian, US and Spanish navies, and the outlook remains strong for the defense sector, noting yesterday's positive announcement on The UK strategic defense review.

2:21 In March, we were pleased to announce our first contract award for large scale hydrogen storage systems for the BP Aberdeen hydrogen hub project. We've also secured orders for high pressure hydrogen storage systems for European refueling station customers during the first half of the year, while a major UK HAR one contract award previously anticipated in the first half of the year is now expected in the fourth calendar quarter. Our high value integrity management life cycle support services continue to go from strength to strength with record performance expected for the full year, driven primarily by UK naval deployments. So first half broadly as expected, the full year remains on track. Good strategic progress being made.

3:08 Here is an overview of today's presentation. In the first section, we'll cover the FY twenty five interim results and financial highlights. We'll then summarize our growth strategy and midterm targets to 2028, as first set out in February this year, alongside our 2024 full year results. We'll then provide more detail on the progress being made against our FY 'twenty five objectives in defense and hydrogen sectors and in integrity management services. 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. Okay. I'm now going to hand over to Sally to cover the financial highlights. Thank you, Chris. So this slide presents the financial results of the continuing operations of CSC and central p l PLC functions comparing the FY twenty twenty four first half year results on a like for like basis.

4:05 CSC delivered revenue of $5,400,000 down $1,100,000 compared with the prior year. This first half performance reflects the phasing of defense and hydrogen contracts weighted heavily to the second half and the later than expected start to major U. K. Integrity management and naval deployments. Adjusted EBITDA loss of $1,300,000 after central costs was behind FY 2024, and loss before tax was $2,100,000 Central costs were $400,000 compared with $900,000 in the prior year, reflecting cost restructuring following the sale of PLC. Operating cash outflow was GBP 400,000, slightly behind FY 'twenty four.

4:47 Net cash, defined as gross borrowings less cash and cash equivalents, was GBP 1,900,000 compared with net borrowings of GBP 1,200,000 in March 2024.

5:00 This slide presents the revenue by market sector for the half year compared with the FY 'twenty four first half results. 4,400,000, over 80% of total revenue, came from sales into the defense market, a similar proportion to the prior year. Hydrogen sales were 700,000, slightly up from the prior year, principally from in factory life cycle support services, including periodic inspection and testing. The remaining 300,000 of revenue came from industrial and offshore services customers. Included within these sector revenues is 2,100,000 integrity management services, primarily related to in situ U. K. Naval deployments, up from the prior year.

5:48 This slide presents the P and L comparing with the FY 'twenty four first half results and the full year for FY 'twenty four. The adjusted EBITDA performance of CSC was £900,000 loss, reflecting the phasing of contracts. The P and L also highlights the impact of central costs, which have been reduced to £400,000 from £900,000 in the prior year. Profit on the sale of the PLC division in October 2024 was £400,000 Exceptional items relate primarily to the disposal costs of PLC. This slide presents the balance sheet at March 2025 compared with March 2024 and the prior year end September 2024.

6:34 The reduction in net assets in half one FY 'twenty five reflects the sale of the PMC division, which was consolidated in the March 2024 balance sheet and disclosed as a GBP 3,900,000 asset held for sale in September 2024. Tangible assets have fallen slightly since the end of the last financial year due to depreciation charges, and net working capital has improved to 800,000.

7:03 This slide presents the movement in the cash balance over the six month period from September 2024 to the end of March twenty twenty five. The cash balance for continuing operations at the start of the financial period was 100,000. Initial cash consideration from the sale of PMC was 4,800,000. Total PMC transaction costs were 1,200,000, and the working capital adjustment related to the sale was 600,000, which represented the net movement in the PMC balance sheet between the locked box date and sale completion in October. The proceeds of the sale facilitated the repayment of the term loan balance of 1,000,000. Other exceptional costs, CapEx and repayment of leases in the period were minimal, resulting in a GBP 1,900,000 cash balance at the end of March.

