Podcast: Surface Transforms – Site Visit and CEO Interview

Robin Byde

So firstly, can you provide us with an update on operations and capacity? And just to say, we’ve seen today that you’ve installed significant new equipment and you’ve expanded the workforce considerably, but also you have suffered some teething problems recently with the ramp up in manufacturing.

Dr Kevin Johnson

Well, like I said in the introduction, you know, when you’re introducing new cutting-edge technology and is breaking new ground, there’s always challenges along the way. And this year has been no different. We’ve been focused this year on our manufacturing ramp up, and there have been some issues along the way and some teething problems.

It’s worth just recapping, I think, and in quarter one this year we had some technical issues with our processing and those have been resolved and that allowed us to move on and progress in the quarter to where we did have some teething problems, as you’ve mentioned, with new equipment.

We’ve been getting over those teething problems on a daily basis. This has resulted in an improved output and in June, and I’m pleased to say that has continued right through to July. We continue to operate very close to our current capacity of £20 million per annum and therefore there is a need to add more equipment and more capacity in the near-term not only to provide resilience but also support the demand coming through for 2024.

Now, we ordered this new capacity about 18 months ago and it has been delivered through that period. And the final piece of that puzzle is coming through this year that will take us up to about £50 million annualised capacity, and that will certainly give us the resilience we’re looking for in the near term and will support the demand in 2024 all this is being achieved by the fantastic efforts of our team.

The team has grown significantly and the new team members are integrating well and they are as excited about the future of the company as we are. We recognise there is a lot to do and I’m very pleased to inform everyone and remind everyone that I’ve got a new COO and new CFO joining in September to support the growth of the business over the coming years.

Robin Byde

Thank you, Kevin. And then moving on to talk about your customers. What are they saying about demand for your product at the moment?

Dr Kevin Johnson

Well, the current contract demand is unchanged and it remains very strong. And frankly, the message from our customers is that is to drive us to deliver on those contract demands. Through 2023 as we’re doing, and for 2024 and 2025.

Now in terms of future contracts, for our perspective contract pipeline (PCP), those discussions go on all the time and they’re ongoing. But we do anticipate making future announcements during the rest of this year.

Now, thinking about a longer-term view from the customers is quite interesting because the automotive market is going through a transition and really that’s being driven by to meet the needs of EVs and also some environmental regulations on particulate pollution. Now EVs are pushing the demand of brakes beyond the traditional iron break with EVs weighing, more than the internal combustion engine vehicles.

The need for lightweight technology for the future is increasing. Ceramics that are natural fit. They are capable of addressing EV braking demands and significantly reduce weight.

So again, that question about where the future of ceramic goes is wider than just what we’re addressing now and into the next few years.

Robin Byde

Thank you, Kevin. And then moving on to talk about your customers. What are they saying about demand for your product at the moment?

Dr Kevin Johnson

Well, the current contract demand is unchanged and it remains very strong. And frankly, the message from our customers is that is to drive us to deliver on those contract demands. Through 2023 as we’re doing, and it’s to 2024 and as I mentioned, 2025.

Now in terms of future contracts, from our perspective, contract pipeline, those discussions go on all the time and they’re ongoing. But we do anticipate making future announcements during the rest of this year.

Now, thinking about a longer term views from the customers is quite interesting because the automotive market is going through a transition and really that’s being driven by to meet the needs of EVs and also some environmental regulations on particular pollution. Now EVs are pushing the demand of breaks beyond the traditional iron break with EVs weighing, more than the combustion engine vehicles.

The need for lightweight technology for the future is increasing. Ceramics that are natural fit. They are capable of addressing the EV braking demands and significantly reduced rate.

And then you can answer this that they also address the need for brakes on cars where they need to reduce their emissions by 2025.

So again, that question about where the future of ceramic goes is wider than just what we’re addressing now and into the next few years.

Robin Byde

And what are you seeing in terms of the competition? You have a potent competitor with Brembo SGL. Are you seeing others emerging? And are you seeing significant pricing pressure at the moment?

Dr Kevin Johnson

Well, you’re right. I mean, this industry’s been almost a monopoly for a number of years until we broke through. And I think that the lack of competition with Brembo SGL has constrained the ceramic brake market. Now that we’ve broken we’ve been able to win new business, and open new markets.

And in tandem with that, we’re also able to win business from our competitor. And we’ve been seeing that more and more as we’ve been going forward.

With the capacity constraint backdrop, price has not been the issue for our customers or price pressure. Customers are focused on quality, capacity and the right product, and that’s where we sit very well.

Now, if I think about the emerging market and emerging new entrants, I am aware of a small number of tech companies that are challenging. But frankly, they’ll need to do what we’ve been doing for the last 10 to 15 years. And there’s a hell of a barrier to entry there.

I’m sure they will get through. But it will take time. And so we’ve got plenty of time to work to that.

Robin Byde

And then finally, you have some big expansion plans. Can you update us on your progress with that program?

Dr Kevin Johnson

You’ve heard me already talk about 2024 and 2025, and that really takes us to the capacity that we have for the footprint we have here in Liverpool today. But there’s more to be done and there’s more requirement beyond 2025.

We’ve already been working on this for some time and arguably we’ve been late with sort of explaining where we are, but we’re getting very close to being at a point now where we know exactly how our expansion is going to go.

We are going to expand here in the local area, first of all, and that’s a debate we’ve been having for some time about whether we do it here or somewhere else.

But first, for first things first, let’s get our technology ramp up right and then we can replicate that on our site in Liverpool. And then from there and that’ll be done. We expect to be able to make some announcements on that again within this year.

And then really the question will be about how do we go from there beyond 2026 to 2027?

And that’s a question I don’t have an answer to yet, but it’s an interesting one to address.

Robin Byde

Thank you, Kevin. Very interesting as ever. And would you like to make any final remarks?

Dr Kevin Johnson

Well, I would just like to talk about the overall summary of our proposition. We live in an ever changing automotive market. You know, I’ve talked about EVs, I’ve talked about the improvements we can bring with pollution and the environment with weight savings.

And I’ve not even mentioned the cost of ownership. All these things are stressing the incumbent technology of iron discs, and that’s where ceramics come in. So ceramics really support the market drivers, we are differentiated as a ceramic producer.

We have a market leading world leading product which is recognised by the best car manufacturers in the world today.

And we have contracts to back that up in an addressable market of £2 billion.

So, we’re really about building a resilient growing business with valuable lifetime contracts. And we have significant expansion opportunities of our existing customer base with a prospective contract pipeline. And not to mention that these are all those priced secured and with strong margins. So, we think we’re a really exciting opportunity for the future.

Robin Byde

Thanks again, Kevin. That was very interesting. And, for investors listening in, you can find our research on Surface Transforms by searching the Zeus Capital Research Portal.

Thank you.