Velocity Composites (LSE:VEL) — Results for the twelve months to 31 October 2023

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. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Andy Bedin, Non Executive Chairman. Good

0:31 morning, sir. Good morning, everyone. Thank you for joining us at our twenty twenty three results conference. And today, we'll be looking back on the 2023 and the highlights. And then we'll also be looking forward for 2024 and giving a very detailed update of our new facility in The U. S. And how that is going. So back to 2023, we achieved 37% growth predominantly through The UK with a little bit of The US benefit coming through. You'll see that for 2024, it's more US growth than UK, but both those market sectors are showing underlying growth as well as the benefits of new business that's already been won.

1:31 We've covered before about the our new facility in The U. S. And new contracts, and we're going to go John is going to do a deep dive on where we are on that, particularly the regulatory side, approval side. You will have picked up that we have adjusted and shifted some of our forecasts for 2425 simply is around the timing of some regulatory approvals. It actually has no impact on profitability because we have won some other engineering business and our costs flow with the size of the business. So you will see that there is the top line adjustment to 27,000,000 plus for this year and $33,000,000 plus for next year. The pluses are if and when we win new business and then that stacks into that the bottom of those ranges are the business we already have contracted.

2:33 As we've said, we've had a very successful, we think, year in terms of standing up The U. S. Facility. Our customers are very happy with what's going on there and how things are advancing. I'd like to point out that that transfer of knowledge and programs for a regulatory approval process is probably the biggest industry has ever seen for one facility. And it lays a significant marker in the industry to show our own capabilities. And it's very important that our customer is happy, which they are, and that has been our key focus and remains our key focus for this next year.

3:20 So as I said, our forecast for this year in terms of top line is another 65% growth to 27,000,000 The margin last year was impacted through learning curve set up in The States, some lag in inflation pass through. All those items correct themselves through this year And I expect in the second half of this year when all this regulatory approval is sorted out, us to have a very strong second half of the year, which will propel us into profitability and a good strong 2025.

3:55 So I'll now pass you over to John, who's going to do a deep dive in some of The U. S. Aspects. Thanks, Andy. You obviously, you know us, the presentation team. For those new to the story, new to the company, just counter through some of these introduction slides. So ultimately, we operate in the composite materials market, predominantly in aerospace, and this is supporting the transition from metallic aircraft to composite aircraft. The well known platforms out there now, which are pretty much like you can see on the screen like a seven eighty seven there, probably full composite aircraft. As you can see, the shift from metallic to composite aircraft has begun predominantly around Twin aisle, but also moving into single aisle and that's what's driving the growth really to support sustainability as air travel needs to be net zero, but also support efficiency around fuel range and the usual drivers around air travel.

5:05 As you can see from this chart, as we've talked previously, not only have you got a significant growth of composites within aircraft, but also the fleet size is looking to double over the next sort of fifteen years or so, ultimately underpinning huge growth within the use of COMPOSIT Materials. And what VELLOCITY does, just as a reminder is we sit between the raw material manufacturers who are all well established huge international organizations producing pretty much single source material into these large platforms. We sit between them and the manufacturers who use those materials to manufacture COMPOSIT parts for aircraft. We use technology to drive huge amounts of efficiency through material consumption, reduction in wastage, but also reduction in process times around both the structural kits, the actual flying carbon fiber kits, hopefully you can see my mouse there at the top, structural product and then also the process material kits as well. So VELOSITES aim is to give our customers one kit of everything they need to make a part.

6:21 And why we can be more efficient and why where we've invested to drive that efficiencies around technology. So VELLOCITY has fully digitized the process around the material ordering. These materials have a very long lead time, six months up to. The material themselves are on cure, so they need to be controlled. So there's a lot of technology that's been developed to align that long term demand to the near term consumption on behalf of our customers to ensure that we have just the right amount of material just in time. Then also a lot of technology development around the consumption of those materials in the kit manufacturing process to drive material efficiency a lot higher as well to make sure that much more of the material ends up flying on the aircraft.

