Velocity Composites (LSE:VEL) — Interim Results

0:01 Good morning, and welcome to the VELOCITY COMPOSITS PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted any time via the Q and A tab situated in the right hand corner of your screen. Simply click Q and A, scroll to the bottom, type your question, and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Andy Beaton, non executive chairman. Good morning.

0:33 Good morning, everyone. Welcome to our half year results presentation. I'm here with John Bridges, our CEO and founder, and Chris Williams, our CFO. I'll just do a short summary at the start. And at the end, John is going to discuss, as well as the our developments around our technology and sales, a little bit of a deep dive into the market and demonstrate, using some third party analysis, how the opportunities are now very significant for VELOSITI And with the key points we want to make, today is we're now at a position within, our industry where many many of our customers are planning for the future having been able to see, the size and scale of the composite aerospace market.

1:32 And we're also seeing this in other industry sectors as well where we are working now, with pilot projects with other customers.

1:44 So as we sit at the half year, our pipeline, which obviously we don't publish the exact numbers for both in UK, but particularly in The US, is, significantly grown in terms of the sales opportunities. And though there are no large ones to announce today, as we've explained before, that that process does take some time and has only really been able to, restart in the current year. But what we do know, because it does take time and there are a number of gates to go through, that there are are engaged with a lot of customers on some very large projects, and therefore, we would be very disappointed if we did not see those start to be converted in the next twelve months.

2:36 And we will keep you, of course, updated if there is any material news to, announce or explain and talk you through those. In terms of our actual, current business, you'll see that 30% growth in the half year. And what we're seeing now is the contracted business, which is usually in the three to five year agreement, is starting to come back. The volumes are increasing. I think 2023 will be a much stronger growth year than 2022. We still had a few bumps in the road globally with COVID,

3:14 and other factors, around. But, you know, the confidence is coming back. You're seeing that within air travel. And let's say John can talk you through why the industry as a whole is now planning for that growth going forward. In terms of ourselves and what's important as we position ourselves in 2022 with these customers, one of the key elements of our sales today is around the fact that we have modernized and digitalized our manufacturing processes. So it gives those customers a key opportunity to upgrade the front end of their manufacturing process, which all our large customers are looking at across the whole of their supply chain.

4:03 And, that investment, drives the efficiencies, which we can then share with the customers. And we've talked about this before of driving our own margin, into the twenties percent, from being, in the teens up to 20%. And we've seen that improve that, in the last, year. And we will we are going to be implementing a a new range of our technology, which we call our digital manufacturing cell, in the next six to twelve months. And that will benefit both customers and ourselves, and will be the underpin, really, for driving new business and winning, new customers.

4:49 And at the same time, in in in, innovative innovation and pilot studies and, other, projects, we have opened up a number of opportunities which are non aerospace, and they have the potential to be as large as the aerospace opportunities that we have and are targeting today. However, the immediate wins will still, I think, be around the aerospace industry. But I do think over a three to five year strategy, you will start to see, significant growth in non aerospace. And despite all this investment, and the challenges of the past, we remain with cash on the balance sheet, liquidity in terms of our bag facilities.

5:42 And within contracting with larger customers, there are also opportunities to fund the supply chain through either joint facilities or facilities with customers. So as we report the half year, you can see the top line growth.

6:03 There's a narrowing of losses, but our objective, obviously, is to move into a strong period of profitability and more significant growth as we come out now of the pandemic. So I'll pass you over to John. Thanks, Andy. Good morning, everyone. So, actually, I'm gonna hand straight over to Chris. On the finance slide. Thanks, John. So just a few financial highlights from the half year results to talk through before I move to John to look at the outlook for H2. So sales looking in a strong position to up 32%, 1,400,000 from 4,400,000 last the same period last year to 5.9.

6:57 A little bit of a change in change in mix, not huge, but core customers are the same in this. And I and I think the main reason for that increase in growth is is the pandemic situation. The same period last year, we saw a couple of lockdowns, site closures at some of our key customers, and we haven't seen the same happen this year. So we've clearly seen that sales recovery and stabilization happen this half of the year. And as John's going talk to, we think there's more positive positivity to come in FY 'twenty three. From a gross margin perspective, so there's some mix impact in this. This reduced slightly from twenty five point one to twenty three point five, some of which was expected.

