Surface Transforms (LSE:SCE) — AGM Proceedings & Investor Presentation

0:01 Alright. Now for the presentation, I'm gonna I'm gonna take questions at the end of which you can type in as we were as you were reminded at the start. So I'll try and whiz through this as quickly as I can taking care when I think it's important we we give you the right messages. And then David will chair the q and a session at the end. K. I've got the usual disclaimer, which I will just move straight on from, but it'll be there as part of the presentation when it's published. Now it's just worth talking a little bit about at the start. I won't spend too much time on this slide. We're just talking about customer and shareholder value and the position of the company in terms of delivering on that value.

0:46 The key ones, as we've always said, is price, and we believe we're competitive with good margins on product. We we know we have a superior technology to our competitors, in particular, with certain attributes to do with heat management and life. Supply chain is very important to our customers, and we've worked hard on our supply chain. We are a credible alternative to the incumbent competitor, and we have a fully independent supply chain, which is very important to some of our customers. The next one on the list I've joined is actually is capacity. It's incredibly important that we can provide capacity. We've been working hard to to provide that capacity, and we have the capacity for circa 16 and a half million per year, and that's installed in the site.

1:32 For those that you've been to the site is expandable up to to the addressable market, or it's not even that now. It's the pipeline of contracts we see coming through up to 50,000,000 per year. And the last two on that slide regarding quality, it's important we have our quality certifications for the industry, which we've had for a number of years. And we are active in all the key markets, which principally for us are The UK, Germany, and The USA. And we have, obviously, our headquarters in The UK, Liverpool, and we have a small sales office in Germany. And all of that really is why what are we doing it for? We see the value in this business and for shareholders and the investment proposition of where we are today, where we had sales.

2:18 I think we've just published our half year numbers of just just shy of a million or 900,000 for the truncated year 2019 was 1,500,000 for the seven months. We'll talk about it in a bit more detail about how we see our current contracts, moving us through cash generation profitability towards 6,000,000, and that's in the context of this contract pipeline that we see over the next five years, 50,000,000. And, of course, that's in the context of the potential market for surrogate breaks, which I've talked about in the past being circa 2,000,000,000 per annum. So it's a it's a significant market for us. Now I'd like to move on now to talking about the revenue road map and how we see those contracts we've been announcing over the last sort of year, two years, and how they build up and what's important features about those for the business as we go forward.

3:12 We'll start with 2020. Something we don't talk about very often, but it happens every day, all the time, is our near OEM customers and retrofit customers in supply product to those markets and customers. This year, we'll have a revenue of of at least 1.3, maybe a little more per annum. And on top of that, we also have our Valkyrie contract, which is worth 1,000,000 per annum. We've seen that be delayed a couple of times, but we're expecting that to come through for a full year in 2021. We're expecting some revenues this year just towards the back end, which are either development or start production revenues. But it'll make a contribution to this year, but it's really about next year and the year after for the Valkyrie contract.

4:01 And then continuing the theme with 2020, we announced last year the contract with OEM five, and we've been working through development through the year, and there is some development revenue that is coming through. We also announced quite recently the new contract. Well, we announced two contract with Koenigsegg, but the new one for the Gimera and the previous one for the Jesco, and we'd be receiving development venue for those two contracts going through in 2020. And there's also OEM six contract, which we announced a year ago, where we would expect to make some contribution to the business in terms of revenue this year with start up production further out for that contract, which I'll come on to. And it's really that introduction of the Valkyrie, the message here that takes us through cash breakeven.

4:50 And as we move through cash breakeven, that takes us into 2021 where we would see our near OEM measurement revenues recover from 2020 with the COVID nineteen pandemic. They're usually about 2,000,000 per year. The battery would be a circa million. And we would in addition to that, we would still have our revenues from development from OEM five, and it starts production for that contract towards the end of the year. So we'd see a contribution from OEM five in terms of series revenue. Now it's worth 1,800,000 per annum. So we won't we won't see that kind of revenue in 2021, but that's what we that's the recurring revenue going forward. And we would still receive some revenue from KEDIG's sake and some revenue from OEM six for development.

5:40 And if you add those up, I think our revenues come to circa about 4,000,000, just over, and that's where we talk about the addition of OEM five contract and the series production takes us through to cash generation in 2021. I move into 2022. Again, we have the recurring revenue with our new OEMs and retrofit. We have the remainder of our Valkyrie contract happening in '22, and we have a full year now with our OEM five contract with 4,800,000. And also in that year, we would then expect to see Koenigsegg revenues come in with the Camera. And if we add those contracts up and the development in the bottom there, they come to just shy of 6,000,000, somewhere between 5.5 to 6,000,000.

