Production, Capacity and Trading Update

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

3 April 2023

Surface Transforms plc

("Surface Transforms" or "the Company")

Production, Capacity, and Trading Update

Surface Transforms plc (AIM:SCE) manufacturer of carbon fibre reinforced ceramic automotive brake discs provides the following update on previously reported technical issues, capacity installation, first quarter sales and its outlook for 2023.

Resolution of production technical problems

The Company is pleased to inform shareholders that the production issues (previously reported on 11 January 2023) have now been resolved. There are more than twenty complex production steps in the overall production process and all sub-processes are now achieving their individual Q1 2023 daily production targets.

As previously reported, one furnace issue in particular, significantly affected output over the past six months, exacerbated by industry-wide supply chain problems for furnace insulation. The Company has subsequently made changes to that process in Q1 2023, including, but not limited to, use of more readily available materials. These changes were successful, and that sub process has now run, at target rates, for over a month. This was the last major impediment to meeting ongoing daily customer requirements.

Progress with capacity increase

Over the last 18 months the Company has been installing capacity to support contracted sales from £2m p.a. in 2020, to over £30m p.a. in 2024. Installation of this capacity increase is on track, with installed revenue capacity of £50m p.a. in place by September 2023.

This increased capacity will be sufficient to meet Surface Transforms' growing customer demand for at least the next  18 months.  This additional capacity also being required to provide resilience, "catch-up", capacity if any further technical problems were to arise. The lack of this resilience, preventing the Company catching up lost production, has compounded the technical problems over the past six months.

Q1 Trading Update

The  production issues that negatively affected turnover, production costs  and operating loss for the financial year ended 31 December 2022 ("FY 2022") continued into Q1 2023. As a result January and February production volumes were lower and scrap costs were higher than planned. Cautious March loading rates have resulted in Q1 2023 sales being £1.4m, and the quarter loss making. Although the furnaces were trouble free in March, the Company initially adopted a low risk strategy on individual furnace loading. Therefore the overall total output for the month of March did not fully reflect the underlying dramatic improvement in yield and furnace availability achieved across the month.

Outlook for 2023

The technical issues are now resolved, and demand remains strong. We are now ahead of the run rates required in Q1 and the Board remains confident that the Company will be profitable in Q2 2023 and thereafter. However, given the issues experienced in Q1 2023, and the ongoing production ramp in Q2, our overall profitability during FY 2023 is expected to be below market expectations.

While the Company and its supply chain will have the capacity to over produce against the original planned H2 2023 production, our OEM customers and their supply chains have their own constraints. Accordingly,  it is premature to assume that these delayed sales will all be caught up in the year. Customer discussions are continuing, and we will update the market as appropriate in due course.

Accordingly the Board is planning its cash needs on the prudent assumption that delayed Q1 sales are not recovered in the short term.  Despite this, the Company will have sufficient cash to continue its extensive three year capital expenditure programme and working capital required as sales increase through the year. 

Notice of Results

The Company will be reporting its results for FY 2022 on 17 April 2023. The Company will also provide the opportunity to hear from, and ask questions of, the Chief Executive on both this announcement and the full results for FY 2022 on a webinar to be hosted by Hardman and Co on Friday 21 April. Shareholders who wish to join this webinar should follow the link:

https://us06web.zoom.us/webinar/register/WN_dGojxPYZQ6yAebGhfx3eow

The Company will provide an update on its Q2 2023 sales on or about the time of its Annual General Meeting, currently expected 27 June 2023.

Kevin Johnson CEO said: "We regard the progress made on resolving all the production technical issues to have been a major strategic breakthrough for Surface Transforms. In combination with the progressive implementation of the capacity increase, we are now confident of the timing of ongoing profitability. In our cash flow forecasting we have assumed that the shortfall in the first half of 2023 cannot be recovered in the second half.  But even with this, hopefully prudent, assumption we are still expecting to have the cash to maintain the momentum of our three year capacity installation programme, and to fund our 2023 working capital need.

During the strains of recent months, we are particularly pleased that our customers have understood the issues we have been facing, noted the progress and have continued constructive discussions on future programmes.. The expectation of both parties, throughout this period, has been that we would fix the problems, which we have now done and install the capacity, which we are doing. Our order book (£290m) and prospective contract pipeline (£300m) are unchanged."

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 About Surface Transforms

Surface Transforms plc. (AIM:SCE) develop and produce carbon‐ceramic material automotive brake discs. The Company is the UK's only manufacturer of carbon‐ceramic brake discs, and only one of two mainstream carbon ceramic brake disc companies in the world, serving customers that include major OEMs in the global automotive markets.

The Company utilises its proprietary next generation Carbon Ceramic Technology to create lightweight brake discs for high‐performance road and track applications for both internal combustion engine and electric vehicles. While competitor carbon‐ceramic brake discs use discontinuous chopped carbon fibre, Surface Transforms interweaves continuous carbon fibre to form a 3D matrix, producing a stronger and more durable product with improved heat conductivity compared to competitor products; this reduces the brake system operating temperature, resulting in lighter and longer life components with superior brake performance. These benefits are in addition to the benefits of all carbon‐ceramic brake discs vs. iron brake discs: weight savings of up to 70%, longer product life, consistent performance, reduced brake pad dust and corrosion free.

For additional information please visit www.surfacetransforms.com