Surface Transforms plc (LON:SCE) has announced that it has been notified of its selection as a tier one supplier of a carbon ceramic brake disc on a vehicle by a global vehicle manufacturer – henceforth to be described by the Company as OEM 8.
Pursuant to this selection, Surface Transforms has signed a contract with OEM 8 specifying the agreed detailed pricing, volume, payment terms and other generic supply terms for the contracted model. The Company has also received an order for engineering samples required by OEM 8 to complete their homologation activity on this high performance car.
Specifically, the selection is for Surface Transforms to be the standard fit, sole supplier of the carbon ceramic brake disc on both axles of this car.
The lifetime revenue on this specific vehicle model contract, commencing in the summer of 2021, is estimated to be approximately £27.5m. In line with normal automotive practice, there are no minimum values in the contract. Forecast production volumes in the contract show a ramp up to full series volume commencing in 2021 with annual revenue being approximately £8m p.a. for the following three years. The contract currently covers series production to 2024 but may potentially be extended. The contract is priced in GBP.
Impact on capacity and cost base
Whilst the one-year period to start of production is shorter than historically seen, the Company has the capacity within its existing Small Volume Production Cell and OEM Production Cell One to fulfil this large contract, albeit with some accelerated timing of previously planned capital expenditure. The volumes set out in the OEM 8 contract, together with the “steady state” volumes of previously announced contracts with German OEM 5, British OEM 6, Koenigsegg, and other customers will fill circa 60% of total Surface Transforms installed capacity by December 2022.
In light of the above increase in contracted revenue, which more than double the previously projected contracted turnover in 2022 and, in the expectation of further contract awards, the Company will be increasing manufacturing support headcount adding approximately £0.5m, £1.3m and £2.0m p.a. in 2020, 2021 and 2022 respectively. This additional headcount will provide the necessary support infrastructure for all contracted sales and further prospective – but as yet uncontracted – sales pipeline.
Trading Update for 2020
Additionally, and independently of this contract award, the Company is pleased to announce that near OEM and retrofit sales have continued to grow, despite Covid-19. The Board now anticipate current FY20 revenues will be approximately £400k higher than market expectations with Group revenue for the year expected to increase to approximately £2.0m. This increased revenue will mitigate the working capital impact of additional overhead in FY20 following the Board’s decision to invest in the Company’s headcount.
Further contract announcements
The Company continues to expect to make further contract award announcements over the next six months.
Kevin Johnson, CEO commented: “This, truly game changing, award builds upon the recent trend of significant contract wins with mainstream automotive manufacturers. The award, which on its own, doubles previous revenue projections for FY22 and accelerates Surface Transforms’ transition into profitability and operational cash generation.
The Board is delighted with this award and want to particularly thank both our employees and the customer for their considerable efforts in concluding the work needed for nomination against the background of the Covid 19 pandemic and lockdown.
This is a very good day for Surface Transforms and we look forward to further extending our relationship with this major new customer and making further contract announcements with both OEM 8 and other, existing and new, customers.”