6:28 And it's that's where we see our the company turn into profitability from our existing contracts. I should then point out that we don't talk about the revenue for OEM six contract yet because we see that entering series sometime after 2022, perhaps in 2023. That's been delayed again due to the pandemic in terms of the introduction with OEM six, but it is there in the background. Now another feature I want I want to point out here is that if we talk about all these contracts, a feature of this business is the recurring revenues for multiple years, so they're multiyear contracts. But it's worth noting when those multiyear contracts finish, they have quite a lifespan. So, obviously, Valkyrie is quite a a special addition, and so that finishes in 2022.

7:20 But in terms of the remainder of the contracts, you can see they're going for quite a few years, 2026 through to 2029 with recurring revenues. Yeah. Looking a little bit forward beyond what our current contract situations are, we do see a prospective contract pipeline of of circa 50,000,000 by 2025. I've tried to highlight a little bit of where those where that demand might be coming from in the right hand side of this slide with OEM one, five, and six having demand for future models. And there's also significant demand from other OEMs that we haven't mentioned on the slide here with current contracts. But we see that happening through the next five years.

8:08 Now I can move on now to talking about what the company is doing in terms of the company activities and operational activities to support those contracts and to support the business and the growth of the business. That's what I'd like to talk about is the product, and it's it's here that I'll talk to you about OEM three. OEM three sort of books the trend in terms of what what our policies are these days and talk about contracts. We only talk about business that we've won, but OEM three is has got a bit of a legacy to it, so it's worth saying that we're we're happy with the progress made with OEM three, in particular with the environmental salt spray testing. We have an enhanced product. It's really about now trying to integrate that product into one of the potential platforms OEM three have going forward. And there is always opportunity for us to optimize that as we integrate it into those potential platforms.

9:06 So we're in a position now where we are talking to we have three about where that can fit and which nominations and contracts it could go on in the future. Then move on to price. It's another key requirement for for the company. We put this graph up regularly. It doesn't it hasn't changed, I'm pleased to say. We understand our customers' pricing and the elasticity of that pricing very, very well for volumes. We've worked hard on our cost reduction so we can we think we know now that we have good margins. And our cost reduction program that we'd laid out is being delivered with the OEM cell one being installed. And we also have future plans for cost reduction that will see us towards our target to cost and pricing, which we believe will be in the marketplace as the market develops into a much higher volumes. So we feel we're in good shape with our price.

10:07 Now just moving on to capacity. I talked earlier on about having a capacity within the factory of 16 and a half million. That's split between two cells. We talk about the small volume cell, small volume production cell, the SVP. You'll be able to see it there from the aerial view. The smaller rectangular box or the square box is our small volume cell. That can generate revenues up to about £4,500,000 per annum and supports a lot of that business with the OEM retrofits and some of the and we'll support Valkyrie and the like. Our OEM cell supports the new contracts I've been talking about, for example, with OEM five and OEM six. And the development of that cell has progressed progressed along the track. It's had some issues, I would say, with with experience through COVID with some of the supplier engineering support where we've we've been able to get people on-site during lockdown.

11:05 That's now been alleviated. We expect that cell some of the furnaces are now making contributions to production. The CNC machines are also supporting production, so it is getting very close to being complete. And it will allow us to have a capacity of 12,000,000 pounds per annum. Now that remain as I say, that cell capacity remains on track in terms of meeting our customer contracts, in particular, OEM five and the Gamera. We're very happy with how that's progressing. And it's worth then pointing out that OEM cell wall can be replicated. If any of you've been here or if you've heard me talk about this before, we've designed the cells to be modular. The footprint of the facility allows us to put the multiple modules down, and we can we can put enough capacity in, and it should be able to address our prospective contract type of 50,000,000 over the next five years.

12:02 And, again, just to mention the cost of a cell, cost of a cell, we we think is in the region of 10,000,000, and there's about an eighteen month payback on that investment. Briefly on the quality and the environment. As I've said earlier, it's incredibly important we have our certification for the industry, and that's something called I a T f one six nine four nine. I'm pleased to say that we've just gone through our audit, and that's gone very, very well. And so we continue to maintain our certifications for the industry, and we were also able to add to that the environmental 14,001. And in particular, to operate with the new capacity, it was important to get our environmental permit.