7:10 So our full digitized process allows us to drive that efficiency both on process times and material. And where we sit within supply chain, as we say, lots of large fully established material suppliers, lots of large fully established part manufacturers and OEMs and we sit between those managing all those processes. You can see there on the right, everything from, as we say, the raw material ordering, inventory management and demand management right away to getting the material in, controlling the life in the batch of that material, streaming them into the kit manufacturing, manufacturing those kits in the most efficient way and then managing the distribution of those kits right away to the lines side of our customers.

8:01 And we benefit from and the whole industry benefits a lot of flow down material pricing control and it really is all about making sure as we say as much of that material ends up flying as possible. I'd like to hand you over to Andrew now who will take you through the financial summary of FY '23. Yeah. FY twenty three was in line with the forecast that were made. Sales at revenue of $16,400,000 as Andy has said, up 37% and EBITDA of plus 1,600,000 At the end of the year, we had cash at the bank of $3,200,000 The fundraise was completed in October 23, and that generated net $6,100,000 of cash into the business, which was obviously used then to support working capital in particular during during the balance of the year. And also, it reduced the usage of the IVF facility and pay down our loans as well.

9:14 Next slide, we'll to the next slide. As we mentioned, revenue 37% higher. UK grew still 20% during the year and The US contributed $2,000,000 of maiden revenues for the year as well. So UK performed well as well as we're seeing the sort of ramp up in production in Europe through Airbus Boeing. Margins were impacted by the sort of startup of The U. S. Operation. Obviously, volumes were low and we didn't get recovery of labor plus obviously additional material spend in going through that period. That impacted the margins by about 3%.

10:02 UK margins were slightly lower than last year as a result of sort of lag in

10:10 inflationary price increases. As Andy mentioned, we expect that to recover this year. Significant increase in administrative costs largely obviously through building out The U. S. Sites and getting the people and resources on board, combination of mainly that, some increase in The UK, small increase in The UK and additional depreciation costs through fit out. So the loss before tax on each gain minus $1,600,000 but obviously the build out of The US facility in particular puts us in a very strong position for FY 'twenty four. Next slide.

10:54 In terms of the balance sheet, obviously significant investment in property, plant and equipment and also in development expenditure to get the facility working during the year. Inventories have gone up significantly again compared with FY 2022. Majority of that is The US $900,000 of that increase was US stocks, which were being built up to meet the demand. Trade debtors remain tightly controlled in the business, small increase in debtor days, but the cash increase was largely again driven by The U. S. Payables. We have one hundred and twenty day payment terms with The U. S. Customer.

11:45 So that reflects in a significant increase in our trade payables as a result. And during the year, we pay repaid about a million pounds of our CBO loans and leases, which obviously came out of cash. Next slide. In terms of the cash flow, we talked about a few of these moving parts already. The $2,100,000 investment essentially in The US around pit property, plant and equipments and the development expenditure. I've already mentioned I've already mentioned also the CBELLOC and finance lease repayments. The next cash position at you see below includes, well, pretty much very little on the invoice financing facility in the in The UK.

12:40 That provides us with about, probably at the moment, about 1,700,000 of additional headroom on our on our cash position. The US debtors go through prime revenue, which is provided by The US customer, and we're able to draw down on those quite quickly. As a result, the financing costs of that are built into the margin that we generate, so we've got that covered.

13:12 Next slide. Thanks, Andrew. So looking at the sort of progress through the year, I think previous sort of presentation we've had, there's been obviously a lot of interest in terms of where we are in The U. S. So just wanted to set out in a bit more detail current state of progress there. So clearly, big project with a launch customer and as we announced back in July, there's quite a detailed regulatory or regulated transfer process that's taking place in order to ensure that the transfer of the kit manufacturer from our customers into ourselves is done both to their approval, but also their customers' approval in terms of the OEMs.

