Surface Transforms plc (LON:SCE) Chief Executive Officer Kevin Johnson caught up with DirectorsTalk for an exclusive interview to discuss their recent OEM5 announcements, the importance of this news, how the relationship will develop in the future and what’s next for the company.
Q1: You’ve recently released a couple of announcements relating to a contract win with OEM5 during July and August, what’s been going on at Surface Transforms at the moment?
A1: Yes, we announced in July the selection of ST as the tier 1 supplier for carbon ceramic brake discs to OEM5 for a new model and then in August we followed that up with the announcement that OEM5 had signed a multi-year supply agreement for ST covering the next 10 years for both series supply and spares. The latter completes all the formalities, so that we are now contracted to supply for OEM5 in the future.
Q2: Who are OEM5 and why have they been working with ST?
A2: For commercial confidentiality we can’t name the customer so we use the term OEM5 to describe this customer internally. What I can say is that OEM5 are a well-known mainstream, German car manufacture.
Now, to explain why they are working with ST, of course OEM 5 like our product, acknowledge our technical superiority and their actions confirm that we are competitive but that’s not the biggest issue with them.
OEM5 are currently single sourced for carbon ceramic brake discs which puts significant risks on their supply chain and restricts the development of the market. Now, this situation is rare and almost unheard of in the automotive industry and what OEM5, and for that matter all other mainstream car manufacturers want, is to have an alternative supply for carbon ceramic brake discs. This is the reason why OEM5 has been working with ST over the last few years.
Q3: So, what did the two OEM5 announcements say?
A3: Well the short answer is that ST has achieved its strategic objective of winning a game-changing contract with a mainstream OEM.
The longer answer is that ST has received both a pricing agreement and signed multi-year supplier agreement from OEM5 and has therefore been selected by OEM5 as the supplier for a new edition of an existing well-known model.
This existing model already has carbon ceramic discs as an option on its main braking axle and we’re using this experience to forecast production volumes. We expect lifetime revenues for the company of approximately €12 million, and that’s excluding spares, and annual revenues estimated to be approximately €2 million per year, which then taper off in 2026.
The start of production is in 2021 with the multi-year supply agreement lasting 10 years until 2029 and these last few years are put into the agreement to allow us to supply spares after car production has stopped.
Q4: Why is this such important news though?
A4: There are a least four important reasons why it’s important news.
The first one is this first model with OEM5 builds on existing business with other customers, we have creating secure revenue streams for us which take the Company into positive EBITDA during 2021 and profitability in 2022.
The second reason is that OEM5 has achieved its strategic objective of approving an alternative supplier for carbon ceramic brake discs. They have reduced their supply risk, improved price competitiveness and can equip future model car launches with a superior product to its existing supplier.
Now, the third reason, ST parts will now be on OEM5 approved parts list and available for selection for future models, they tell us we are now in their ‘parts bin’. Following this, the two companies have embraced this concept of multiple models using ST product with pricing already agreed across a range of platforms with a defined link between increasing volumes and reduced product pricing. Of course, this already led to specific discussions on future potential, this potential here is enormous and it’s worth noting that it’s through these multi-models that we’re going to realise all of that value.
Finally, the fourth reason, ST’s expanding its reputation as the alternative source for carbon ceramic brake discs and it’s to the rest of the wider automotive market that this is relevant so we can support other OEMs who are keen to have an alternative supplier for carbon ceramic brake discs for their cars.
Q5: I think you just touched on this on the third reason but now that ST and OEM5 have formalised their relationship, how do you think this will develop in the future?
A5: I think it’s going to be very exciting period over the next 3-5 years as a series of new editions of OEM5’s portfolio of car models are launched. OEM5 has stated that the potential for further model awards will reflect their experience of ST’s supplier performance.
Now, using our experience across the company we’ve already demonstrated with customers like OEM6 and Koenigsegg, that our supplier performance leads to further contract wins and we intend to do the same with OEM5.
Putting ST discs on multiple OEM5 models will result in substantial revenue growth for the company over the coming years.
Q6: Where does Surface Transforms go from here?
A6: Well, firstly, delivering our current contract for Aston Martin’s Valkyrie through 2020 takes us to operating cash breakeven then as I look a little further, the start of production for OEM6’s new model and this OEM5 contract begin in 2021 and this will take us through to EBITDA positive, and further on from there, we become profitable in 2022.
Maintaining good supplier performance allows OEM5 to select ST for additional models over the coming years and we have a number of other OEMs also wanting to achieve similar outcomes like OEM5.
Inside the company, the key is going to be matching manufacturing capacity to the growing customer demand. We have new manufacturing capacity coming onstream in 2019 and 2020 with potential revenues of approximately £12 million per year, on top of our existing £4.5m capacity.
So, as we add further OEM contracts, installing additional capacity takes approximately 18 months. New contracts typically have a lead-time of 24 months but the two are compatible so we’re in good shape to make investment decisions on capacity as we required over the coming years.
It’s worth remembering that our factory in Liverpool has the footprint for multiple cells with the potential revenue of £50 million per year so we see this new OEM5 contract is the cornerstone to realising our ambition of filling our Liverpool factory and we hope others see that too.