12:51 And that's been received and allows us to operate as we would normally. On location, it's a little bit of an update here on our German location. We plan to relocate the German office to the the region in Germany which has the most OEMs. That's typically Southern Germany in the regions of Munich, Stuttgart, that kind of area. And that's part of our planning really for to mitigate any Brexit risks. We're expecting to, as we relocate, include a small warehouse there that if we need to, can carry some buffer stock should there be any disruption with the frictionless borders that we enjoy today and may be disrupted. So we will mitigate that by having a a small warehouse in the in the area of the OEMs.

13:43 Just touching on supply chain. There was a task which has been completed now for for quite a little while to allow us to have dual sourcing for our raw materials. That's been in place and is working well. And we are working on other strengthening aspects of our supply chain, particularly for some of the metal parts, and that's continuing very, very well. We're very happy where we go with that. But that's an ongoing base that's an ongoing program as cost reduction would be, where we have plans to improve that as we go with our with our existing and potentially new supplier base. Now I just put on my that's that's the day to day operational activities, if you like. I thought it would be useful to talk about the impact of COVID and how we've been coping with that.

14:36 COVID nineteen has obviously had a wide ranging impact across the the entire world. I'm pleased to say that we've remained operational throughout. Our revenues, after we looked at the COVID scenario, are on track. So our half year revenue is exactly where we would like it to be, if not slightly ahead. We are we have seen a delay from our customers, in particular, the Valkyrie, where they were in lockdown for a period, and that's that's provided a delay, if you like, to the start of production. And we've also seen, although all of our customers are now back and working on their programs, some of the SOPs for the for the future programs have moved slightly as well. Instigated a cost reduction program in the region of 500,000 to 600,000.

15:28 That's that's on track. We are utilizing some of furlough scheme even though we've been maintained operations and been able to deliver to what our customers been asking us for. We have furloughed some staff, and we continue to manage our staffing with the furlough scheme that is in place. But it's important to note that we in terms of our engineering, we've been trying to maintain the engineering because the engineering is integral to delivering to our future contracts that we already have in place with Gimera, OEM five, and OEM six. We also completed fundraising, which we thank all of our shareholders for. Once we completed all of that fundraising, including including the open offer, which was significantly oversubscribed, we raised 2,250,000 net of fees.

16:20 And the the reason for doing that fundraising was to mitigate any worst case risk from COVID nineteen. If we don't see a if you like, a a rapid recovery or we see a we see a slow recovery, we feel like the the fundraising we did there puts us in good good strong shape on the balance sheet to weather that storm. Now then looking at the outlook for 2020 and 2021. As I say, the actions we took during the year so far have allowed us to mitigate a significant risk of COVID nineteen, and we continue to review that regularly and try and understand how we should be working and progressing to mitigate that risk as it develops. And that's an ongoing challenge for us, but we feel like we're managing it well.

17:13 And we're maintaining the schedule for ramp up for current contracts. So although I talked a little bit earlier about some of the future contracts, SLPs having moved, that's not the case for OEM five or Gamera. So we need to maintain that that momentum we've been building and continue that through twenty twenty, twenty one. Alongside that, although some of the SOPs have moved for those pipeline of contracts, Some of them haven't, and we continue to work very hard on completing nomination processes for new OEM contracts in 2020. Well, that hopefully gives you a bit more detail about how the business has been progressing, where we see ourselves. I could just summarize that for everybody now.

18:03 First of all, we believe we still have an exciting investment opportunity with with a strong ST position in this potential £2,000,000,000 market per annum. We have a effective contract pipeline of 50,000,000 over the next five years, and that covers OEMs one, three, five, six, and also new OEMs that we haven't mentioned in the past. Hopefully, I've explained the revenue road map that we have in place, and that takes us through cash generation in '21 and profitability in '22. It's also worth noting those are multiyear recurring revenue contracts, although we have five, six, and Koenigsegg. And we obviously have our recurring revenue within the OEMs and retrofit customers, which are very welcome as well.

18:51 And then on the operational side, that continues to advance. Our product application engineering with is progressing with OEMs. I've mentioned where we are with OEM three. We feel like that's progressing as well. Price and margin is well understood. Capacity is coming on stream from our our new cell. Furnaces are contributing as are the CNC machines. Our supplier our supply chain is in good shape. We're always strengthening that. The COVID nineteen backdrop to us does pose risks, but we are managing those risks and mitigating those risks on a daily basis. And as I say, in terms of our engineering work, it's about delivering to current contracts and completing the renovation requirements for new OEM contracts in 2020.

19:42 Just as a a final summary, comment really, we're well funded to deliver on all of our contracts we have in place and our contract pipeline. And I thank you for listening.