14:03 So just to put some numbers around it, there's over a thousand kits in total to get through this process and each OEM will have slightly different requirements. But essentially those kits will need to achieve the OEM approvals, we'll need to submit a transfer plan that's acceptable to both our customer and the customer's customer. We'll then need to manufacture the first kit, get that bolt off both from a desktop point of view, but also to actually get that first kit into the customer for buy off physically on the production lines, deal with any issues that arise around any of the data transfer. And then obviously once all that's complete, we'll then look to ramp up production and transition from our customer into ourselves.

14:54 So all that's quite a very detailed process and we've talked about it a little bit before in terms of how that works. But essentially as of now, we're around 65% away through that in terms of 65% of FY24's revenue programs on the full rate production. So they've completed all that process in its entirety, fully signed off and are at full rate production from VELOSITES PLC. So again, that's huge achievement through the year. Those significant volumes going through now is testament to all the hard work, not only the team in The U. S. But the team in The UK that supported that and close cooperation with the customer to get those programs through.

15:40 That work continues of course, so of the remaining work, 32% of that FY24 revenue is now under various stages of that transfer process. 8% of that, so that's not 8% of the 32, it's 8% of the total. That consists of 197 kits and that's currently being cut and tested. So that's sort of final end of that process. As you can see, I put the number of kits in there so you can sort of see that it's not a linear curve. Some kits are, generate more because they're more expensive, they're bigger and also they're of different production rates. So the kits, the number of kits is one measure, but again, it's also the amount of revenue that that generates in FY 2024.

16:31 So that first 8% is going through. The next twenty five percent of that 32% is only 80 kits. So again, slightly different program, but much less kits deriving much higher revenue just because of the volumes that are involved. But that's currently going through OEM approval. So OEM has been audited several times through different parts of their organization and all the paperwork is ready to launch the more detailed kick cutting effort part of the FAI in the very near future.

17:10 That will complete and is scheduled to complete by April, and that's why some of the revenues are part revenues in '24, generating full revenues in '25. So that's been a, as I say, huge, huge effort. It is a very, very intensive process with a new team. But again, thanks to all the hard work of the wider VELLOCITY team in making sure that knowledge transfer was successful, the customer liaison was successful, the OEM liaison, all really drives the transfer of these kits from customer to us. On top of that, just some other activities. So again, with the strength of the relationship, we've got all FY twenty twenty four pricing agreed.

18:00 Any inflationary costs, material price changes have all been agreed and put through. Just to give you a bit more color in terms of the scale, the current amount of business plus the current amount of FAI is currently being done on two shifts, five days a week with three machine sales. So going forward, we can expand that by increasing the number of machine cells. And ultimately, there's always the third shift, but there's currently three machine cells running. In Tallahassee, There's an obvious and immediate capacity for six cells. As I understood, there'll be other machines brought in through the year to support that, but plenty of capacity within the facility itself.

18:48 And then the final 3% of FY twenty twenty four revenue that's transitioned into more of a service charge rather than kids. So protects the margin, but that just completes the full 100% of the transfer. And as I said, full rate in FY 2025, the current production rates being forecasted, we're looking at $16,700,000 of sales from that large customer in The U. S. Facility. So good progress, huge effort through the year for the whole team. And it's really pleasing to see a completely new site in a new part of the world operating to the VELOCITY processes and procedures. And so looking forward in terms of our focus through this year, clearly completing that project still becomes and maintains full priority in terms of making sure that whole transfer completes, working with the customer, the OEM and the VELOSITES team to ensure that happens.

19:55 And also, as Andrew said, some of those inflation lags as contracts renew gives us chance to update those with more later more recent thinking around things that need to be within those in terms of examples like labor inflation, energy inflation, exchange rates, those sort of things. So again, getting that completed this year in terms of commercial aspects of existing business.

20:26 Thankfully, we benefited from Andrew's experience since July this year on an interim basis, but we've done a lot of work in terms of identifying a full time CFO with a lot of experience including our name and we look to be able to update people shortly on that. And then really as we talked previously through the year, continued focus on top of the existing business, our new business. So we've spoken previously about more business with existing customers in Europe and then also the winning of new business in new customers in The U. S, which continues and continues at the pace. So really with FY 2024, that revenue of at least $27,000,000 will be updated and will be higher with any new business wins.