7:57 That concludes the slides covering our FY 'twenty five interim results. I will now hand back to Chris to cover strategic progress. Thanks, Sally. This section of the presentation covers our strategy in key market sectors and the progress we're making in FY 'twenty five towards our 2028 targets, as first presented during our FY 'twenty four full year results presentation in February this year. The delivery of value for our customers, our shareholders and other stakeholders is through the strategic development and growth of CHESTERFIELD SPECIAL CYLINDERS in established defense and emerging hydrogen energy markets and through the growth of integrity management life cycle support services as summarized here. In the defense market, we're the trusted supplier of safety critical pressure systems to navies and defense contractors worldwide with a proud one hundred and twenty five year history.

8:52 This market is characterized by high value contracts with the benefit of long term program visibility, but are often subject to delayed order placements and irregular project milestone phasing as we've seen this year and in recent years. A sole supplier to UK submarine and surface ship programs and long term partner to major European shipbuilders for their domestic and export submarine projects, we have the advantage of early engagement with engineering and procurement teams to support long range operational planning. In the hydrogen energy market, our world leading reputation in safety critical bulk gas storage and transportation reflects our extensive knowledge and expert expertise. Strong UK and European government backing for clean energy projects provides an exciting opportunity for CSC in the supply and life cycle support of hydrogen static storage and transportation systems.

9:48 Our unique integrity management services are the third and final area of strategic focus, where in situ and factory based life cycle services cover mandatory inspection, testing, and recertification of safety critical assets in defense, hydrogen, industrial, and offshore markets. These three areas form the basis of our strategy and our growth plans.

10:13 This slide is a reminder of our ambition and clear business targets to 2028 and the high level objectives we set for this year. First, the targets. By 2028, we will deliver revenue greater than 30,000,000, double high value overseas defense revenue, increasing overall defense revenues by at least 40%, grow hydrogen sales to 30% of total revenue at around £9,000,000, double integrity management revenue to around £5,000,000, maintain 30% of revenue from life cycle support services throughout the growth period, and deliver an adjusted EBITDA margin greater than 15% before central costs, 12% after central costs at PLC level.

11:02 At a high level, our FY twenty twenty five objectives are to secure key defense newbuild contracts from overseas customers, position for major UK newbuild contract awards and European refuelling station opportunities, and to ramp up integrity management services delivering major UK naval deployments and positioning for overseas opportunities. In the following slides, we'll present more detail on the progress made in FY twenty five so far across defense, hydrogen sectors and integrity management services. In the first half of FY twenty five, revenue from overseas defense contracts was 1,200,000, of a total defense revenue of 4,400,000, more than double the 500,000 performance in the first half of twenty twenty four.

11:56 Overseas defense order intake in the first half was 6,000,000, around 60% of the total defense order intake of 10,000,000, and showing a significant growth of 67% over the first half of twenty twenty four. Geopolitical tensions underpin the outlook for increased defense spending, as confirmed by The UK Strategic Defense Review and yesterday's announcement that 12 new attack submarines were built under the SSN AUKUS program. This is great news for The UK defense sector, especially with commitments made by the UK government earlier this year to set direct SME spending targets in defense, where The UK currently lags behind Europe and The US.

12:38 With strong commitments also made by The UK and the European Council under its rearm and security action for Europe programs, we would expect to see newbuild programs expanded and the drumbeat of deliveries increased over the longer term, presenting further gross op growth opportunities for CSC well into the next decade and beyond. Recent contract awards underpin the outlook for overseas defense revenue in f y twenty five, twenty six, and beyond. The Hunter class frigate for the Royal Australian Navy supplying BA systems was contracted in February 2024, while in the first half of this year, we secured the River class destroyer for the Royal Canadian Navy supplying Irvin shipbuilding, the US Navy submarine program, supplying General Dynamics Electric Boat, and the Spanish Navy submarine newbuild program, supplying Novantia.

13:31 We're therefore pleased to be on track to meet our 2028 goals for overseas defense revenue, and the increased commitment to defense is very positive for our longer term outlook. In the first half of FY 'twenty five, revenue from hydrogen contracts was 700,000, slightly up from the first half of FY twenty four and primarily related to in factory life cycle services for hydrogen road trailers. Hydrogen order intake in the first half was 3,000,000 pounds, showing a significant growth over the first half of FY twenty four at 800,000, and full year FY '24 at 1,400,000, demonstrating strong progress in this developing market.

