Velocity Composites (LSE:VEL) — Interim Results

0:00 Good morning, and welcome to the VELOCITY COMPOSITES PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Please just simply type in your questions and press send. We begin, I'd like to submit the following poll, and I'd like to hand you over to John Bridges, CEO. Good morning, sir. Morning. Welcome, everyone. This is our half year presentation thirtieth of April twenty sixth. You've got myself and Rob, the CFO, as as normal, and we'll take you through the slide deck and pick up the questions afterwards. If I put take you through to the first slide, Rob, would you give us some color on the the headlines?

0:51 Yes. Absolutely. Thank you, John. Good morning, everybody. So looking at our financial highlights, these are in line with the trading update that we gave about a month ago and indicate that revenue was $8,400,000 in the first half of FY 'twenty six compared with $10,400,000 in the first half of twenty twenty five. The reasons for the lower number twofold. One, we had one UK customer who rephased a number of their purchase orders to the second half of the year, which we are currently working on. And also we had a issue with a US supplier who supplied us material which was not up to standard and they had to recover that situation and are in process of getting us new material for the second half.

1:49 So we expect to fully catch up the loss in the decline in the second half and we'll be back on track to hit our market expectation as far as revenue is concerned. Gross margin was 28% in the first half. This largely versus 29% in the first half of twenty twenty five. This was largely caused by running the factories at less throughput, which meant it was slightly less efficient, causing us to drop a bit of margin. Now our forecast in the second half is for margin to be at a lower level as the mix of products sold in the second half is at a lower margin. We expect those margins to recover as we go through FY 2027, and we continue to target to get to high 20s margin.

2:46 Our published key measurable is 25% gross margin, and we do not see that we will drop below that. Adjusted EBITDA was positive at 100,000, reflecting the lower sales where we were 300,000 in FY twenty five h one. The resultant loss for the period was 900,000 up on the previous FY twenty twenty five H1, but again, down to the lower sales level. Cash at bank improved, and I gave with comparison there to the position at the year end rather than prior half, it shows that we improved cash by £300,000 in the half.

3:44 Thanks, Rob. So, really, these slides give you a bit of a background about the sort of two r's from sort of industry point of view and then on to the sort of internal velocity perspective as well. So, really, h one this year, we've seen, you know, some of the issues that were causing sort of of sort of challenge around rate increases. We we all know that rates are targeted by the primes to be to be raised, and, you know, that clearly creates a much more better situation for our customers and ourselves as everyone gets busier. And some of those reasons for those delayed rate increases will start to clear. So we we spoke about that the sort of full year in January, you you know, know, the the the whole reacquisition of of Spirit by Boeing and then the carve out of those Airbus plants did sort of get rid of that.

4:45 That pause whilst that process went through and those plants that were affected are now sort of back open with their new owners and engaging as expected. Again, good news came through with the FAA raising the sort of production cap on 737 MAX. Again, helps our customers to get busier and get back to rates that we were we're all enjoying prior to the pandemic. And again, all that hard work that I'm sure has gone on to clarify all those issues with the FAA means that everyone can get back to making more aircraft. Lots of commentary certainly in the news and in in the industry press around defense spending and procurement. I'm seeing much of that flow through to current and prospective customer base just yet.

5:35 So the little pockets in in places, but clearly, there's lots of fulfillment to be done in those fields, which will eventually lead to manufacturing rate increases, which again help along with the the civil side. And we aren't really seeing an impact due to the issues in the sort of Iranian conflict and obviously short term impact on fuel prices. But again, nothing major, nothing too obvious in material pricing. Hopefully, the resolution there means that it's another issue that we don't have to worry about going forward. So that's h one. Looking forward into h two, again, the the the optimism where we is creeping in through our customers and, again, for ourselves in terms of those rates are starting to bite. And, you know, the work that's been really ongoing for the last year or so to get those rates to move is is starting to flow through to our partner supply chain.

