Surface Transforms plc (LON:SCE) Chairman David Bundred caught up with DirectorsTalk to discuss the radio silence, the recent RNS, OEM names, contracts & testing, their new factory, aerospace light aircraft, cash balance and the breakthrough for Surface Transforms
Q1: I see on the blogs and forums that a number of shareholders have been worried about the radio silence from Surface Transforms over the past few months, what are your thoughts on that David?
A1: Yes, I’m aware of that, in fact some of them have even rung me to ask me why we’re not on the air all the time. The issue for us is getting the balance right between keeping shareholders up to date, we could issue a weekly bulletin of things going on every week, without the contrasting position of getting a reputation of being a company that does news flow just for the sake of news flow. We completely understand that news flow drives price movement but news flow is a precious commodity and so we say things when want to say them, when we need to say them. More importantly and I say this to the people who ring me, if we had bad news or if nothing was happening we’d be obligated to announce it anyway, they’re the rules, so what I say to those that ring me is stop worrying, just because we’re not saying anything doesn’t mean to say nothing’s happening, in fact there’s quite a lot happening. Either way, whether we were right or wrong, we have now issued a fairly comprehensive RNS which I hope has answered a lot of the questions and has got a lot of update information in it.
Q2: It was earlier this week that you put the RNS out, what were the key highlights there?
A2: The key highlight, singular, is that Surface Transforms are on track doing what we said we’d do. Trading is in line with expectations, driven by 55% increase in near OEM sales and a 25% increase in retrofit, more importantly our discussions with the game-changing OEM’s are going well and finally the new factory move and capacity expansion is well underway.
Q3: Now, game-changers, there’s still no names there, why is that?
A3: Yes, that frustrates the managers, the executives, the Board, it frustrates us more than it frustrates the shareholders. Firstly, it’s not a serious commercial issue in the sense that it doesn’t make any difference to the programme and the issue of why we can’t name them is not with the people we deal, the customers, engineering and purchasing, they’ve told us they’d be happy to be in the public domain. It’s about the issues with the car company’s product planning and marketing department and the best example I can give is we were told by one car company that linking our name to theirs at this stage of the development cycle would simply lead to a load of follow-on questions on weight breaking performance, even engine size, which they don’t yet want to answer. So in summary for them it’s a marketing decision, not an engineering/purchasing decision and that’s simply why we’re not allowed to name them.
Q4: We don’t seem to have any firm contracts with the OEM as yet either, when can we expect news on that?
A4: Yes, of course the sooner we get these contracts the better for all of us, part of the time it takes is the point I’ve just made, it’s partially driven by the marketing people who don’t want to make announcements. We are still confident, our test schedules are not just general rig test schedules, we know which model we’re targeting and we’re testing on those target models and generally, not always but generally, we are the only component being tested. These days, in practice, what happens is the OEM’s do their component selection very very early on and they just test with that and it’s to do with their engineering resource, they don’t want to duplicate the engineering so not to beat around the point, our customers are getting close to the engineering point of no return on contract award but yes, it’s frustrating that we haven’t yet had those contracts.
Q5: How is OEM testing going?
A5: Well, picking up on the last point, there’s no disasters, the models are still due to be launched, right now there’s no slippage on the stock in production dates so we’re on track. I don’t want to mislead shareholders here, all engineering component testing is never a straight line, issues arise and we deal with them for example, don’t forget a lot of testing is about trying to break products, literally break them, destroy them, sometimes they break where and when you expect, sometimes they don’t but there’s always a rational explanation which you deal with so we’re getting on with it.
Q6: Now you mentioned earlier about Surface Transforms’ new factory, how is that coming along?
A6: Very very well, very pleased with that, we’ve signed the lease, ordered the plant and we’ll start dis-assembling the Ellesmere Port furnaces in August. So we’ll be out of Ellesmere Port on plan February 2017, the orders for the new equipment have been given to the suppliers at the budget price in the fundraising, of course our shareholders would expect no less than this good housekeeping from us, it’s all going well.
Q7: There’s been little or no news on the aerospace light aircraft, should we be concerned about this?
A7: I did mention this in the RNS, firstly and most importantly the key military aircraft is on plan, is expected to be fully signed off by the aircraft manufacturer and the US Navy Air Force in the next year. As I said in the RNS, frankly not much is happening on the light aircraft project, entirely attributable to resource constraints within our customer, it’s his priority and he’s just chosen not to prioritise it. It’s a bit disappointing, it’s a pity but we never said we’d get all five automotive contracts, all seven, something was going to fall away and I think the thing that has fallen away is the light aircraft.
Q8: Talking about the big picture, how is the cash balance looking?
A8: Well, we’ve the £5.5 million cash fundraising which was £5.9 million with debt equity conversion, that’s helped just a bit and by the way, my thanks to those long term and new shareholders for their participation in this successful fundraising. So we’re in good shape on cash, our year-end cash as I’ve said in the RNS was £4.8 million and that’s after paying the bulk of the typical 30% deposits we pay on our permits capex and of course without, as yet, receiving the grant associated with that capex or the R&D grant. So we’re in good shape and all our cash projections show head room on current projections.
Q9: Finally then, I expect investors really want to know when we can see a breakthrough for Surface Transforms?
A9: Yes, that’s the question everybody keeps asking me, there’s two parts to that question, cash breakeven and it’s what I call explosive sales growth, although 25% of 55% isn’t bad.
When we see the breakthrough on cash, in respect to reliable ongoing month after month cash breakeven, we’ve occasionally broken even on cash the odd quarter, the odd month, the odd 6-month but ongoing the catalyst will be the aerospace military contract. During the fundraising we reminded existing and new shareholders the significance of this £1.2 million aerospace contract and reminded everybody it will be the first OEM contract in the monthly reliable production in Q1 2018. As a reminder, our cash breakeven point has risen a bit actually, we used to talk about our cash breakeven point being £1.7 million, which a lot of shareholders will remember, it’s now north of £2 million with the new factory and extra engineers and what not. Against this breakeven point, our current ongoing true reliable sales, our sales last year £1.4 million but I’m knocking off seasonal spot sales and unreliable or what we regard as unreliable, race car sales, our sales are north of £1 million therefore if we take the core sales, the reliable sales, and add on that £1.2 million we’ll be north of £2 million when we go to production in Q1 2018. That’s 18 months from now and to repeat the point, both our cash balances show significant head room through this 18 months final lap so in summary, we’ll be cash breakeven in Q1 2018.
Let me just go on to sales as there’s two parts to that question. The part about sales growth, we talked about the first five automotive contracts in the RNS having sales volume on maturity of between £15-20 million, in fact if anything our projections are currently better than this, the RNS notes that the German sports car manufacturer is talking about testing on a higher volume than we’d previously discussed. The RNS describes the sales start of production date and you can see there the growth really takes off in 2018/2019 financial year, that’s roughly 2 years from now so in summary we’re nearly there, it’s been a marathon but we’re now inside the stadium.