14:16 Recent contract awards underpin the outlook for hydrogen revenue in FY 2025, including the significant contract announced in March to supply large scale storage systems to the BP Aberdeen hydrogen hub in Scotland. As our first contract to supply large scale hydrogen storage systems to a new generation of groundbreaking clean energy projects in The UK, this award represents a significant strategic milestone for CSC. System delivery is planned for the first quarter of twenty twenty six.

14:48 In April this year, the UK government reaffirmed its commitment to support domestic green hydrogen production with growth through the Hydrogen Allocation Rounds Five one projects have already been approved by the government, and a shortlist of twenty seven two projects has recently been announced. We're well positioned to supply static hydrogen storage systems and road trailers to funded projects, which are expected to be operational between 2026 and 2029. Our first major contract award under the HAR one program was expected in the first half of this calendar year. The project has been approved by the UK government, but the timing of order placement for storage systems has been moved to the fourth quarter of this year.

15:36 Outside The UK hydrogen market, a contract was secured in the first quarter of twenty twenty five to supply high pressure hydrogen storage systems to leading French refueling station specialist, Attaway, for delivery in the fourth quarter of this year.

15:51 To complement our extensive history in type one steel road trailers, we have signed a cooperation agreement with a leading European manufacturer of lightweight type four composite cylinders, enabling us to offer the market a full product range and to support future life cycle service demand. Hydrogen revenue expected in the second half of the year is supported by a full order book coverage underpinning an anticipated record revenue performance for the full year. We're therefore pleased to be on track to meet our 2028 targets for Hydrogen revenue of 30% total sales. Expert integrity management services are a growing part of our business, and we're well positioned as pressure system OEM to capture noncapital intensive repeat revenue throughout the product life cycle from extensive installed fleets across regulated operating environments.

16:47 Where safety critical cylinders cannot be removed for periodic maintenance, we deploy our specialist integrity management teams to carry out in situ inspection and testing, minimizing operational disruption, and maximizing system availability. In the first half of the year, integrity management revenue was 2,100,000, which is 17% higher than the first half of twenty twenty four, primarily driven by growth in UK naval deployments. Order intake was 2,700,000, a growth of 29% over the first half of twenty four, already exceeding the full year 'twenty four intake of 2,500,000.

17:25 A strong outlook for future UK naval deployments underpins an expected record full year performance for Integrity Management Services in 2025, demonstrating strong progress towards the target of doubling revenue to around 5,000,000 by 2028.

17:42 Built in our position as sole supplier of pressure systems to UK submarine and surface fleets and as OEM for navies worldwide, we're currently positioned to secure our first integrity management contract on European naval vessels.

17:57 Growth in integrity management services supports our goal of maintaining 30% of revenue from high value repeat life cycle services throughout the period to 2028. So in summary, FY 'twenty five interim results reflect the phasing of newbuild contract milestones and integrity management deployments in the first half of the year.

18:21 Strategic progress is being made towards our midterm twenty twenty eight targets, with significant contracts secured from overseas defense customers and the first contracted award to supply large scale hydrogen storage systems in The UK. Record revenue hydrogen record hydrogen revenue is expected for the full year. Growth continues in our integrity management services, and a record revenue year is expected in FY 'twenty five. Strong order intake in the first half of the year and robust order book coverage support our second half revenue expectation, driving a return to full year adjusted EBITDA profitability and results in line with market expectations.

19:07 That concludes the presentation. Thank you for listening. Chris, Sally and I will now take questions. That's great, Chris. Thank you and the team for your presentation. I will now bring your cameras back up. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. And as you can see, we have received a number of questions throughout today's presentation.

19:38 And Christopher Mayne, I'll hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end. Thank you. Cool. Thanks, Alex. Right. So we'll get into the into the questions here, presubmitted question. First question, you seem to be making progress with your strategic goals, but with recent defense spending announcements by The UK and Europe, are you being ambitious? Are we being ambitious enough in our in our targets? So I think what yesterday's announcement on the strategic defense review is great news, for The UK defense sector, especially with commitments made by The UK earlier this year, to support direct SME spending targets where we we currently lag Europe and and The US. I think with these recent announcements, we would expect to see new build programs expand and the drumbeat of deliveries increased, presenting further opportunities over the longer term. It gives confidence in our near term goals, but won't necessarily change the landscape to 2028.