21:26 And really, again, just looking at another significant increase on FY twenty twenty three revenues in FY twenty twenty four and building that momentum as the industry grows back.

21:42 Summary, are you So sure to take the again, key points, 37% growth this year, which only includes a couple of million in The U. S. Facilities stood up. 65% of the programs have been transferred over and qualified, and that will lead to the $27,000,000 that we're forecasting for this year, dollars 33,000,000 for the current business that we already have for 2025. The some of the the fundraise we have just used to temporarily pay down our working capital facilities because no point paying interest and having cash on the balance sheet. And I will cover that in a minute, I think from the questions.

22:38 But I think someone has spotted that the cash is less than the 6,000,000 that we raised.

22:46 And we'll come back to that how we've utilized that cash. But mostly it's still available for use and it's being used now for expansion in the current year and next year. And overall, we believe that we have a very solid next two years of underlying base growth, doubling the business again by the end of 'twenty five without winning any more new business. So I'd like to thank you for listening to our prepared presentation. And the next stage is that we're going to move on to look at the Q and A and answer those. Andy, John, Andrew, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd 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.

23:49 As you can see, we have received a number of questions throughout today's presentation, and thank you to all investors for submitting their questions. John, could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. I'll that. First question is simply asking what confidence do we have in the 30,000,000 to $36,000,000 revenue guidance and achieving profitability and what the visibility is on that, some variables. So just to repeat, and it may now be answered to from the the presentation, the 30 to 36 is the full rate value of our current business that we already have. So the only challenge we have is the transfer of that business from GKN.

24:39 We don't expect demand in The UK or The US to fall from the current expectations. And the long term prediction for those contracts is the demand for them will continue to increase for the different programs that we are working on with our customers. So we're pretty confident that that is the current level of demand for the current level of business that we have and applying the margin that we believe that that can generate, which is at least 25%, that that should deliver a sustainable level of profitability and also cash flow. So we're aiming to be cash neutral to positive from now on even though we're growing at this rate. So hopefully that covers that first question.

25:41 In terms of risks, by the way, and I think we've mentioned this, FX, obviously, noise change things, though our risk is the dollar and that is a strong currency. And the other thing is, I guess, a major event of some kind like we saw with COVID in the past. The next question, which I'm going to, just cover here, yeah, is that, someone has said that they're surprised about that we have exhausted already our cash that we raised last year. Now, we are in a net cash position, and, net of debt.

26:31 We have paid some of that debt off and we've also paid down our revolving credit facility in The UK, which we can redraw, which is worth 3,000,000 as well as we have facilities in The States as well. So though the amount of cash on the balance sheet looks a lot less than what we raised, that's because, as I said before, we've paid down some debt both year on year and from the half year to if you look at the half year position to the full year position. And that's really just leaving our powders dry. And clearly, can redraw that revolving credit facility when we want, but there's no point incurring fees at the moment. And the return on interest for the money just sat in the bank is less than paying down these flexible working capital facilities.

27:31 So that's where we are with that. And we also expect to be cash generative. So yes, we put some of that money to work upfront in working capital in other areas. I think we've bought forward a bit of materials, which saves us some money in the second half of the year, and all that comes back into the bank accounts in that second half. The next question we've had is just a prospect for second customer for the Alabama facility. We have mentioned a few things in the RNS. So John, do you want to just give a little bit more about obviously, restricted on in NDAs and other areas on what we can actually say at the moment? Yes.

28:20 I think we've covered previously, but we want to make sure that we're working with other customers close to that facility. And so what we're doing really is focusing on customers nearby, one of which is progressed into full and detailed bids under an MOU, and that is is is is progressing well. And then the second, third customer, if you like, from potential customer from that facility is just about getting to the point where we have all the information to to release a bid. But against different scales, these are the large larger opportunities compared to perhaps what we've done in Europe and we want to make sure that they're right and they're a full TCO business case. So it's not just a case of firing in pricing.

