Disc brakes specialist wins £100m order at expense of its main competitor

Surface Transforms

Surface Transforms, the Knowsley-based specialist high performance brakes manufacturer, has been awarded a £100m contract by an automotive client.

The group makes brakes for high performance cars and jet aircraft.

It said the £100m deal to provide a carbon ceramic brake disc for the client, previously described as “OEM 10”, is the single largest contract awarded to date.

But, it said, it crucially sees Surface Transforms discs replacing those historically provided by its main competitor.

OEM 10, based in the US, is one of the world’s largest automotive companies. This new contract is the second contract with this customer and Surface Transforms will be the standard fit, sole supplier of the carbon ceramic brake disc on two model variants covering front and rear axles.

The lifetime revenue on this contract is estimated to be in excess of £100m over six years. The customer is currently estimating a start of production (SOP) date in 2024.

For prudence, the company said it anticipates series production revenues will commence in the first half of 2025. Sales from this contract award are expected to be approximately £20m pa, tailing off in the later years.

The current variant of this contracted model is already fitted with carbon ceramic discs provided by a competitor. The customer’s decision to replace the incumbent with Surface Transform’s discs followed a searching technical evaluation.

The contract award raises the company’s lifetime contract value to £290m, across 11 contracted models, with an average contract life of five years.

In a trading update this morning, the company further said sales for fiscal year 2022 will be lower than previously forecast at approximately £6.5m.

This has primarily been caused by technical issues at OEM 8 unrelated to its discs, which delayed the production ramp following the customer’s SOP and was more prolonged than the company originally anticipated.

The company said this is clearly disappointing, but notes that the total OEM 8 contract value remains unchanged at £100m, and the impact is that the timing of the lifetime programme has started a few months later than originally planned and, unless caught up in the meantime, will eventually finish, a few months later than originally planned.

Surface Transforms said it has also had its own production challenges, now materially rectified, and while they were neither the reason for the ramp up delay, nor the bulk of the sales shortfall, have limited its ability to build a finished stock buffer.

Given capacity constraints, it has meant that the company could not offer OEM 8 more than its previous commitments until the new £50m pa plant comes on stream in the second quarter of 2023.

The company expects that profit and cash will be around £3m less than previously guided. As OEM 8 volumes have now resumed, the board anticipates that the company will be profitable in November and December 2022.

Deliveries of the Phase 2 equipment that will raise capacity to £50m have continued. There are some project delays associated with supplier supply chain problems, notably electronic components and graphite. However, these are broadly covered by project timing contingencies, and the company still expects the planned Phase 2 doubling in capacity to be operational in Q2 2023.

Planning and supplier discussions on the Phase 3.1 capacity increase to £75m pa by mid-2024 and £150m pa by end 2026 continues apace.

The increase in capacity as a result of Phase 2 and Phase 3.1, ahead of order requirements, will be a major contributor to building spare capacity and increasing the company’s resilience against any future SOP delays.

Looking ahead, while the customer and all its suppliers want to swiftly catch up the current delay, each supplier, including Surface Transforms, has their own supply constraints, and it is, therefore, premature to forecast increases beyond the previously agreed ramp. The new agreed schedules are consistent with previous plans and so the company is not changing its guidance for 2023. The company will be profitable in that period.

Chief executive, Kevin Johnson, said: “The OEM 10 contract is an extremely significant strategic win, achieved against vigorous technical competition. Moreover, it underpins the key message of our recent fund raise on the need to be installing capacity in advance of contract wins, thereby giving confidence to our customers of our ability to supply. We greatly enjoy working with OEM 10 and look forward to a developing relationship.

“However, the separate combination of customer SOP delays and our own challenges is frustrating. The general issue of delays in both SOP and the subsequent production ramp has been previously reported and was the reason for the substantial increase in timing contingencies included in the recent fundraising guidance.

“Our spare capacity will be an even greater requirement as our order book grows and, therefore, reaching £50m capacity in Q2 2023 and £75m capacity in 2024 will be major contributors to building and ensuring customer and shareholder satisfaction.”