20:40 So another question related to to to defense. Here, earlier this year, you announced a contract to supply the US Navy. How is this project progressing? When will you deliver products? And how will Trump's tariffs affect the the project? Chris, over to you. Okay. So we're clearly delighted to secure the contract with General Dynamics Electric Boat to supply the US Navy's submarine new construction program. And we feel that we're making good progress with early project milestones being achieved and our relationship with the U. S. Project team is really good, and we're definitely on schedule to deliver by 2026. I guess in relation to the tariffs, it's potentially likely to be a changeable situation by the time that we deliver in in '26.

21:28 And we're not contractually responsible for any tariffs that might be payable at the time. But let's just not remember, let's just reflect on the fact that our U. S. Customers engage with us due to our experience and long track record in being able to supply these specialized safety critical products. Thanks, Chris. Question related to the second half outlook. So the second half looks challenging. How confident are you in delivering the revenue and return to profitability, Sally? Okay. I guess the order intake in the first half was strong. We've got 95% over 95% order book coverage for second half revenue. We've got the resources in place to deliver the contract milestones and the integrity management deployments, giving us confidence in the full year numbers.

22:16 A question on hydrogen. Is the UK government actually committed to hydrogen, and why are you confident that orders will be placed soon given the continual delays? So I think delays to government funded hydrogen projects have been frustrating over the last few years for us, and for the wider supply chain. But I think recent confirmation of funding awards for the five HAR one projects, other projects to under HAR one to be confirmed within within the next few weeks. And the shortlisting of 27 projects under HAR two shows strong commitment from from The U from from the UK government, so we remain optimistic. We're actively involved with with the key project developers, which gives us the visible visibility of those project timelines and and and production plans.

23:10 K. The CapEx of £200,000 in the first half of year seems very low for a business preparing for growth. Is this enough for growth, and what are your future CapEx requirements? Sorry. And so we managed CapEx spend carefully during the first half, and we've just focused on the maintenance activities on existing equipment. Our operational focus will remain on the efficiency of existing equipment to deliver the capacity for our twenty twenty eight targets, which we believe we can achieve without major CapEx. Chris, have you got anything to add to that? Yes. I guess that so we've clearly been careful with cash in the first half of this year, dollars 200,000, as Sully described.

23:58 So we're expecting to spend around about $700,000 on CapEx by the end of this financial year and maybe a similar amount next year, all on our maintenance and the slight incremental improvements. Clearly, as we grow, particularly in the hydrogen market, the expectations of some shorter lead times of some of those products are requiring some investment to improve the efficiency. And clearly, we want to continue to do that over the forthcoming years. But I think as Sally described, low CapEx requirements in terms of no major issues over the next couple of years. Thanks, Chris. I think related to that is a question here regarding resources and skills. Have you got this the resources and skills to deliver your growth plans to to 2028?

24:46 Do you take care of that one? Okay. So we're clearly lucky to be based in South Yorkshire. The you know, the it's a region that's got great access to a strong pool of skills that our business needs. We've currently got seven live vacancies. We've got a new website that is demonstrating advertising those. We're using all the media to be able to get those. We continue to grow our team with the right skills. And I'm pleased to sort of describe to the audience again that we've got an active apprentice scheme that we will be recruiting again in 2025 at the back end of this year. Thanks, Chris. We've got a question related to artificial intelligence. So how are you utilizing artificial intelligence in in the business? I'll I'll cover that. So we currently use proprietary AR tools for our administration principally administration processes and extensively in our IT and cybersecurity measures. We don't currently use artificial intelligence in our manufacturing process processes, but we do see opportunities to use artificial intelligence in production planning methods and also in the interpretation of product inspection and and testing testing data.

26:15 Okay. We have a question related to the stock ownership of the company. What is the management board stock ownership like? So currently, the combined executive and independent nonexecutive board shareholding is around 1% of the total issued stock. Question regarding the order book cover for h two. Can you give any details on the the percentage of order book cover for the second half of the year, Sally? So the second half, we're over 95 covered for the revenue that we've got in the second half, yeah, primarily from some larger contracts which were announced getting those initial milestones in in within the new. Yeah.