6:36 You you know, we've talked previously about issues in engines or orgines and casting. You know, there's a whole rate of things that have been put out there for, you know, causes of delays by the by the primes. But, again, those seem to have cleared or are in process of clearing, and and we are sort of seeing our customers forecasting rent increases through the back end of this year and into next year. We mentioned, you know, the continued benefit from all that distraction around the reacquisition, the spirit sites, seventy seventy seven max rate increases, really opens up then our customers be a lot more busier. And as they get busier, they need to look for, you know, new ways to meet rate and, you know, reduce their costs as they grow and and get back to the rates we've all previously enjoyed.

7:31 EU wise, we again, we're not seeing huge amounts flowing through our way through into the defense spending with with our customers. Again, we'll we'll keep that from the review with, you know, certainly new business opportunities as well. But again, The US defense market, as we'll talk about in a moment, much larger and, you know, there are definitely signs of of growth within there as everyone looks to replace stocks that have been used, but also meet future challenges that are sort of pretty well known out there in the in the media. So if you take a look then of internal progress, our lead sort of customer in The US, take US operations first.

8:21 Again, we continue to support our lead customer more sort of additional different type of work has been awarded with with them as we look to support them going forward and also mitigate some of the delays by challenges with one of the key programs which is transferring. Good to report that that transfer has started and will progress through h two. Again, we continue to to work well with the customer on supporting them and meeting their time frame. And, you know, recognize this is all OEM led, everyone is is moving as quickly as as allowed within the processes, but good good coordination. And, yeah, we could see that moving forward.

9:10 And we'll progress through through h two. The material quality hue that that Rob mentioned, again, quite isolated, but we're breaking in the it's not the flat material. Obviously, that's affected. It's all the other materials used with it because the customer is a we've able to build with one material missing, thankfully. So, again, we've managed that with the customer. We've worked with the field supplier and the customer to help that recovery plan when the the new material arrives, and that'll flow through in in the second half. We did announce earlier in the year through various channel the the partnering really with someone who's got a lot of senior experience in The US to come and work with us on our business development over there.

10:00 Clearly, it serves in in question and significant market for us and lots of different in play there. So we needed some some extra resource, and and we're pleased to announce that we need to work with VELOCITY COMPOSITES in in The US and really help drive those, you know, through the activities. He's got a lot of experience within the industry and at the senior level. He's working in the client organizations in in a cultural role. And, again, that work has has started, and it also has an additional benefit of, obviously, helping them in in the European development by freeing up resources that were pretty much spread across both companies. So it's great great hire, lots of good engagement there, and, yeah, looking forward to that one progressing.

10:53 And, of course, that engagement in North America continues. We have some, you know, different cases that are pretty much completed, and we're just awaiting POs to flow through to our new customers, which then, you know, obviously allow them to raise POs on us. And then lots of engagement with the the sort of large multi site organizations over there at the senior level, but obviously cascading down into the individual sites and picking those pilot schemes, which, you know, we want to clearly launch and then develop into full site and then multi site opportunities. In Europe, we we announced last year an increase in scope with one customer.

11:40 And again, pleased to report that that FAI activity is complete and the path transfer now is is completed. And we're supporting that site with the the heated products that we deliver. The two new sort of two historic customers who were going through various different work transfers, Those activities, probably not too surprising given the industry discussions, you know, we've had previously. Those take longer than planned. So we are still seeing orders from those and even those continuing into '27. So we look to manage them.

12:25 And obviously, one of them is a lot more sort of legacy programs where the the volumes of significantly reduced, but we'll continue to support spares and, you know, future requirements that they need. The other customer, he was moving to locations that we don't currently support. But again, we continue to look into that and also support them with their lengthier transfer process. Again, who knows what longer term requirements required from the The UK facility as well. We mentioned, you know, about the the reacquisition reacquisition of the spirit sites and also the takeover of some of those sites by Airbus, the ones that we're producing mainly Airbus programs.

13:12 That's allowed us to engage much clearer as their new procurement teams and procurement strategies take hold. We've got some some smaller wins and opportunities there. And again, we continue to progress those, obviously, supported from The UK. We also the team completed the the transfer of the the previous facility in Farram all up to Burnley. You may remember that was a facility we opened under a contractual obligation. That obligation fell away, and we chose not to renew the site lease when that site lease came up to full renewal. And again, all that work was successfully transferred up to Burnley.

