Surface Transforms upbeat on recent contract activity

Surface Transforms has been selected as the tier two carbon ceramic brake disc supplier on a new car to an existing British original equipment manufacturer (OEM) customer, it announced on Friday.

The AIM-traded firm said it had also concluded a commercial settlement on the existing contract with that OEM - referred to as ‘OEM 6’ - in respect to the delay to start of production of the original car in the contract.

It said it had also been nominated by its long-standing customer Koenigsegg as a tier one supplier on the Jesko car, that would replace the existing Regera car.

The board said the new contract award by OEM 6 was for a limited edition car to be produced over three years, with start of production towards the end of the 2021 calendar year.

It said the car was announced at the 2019 Geneva Motor Show, with the Surface Transforms board estimating the contract would generate lifetime revenues of £6m, excluding spares, to the company.

Separately, and in recognition of the delays to the start of production of the original car in the first contract, OEM 6 had agreed to pay Surface Transforms around £0.3m cash relating to the direct costs on discs that had been partially completed prior to notification of the delay to the start of production.

Surface Transforms said that while that added £0.3m to near-term cash, it would not impact the gross margin quantum expected in the 2020 financial year.

It said the margin, which was unchanged over the life of the contract, would be received in line with recent guidance on the new production delivery schedule.

That existing contract was still expected to generate revenues to the company of around £2m over two years, starting in the 2020 calendar year.

“These two contracts provide an order book of circa £8m with OEM 6 over the next five years, and discussions continue regarding other future models with significantly higher anticipated production volumes,” the Surface Transforms board said in its statement.

The company’s second new contract was with Koenigsegg - another existing Surface Transforms customer - for their new 300 mph supercar also launched at the recent Geneva Motor Show - the ‘Jesko’.

It said the Jesko replaced the Regera model, with an expected start of production in autumn 2020.

Surface Transforms would be the tier 1 supplier for the carbon ceramic brake disc, with annual revenues of around £0.3m.

Similarly to OEM 6, discussions regarding future models that would add volume rather than replace existing revenues remained ongoing.

Finally, the board said discussions with Germany-based OEMs were ongoing, with “positive progress” being made.

It said it remained confident of announcing developments on ‘German OEM 5’ in the near future.

“This £6m lifetime sales contract award from OEM 6 is very good news and represents another crucial step in achieving Surface Transforms' profitability objectives,” said chief executive officer Kevin Johnson.

“Arguably of equal importance, however, is the strategic implications of these two contract awards - confirming that once we have a position with a customer, we can, in the case of OEM 6, grow from that base and, in the case of Koenigsegg, maintain that position as they change models.”

Johnson said that capability, reflecting both the customer's experience of the product and the company’s supply chain performance, would be “crucial” in becoming a “significant” automotive supplier as the firm further developed production relationships with the mainstream OEMs.

“In the near term we are also delighted that the commercial settlement on the programme delay has been amicably settled, the immediate cash injection of approximately £0.3m is a welcome addition to our cash headroom.

“Moreover we expect this announcement to be the start of further positive news flow, in the near term, as we look to conclude current discussions with German OEM 5.”