27:14 So question related to the security of steel supply. So how secure are your sources of steel, both physically and and economically? Chris, could you come to that? Sure. So we've got a our steel supply comes from Europe, and we've got a good relationship with that supplier. And more recently, we've opened up a second supplier as well just to make sure that we weren't too exposed. So I think and we've got an agreement in place with our core supplier that is is is there for the future. K. There's a question related to the first half accounts. 1,200,000 pounds of goods were transferred over time, which seems a strange concept. Why aren't they recognized at a point in time, Sally?

28:06 Okay. That that's related to IFRS 15 accounting standards. So there's a number of requirements and conditions that have to be met, which means that we have to recognize revenue over time. It's not so much of a choice that we get to make. It's it's making sure that we are in line with IFRS 15. And so those shorter term smaller contracts would be point in time, but the larger contracts that we have milestones on over a number of periods, we we have to recognize over time. Thanks, Sally. So the question related to the competitive environment in in hydrogen storage transportation. Can you give us some background on the current competitive environment for hydrogen storage and transportation within The UK? How many competitors are they are there? And does CSC have a niche in this market? So the the hydrogen industry in The UK is a more competitive environment than than than we face in defense markets.

29:07 That that's for sure. There are competitors. There there are no other manufacturers of type one type one storage systems or road trailers in in The UK. That's not the the proven type one designs. There are there is some competition in in the supply of lightweight composite road trailers in The UK, and that's why we are are entering that market with an offering as described earlier with the new cooperation to to to be able to supply those systems. So, yes, it's a more competitive market. There is some overseas competition from European suppliers, and we anticipate over the longer term that there will also be Chinese competition in in this sector.

29:53 Importantly, hydrogen storage and transportation is a safety critical industry. The operators in that environment take risk management very seriously, and I think it's important to recognize that that we we believe our long track record in in in safety critical gas storage systems puts us in a in a strong position to to compete. We we also have very strong relationships with with our with our key suppliers who are also determined to see growth and expansion within the hydrogen market. So, yes, more competitive environment, but so far, you know, we we believe we're we're offering a very strong product that's also backed by The UK based through life life cycle maintenance and support integrity management and factory reconditioning services, which is an important and a unique offering to to CHESTERFIELD SPECIAL CYLINDERS.

30:52 Yes. Do you do you expect to improve the gross profit margins, I guess, looking at the the the the first half and second performance? So, Sally, yeah. Thanks. Yeah. So the the gross margins in the first half reflect the operational gearing in the period resulting from the lower revenues, which were driven from the phase in of the new build contract milestones and integrity management deployments. We do expect gross margins to significantly improve for the full year and beyond and be higher than FY '24 due to the customer and product mix. And then future years, the the increased revenue, therefore, increased contribution margins and to cover that fixed cost base. Okay. Yeah. Thanks, Sally.

31:39 So I think let's we'll make this perhaps the the the the last the last question. Do you see any growth opportunities in the oil and gas market where CSC used to operate? So I think there was a major new build program in oil and gas markets over ten years ago, and that was a very strong period for for CHESTERFIELD cylinders back back back in the day. But there is, at the moment, currently very limited new building activity for floating offshore installations and and and and offshore floating cranes. But it's we are still actively supplying replacement cylinders and upgraded cylinders, and we're also supporting offshore services customers with their mandatory inspection and testing through our integrity management services where we do see steady growth opportunities over the period to to turn 2028 through that in already installed installed fleet.

32:35 That's great, Chris. Sally, Chris, thank you for addressing those questions from investors today. And, of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Me Company platform. But before redirecting investors to provide you with their feedback, which is particularly important to the company, Chris, could I please ask you for a few closing comments? Sure. Thanks, Alex, and thanks, everyone, for taking the time to attend the presentation today and for your questions. Clearly, FY twenty twenty five is going to be a year of two very different halves with strong order intake and robust order book coverage. We're confident about delivering the second half and the full year in line with market expectations. We were pleased today to present the progress we're making towards our FY 2028 goals, and we're excited about the prospects in the defense and hydrogen markets and in our integrity management life cycle services. Thank you for your continued support.

33:27 Chris, thank you and the team once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of CHESTERFIELD SPECIAL CYLINDERS HOLDINGS PLC, we would like to thank you for attending today's presentation, and good morning to you all.