13:57 Some of the brave people at VELOCITY COMPOSITES to to come up as well. And, yeah, that's all completed and will drive further opportunities in in the second half. I'll hand you over to Rob who will take you into a deeper look at the the panel, please. Thank you, John. So we've already covered the reduction in revenue and the impact on the gross profit. I think it's pleasing to see that we managed to reduce our administrative expenses in the period by 5%. These were actually the flow through of cost reductions made in the second half of FY twenty six.

14:47 And that is something that we keep keep an eye on, obviously. We expect further benefits in the second half of FY twenty twenty six due to the closure of the Varon site and activities being consolidated up in Burnley. As I mentioned before, adjusted EBITDA was positive, and that was despite the sales reduction. And that's now our fifth sorry, third consecutive half year of positive EBITDA. Looking at the balance sheet, non current assets reduced through depreciation and the fact that we have had a very low spend on capital equipment during the period.

15:35 That's largely due to the fact that we've now fully implemented our capital programs both in The UK and U. S. And we have our capacity in place to grow the business through the next period. Inventory reduced from $2,400,000 down to 1,900,000. That was largely following sales, not as efficiently on inventory turns as we were in the previous half, but that's largely due to the efficiencies to scale that you get as throughput increases, but also as we had an imbalance of inventory, as John mentioned, on the program, which was suffering from material quality issues, we have bought most of the material in.

16:26 And then we had the one item, which meant that we couldn't ship the kits. So that distorted the number a little bit. We expect to recover that inventory position through the second half. The trade and trade receivables were broadly in line with the previous half. This actually was a slight higher debt of days caused by the fact that we'll mix and balance and switch between US to UK sales. We generally get better payment in in The US than we do in The UK. So nothing to worry about. No late debtors or anything like that. Everybody was paying on time. Trade payables increased, and and this is due to better terms that we negotiated from one of our suppliers, which has helped us in the period.

17:25 Moving forward to the cash flow. In the period, we had 82,000 outflow from operating activities offset by working capital movement of 1,100,000 inflow to give us a a cash inflow from operations of just over £1,000,000. We did receive a 137,000 in the from r and d tax credits. That's unlikely to recur at the same rate going forward, but was a welcome top up to the cash in the in the period. That cash from operations was used as as you'd expect. We have investing activities. This is the capital expenditure, and you can see it was a tenth of what we spent in the first half of FY twenty five.

18:23 Cash used in financing activities, this is repayment of loans and leases, interest and those kinds of charges was broadly in line with the first half of FY twenty five. But moving forward, we'll reduce because we're now at the end of the repayment cycle of the loans we took out during the pandemic, the c bills. And you can see the amount paid is amount outstanding on those is a 180,000. We will be all but £30,000 of those paid off by the end of this financial year with the remaining balance paid in FY twenty seven h one.

19:12 So what we're looking at is a largely cash flow neutral business as we stand with the forecast increase in sales will drive the operating inflow up, and the lower outgoings on servicing debt will reduce our outflow. So we are looking at just moving into cash generation as we move forward into the second half and into next year. Clearly, working capital movements, we buy inventory and we work the data cycle and credit bearing clearance will not make that smooth increase, but we are fundamentally in a cash generative position once those programs transfer over and back into growth cycle.

20:09 John? Oh, sorry. That and we've set that out pictorially. And by the way, this presentation is available on our website, and you're more than welcome to go to that to and download it to digest at your leisure. John, if I can hand back to you. Thanks, Rob. So, again, looking forward, you know, we've got, you know, clear objectives around completing the transfer of remaining US programs with our sort of mutual customer and also completing those activities with with new customers supported by the sort of new BD resource that's been in place now in The US, freeing up our existing resource to assist more in Europe.

21:03 So lots of activity going on. Clearly, the FAI in The US takes a lot of resource. Those transfers continue to resource the new bids, the business case creations, all going on US and Europe. And, again, the team working hard to complete those and get those in place really weak customers. On On top of that, we've got these sort of sort of blips within h one with the supply chain, with managing with customers, really working that through them to achieve the best outcome there using the sort of technology in our supply chain marketing activities to really drive a quick recovery for them across all materials, the ones that were affected and the impact on the ones that weren't.