29:19 These are detailed and post collaborative bids where we've understood the current state and worked through a detailed future state with the customers. Yeah. And just to this one else has elaborated on that asking about the same question and then also picked up on can these contracts roll over, John, maybe explain that like the current big contract in The States is five years, but you'd expect that why you'd expect that just to roll over and also that facility has expectations to grow, doesn't it? Yes, so full contracts have provisions in them for normalized rollover, if you like, because the nature of the work is that the supply needs to continue and you can sort with the regulated transfer process, there's no room for sort of unplanned change.

30:14 So I mean, looking at all our existing contracts, they've all rolled over in at least once, some of them multiple times. And that's really what we're saying in terms of the sort of one customer that's we get to roll over and get those new provisions in there for inflation. So yeah, the expectation always is, it has to be a rollover or a very long and detailed handover process. And the start of the next rollover has to take into account material lead times as well. So we often start negotiating the sort of rollovers a year, eight, nine months before the contract is due to end. Yeah.

31:01 So we've got a series of customers which came from The UK, which are global. And clearly, we continue to explore additional business or additional facilities with them. And then we have a number, several very, very large U. S. Concentric customers, which are as large or larger than any of our current customers, naturally U. S. Being the biggest market for composite aerospace, and they're the ones that we're mentioning either under a memorandum of understanding or working on a business plan with. For them to for all our current customers and the two we're talking about to outsource everything they've got, you're talking, you know, hundreds of millions a year.

31:57 So we have enough within our sites based on our current customers globally and several new customers that we're in detailed discussions and negotiations with to make this a very significantly larger business than it is today. And I think that answers a couple of the other questions around business development. One person in particular said, well, how do we forecast our revenues? So the current revenues we're forecasting are contracted based on current production, but many of those programs are forecasted to increase in size, plus a lot of our deals that we strike now are looking to say we will take over everything from that facility.

32:45 So if that facility wins new business, we win the new business as well, plus as well as the forecast increase in demand, which will come through the current contracts based on program demand for different platforms long term, these new customers that we're working on give us a wider portfolio of opportunity long term for growth. So the biggest single driver at the moment is winning new business, but the long term driver is the trends in the industry around the use of composites with us having the underpin of these long term relationships and contracts. And that covers about two or three other questions that came through.

33:32 Someone's asked about inflation, and we're moving all customers to a contracted inflation adjustment that would happen once a year for main for nonmaterial areas, so labor and energy and other areas and Interest rates. Interest rates. Interest rates as well. And then for material costs, John, how regularly do they correct? They're normally done annually as well, but they are and always have been contracted because the material flows through, the material pricing, sorry, flows through us. So we always have the ability that should a material price change, it's all single source, it's all innovated supply, that price change flows through us to our customers and that's pretty well established from day one. I think with the recent inflation issues and particularly with them all happening simultaneously, that's something that we've got into contracts as they renew to ensure that there's sort of fair and equitable protection there in terms of managing those costs.

34:48 Some of that's noted on the going concern statement that it says that we would, in some months, potentially use our invoice discounting facilities. Andrew, do you want to elaborate on that in terms of where is it every month or is it just sort of as we grow and then we generate the cash and pay that back? I think the use of the idea is very much short term at the moment. If we need to use it, it'll be over the next few months as we the volume start to increase. As John mentioned, we're going through this final FIA process. So the revenues are going to increase into the spring. And when we get into that stage, then we start to generate cash.

35:34 So it's very much as I see it short term usage at the moment, but the facility is there if we're looking for some additional expansion. We built into the forecast the CapEx requirements to complete the build out of the Alabama facility with additional cutting machines. As George mentioned earlier, we've got capacity to get up to six in there. I I think we're planning to move from three to five over the next twelve months, which will provide with substantial opportunity for second customer and third customer volumes to go into that plant. Brilliant. Because that's the second part of the question, which I was going to put to you, which was do we then have you built in or do we have the money to pay for the CapEx if you're using it for working capital? And your answer is yes, we do. You've built when you're looking at that expansion plan of the current facilities, you've built in quite significant CapEx to bring onboard a second or third customer through our current facilities is what you're saying?