21:50 Again, with these additional resources, we're doing well to build that pipeline. We've got some smaller work, and that will continue. And, again, we'll announce any significant wins accordingly to sort of really drive all the hard work that's already gone on those business cases as we continue just to actually grow normally, but also replace some of those legacy programs as they naturally wind down. And really close those out and get on progress some of these large multi site opportunities. I think that's the sort of overall summary. Thanks to your time, and I guess, usual, we'll go to the questions.

22:36 That's great. Thank you for updating investors today. Could I please remind investors to submit your questions just by using the Q and A tab situated on the right hand corner of your screen? For your reference, a recording of today's presentation will be available on the Investor Me company platform shortly after the meeting has ended. As you can see, we received a number of questions during today's presentation. Robert, if I could just hand back to you to read out the questions and give response if appropriate to do so, and I'll pick up from you at the end. Yes, certainly. So we've got a couple of questions coming so far. Firstly, your 28 gross margin in H1 and 29% last year is impressive. Despite your lower guidance for FY 2026, could GM recover to these levels in FY 2027?

23:24 I'll take that, John, if I may. So our forecasting and outlook is saying that we will be at a lower rate in f y twenty seven. We we expect to be around the 26, 26 and a half percent through FY twenty seven. This is as we digest the work onboarding in The US, but we will be working to improve those margins. And as we tack through the years, we expect to go up a learning curve and get better efficiencies. And we will drive back to get above back up to the 28% level probably into the FY '28 period.

24:12 So the second question, how soon might we see the benefit of your new biz US Business Development Director translating into new customers or contracts? There is presumably a significant lead time on these opportunities. So, John, if you could take that one. Yeah. Thanks, Rob. I I guess the first thing to understand, it's not like inherited a sort of blank sheet of paper. There's clearly lots of different projects already in play at different stages to build on. As we said, some of those, we're we're awaiting the launch from our customers to then flow down to us. And then the wider engagement with some of the large groups over there, which there is the question state. Just take a little time to work with them to navigate through business cases and contractual agreements.

25:11 But, yeah, we we won't see, you know, a nice steady flow in that as those progress the the the additional resource and the expertise of that resource, you know, to complement what we've already got is important. And we think, you know, that's really gonna help move those forward at at the at at the pace. You You know, know, one thing we probably didn't touch on was, you know, the move to Verint that existing infrastructure has been split across UK and US facilities. So, you know, we still have that million surplus capacity, and we're using all sites at their full capacity on full shift. So, you know, clearly, we want to fill that and and drop covered in in the numbers, you know, with the borderline breakeven where we are with sort of very small incremental.

26:02 Then to really to start putting a dent in that sort of scale of firm and different capacity. And, you know, both sides are are ready to to absorb it. And the the fact that they are ready to absorb it forms an important part of the the growth as well. That's great. Thank you for answering those questions from investors today. Before we ask investors to share their feedback, which I know is particularly important to the company, could I please just ask you for some closing comments? Yeah. Sure. I think, hopefully, the takeaways from everyone were that that the industry is getting busier, which is great. That's great for all of us. Breaks are rising, and we'll see that. You know, that's very public information that people can see for themselves.

26:52 We're navigating the sort of supply chain issues on that ramp up with our customers. And, again, the team here has worked hard to to do that over the sort of extended material lead times, and we continue support our customers through that. We're currently support sustained with further further business for those customers. And then we're also seeing those business development supported now in The US and the in Europe with with additional experience resource. And looking forward to seeing that capacity utilized and the sort of challenges of some of these significant rate increases being being sold by VELOSITES working very closely and, you know, very with partnership approach we've got with our customers to to deliver some of those incredible rates that we're that we can see on the horizon.

27:49 Also, probably a good opportunity to thank Rob. This might be Rob's last opportunity. So, again, thank Rob. Rob Rob and the team. They've done a great job in in getting, you know, working through the sort of financial aspects of these business cases, which are incredibly important. And thanks, everyone. Hope you enjoy the weather, and hopefully, enjoy the football. That's great. Thank you once again for your presentation this morning. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations? On behalf of the management team of VELOSITI COMPOSITES PLC, we would like to thank you for attending today's presentation, and good morning to you all.