36:41 Correct. Yes. Brilliant. Yes. Someone I mean, someone's just asked a question about, obviously, the industry is very long term in new aircraft. And does that mean that we are most we're being speculative on our growth opportunities. And again, I'd just repeat, our growth forecasts and opportunities are about current programs, are already on the slate and doing more of those from our current customers or a couple of new customers. We do believe long term that there will be other programs, other aircraft, and they will have more composite content.

37:28 That isn't in our forecast. That's something that's an upside for the company over a longer period of time. But that's not so we're not being speculative in what we're forecasting going forward in terms of new programs in the sense of a new aircraft. Yeah. And I think it's just worth covering now in terms of military because I think I think David D has asked the question as well there. Military pretty much is all composite already just because from a performance point of view. With civil, we saw from some of the previous slides and the appendix slides, there's already been a transition for the twin aisle long range aircraft.

38:13 And then clearly as single aisle platforms are replaced, again, there'll be a large focus on composite structure. Even if you look at something like 777 that's just coming through its midlife update, they've taken that opportunity with the 777X to put a composite wing on an existing platform. So I think everything we're hearing and the industry is saying that composites is where it's at in terms of performance both clearly military where cost is less of an option, but also in civil where it's all about performance and efficiency. And then linked to that is the sort of transition of propulsion as well. We're seeing a lot more discussion and research and development around alternative to standard kerosene aviation fuel. So you've got electrification at one end, hydrogen in the middle and sustainable fuels at the long range. So I think all that points to aircraft needing to be more efficient, needing to go further on less fuel, whatever that fuel may be.

39:24 Right. Well, that's all the questions that we've been asked. Some cut across each other. Hopefully, we've covered those and maybe just some of those questions that, as Andrew explained, yes, we are using up some cash at the moment, but we will then start to generate cash in the second half of the year. Yes, we have built in the CapEx requirements to further expand our facilities to meet, hopefully, additional demand and new customers in the current facilities. The forecasts are based on our contracted revenues, which our customers already have the business for.

40:11 And I think we've achieved a great deal in terms of setting up our largest facility or it will be our large facility in The States remotely in a highly regulated market. And I would express that this gives us a huge moat. There's no one else doing what we're doing. There's a great demand for the efficiencies and the services that we provide. And we have some very large major new customer opportunities. And we simp they simply wouldn't be talking to us if they didn't see us as a credible business. So we believe that we have in the last twelve to twenty four months created a very significant asset, which has superb growth opportunities.

41:02 The fundraise really helps ensure a nail down that we can move into profitability, which clearly is important from a credibility point of view with investors. And just to remind people, we are ourselves investors in this business. John is the largest shareholder. I bought in myself. And all the management actually sacrificed voluntarily 20% of their base pay in exchange for equity each year. They don't have to do that. It's not extra to their normal pay. There is an LTIP, like all companies do have that's separate to that on incentives and targets, but that is something that people feel they're prepared to do because they really believe in the long term value of the business. And I'm not sure if if there are any other companies even on the aim, where all the management actually do that on a voluntary basis, which I think speaks volumes of where we believe this company will go to in the next two to three years, let alone five to ten.

42:16 So thank you all for listening today. We're always open for questions, and we have organized a number of shareholder visits over the last year, and we'll continue to have the open door policy and support for smaller shareholders as much as larger institutional ones. So thanks again. Thank you, John. Thank you, Andrew, for all your support over the last six months as well, stepping in, doing a fantastic job, and we're very confident we should be able to onboard a new full time CFO, which is very experienced, both in manufacturing and the AIM. Andy, John, Andrew, thank you very much for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

43:12 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 VELOSITES PLC, we'd like to thank you for attending today's presentation, and good morning to you all.