7:47 But there were some contractual margin challenges in here as we renewed some of our key contracts this time last year. We are also seeing labor inflation and some inefficiencies that we've deliberately held to retain capacity in our manufacturing facilities with some of the anticipated recovery in H2 and next year. I think other things we're working on around gross margin, we're looking at, as Andy alluded to, our digital manufacturing cell, which is looking at increased automation and increased material efficiencies. And we do expect that health capacity to be filled with some of the growth in the coming twelve, eighteen month period.

8:39 Loss before tax and EBITDA loss both improved 400,000. So loss before taxes improved from 1,100,000 loss to 700,000 loss. Adjusted EBITDA from 600,000 loss to 200,000 loss. That that is primarily driven by the sales improvement and recovery that we've seen, but also we have experienced lower administrative overheads. Some of that has been has been foreign exchange. We are largely on par with our overhead base of what we were this time last year. We're kind of going to good efforts to kind of maintain that. From a cash perspective, so we've moved from $3,500,000 this time that shift to $2,000,000 Large part of that, but most of that is due to, well, capital investments.

9:29 We saw we have seen a sales peak particularly a couple of months before these results were announced, and that's driven our receivables up at half year. But we have since seen that recover. To give you a flavor, as of last Friday, our cash position was 2,700,000. So we've seen that recover and come through the cash flow. So a large part of that is down to timing, but we are seeing increased investment in our working capital for the right reasons because the recovery and the growth is happening. So and we're expecting that to continue. And then as Andy said, still retaining our remote discount facility as of the half year, 2,500,000,000 capacity in that undrawn and still undrawn.

10:18 We have two facilities, one with a key customer with which we think we can leverage for growth if needed and one with our main supporting bank, NatWest. And in terms of outlook, continued challenges. Obviously, there's supply chain disruption on a on a global level that we're working with and inflation as previously unseen. We think we've got solutions to tackle both of those, and we're actively focusing on them. So terms of outlook in in line with expectations at at present. Thanks, Chris. So as Andy mentioned earlier, I think it's worth just reflecting on what's underpinning the recovery of, obviously, existing business and ultimately new business as we look to engage with existing and new customers. So, clearly, the ultimate driver of all this is air travel, and this this chart really gives everyone a bit of a sense of how that recovery is is taking shape.

11:26 The latest data was of March, but really it shows there's a bit of regionality to it as perhaps some continued lockdowns in the Far East curtailed recovery in that those territories a bit longer. But essentially, we're seeing quite a strong bounce back in air travel, and I'm sure we're all sort of sort of see the news stories of, you know, sort of disruptions at airports as they manage their recovery. But ultimately, we're seeing, you know, thankfully a nice strong recovery if people want to travel and recover their their travel. A lot of that's driven, you know, certainly in, you know, locally, regionally with single aisle travel, but also the longer distance twin aisle travel, which are more composite heavy platforms will will follow.

12:20 And, you know, we as we've talked previously, there's a knock on effect here of airline fleet renewal as they sort of retire off their older fleet through the pandemic and, you know, starting to replace those with more modern aircraft and return to service their more modern fleet as well. You've got the usual correlation with oil price driving, you know, more efficiency in newer aircraft as well, and unfortunately, that remains quite high at the moment. But again, that just forces the economics around, you know, renewed fleet compared with extending an older fleet. And as we say, the composite heavy heavy platforms at Twin Isles will recover as, you know, that inter interregional travel returns.

13:07 The next slide really just puts some of those per platform numbers, and this is, you know, it's Wikipedia, but it's public information from both Airbus and Boeing. It's just been, you know, correlated nicely here, but you can see the sort of production levels and aircraft deliveries at pre COVID levels, how they were impacted, and how they're starting to bounce back these twenty twenty two numbers a year to date as of as of this week. But, you know, single arms were always the stronger numbers deliveries. They've obviously been impacted around 25%. And then in the seven thirty seven max, they obviously have some some significant issues prior to COVID, which they're recovering from as well. But, we're starting to see those those numbers come back and forecast to bounce back into next year quite strongly.

13:58 And then the equivalent Airbus platform three twenty series, again, you see strong recovery because they weren't impacted by the same issues of Century seven MAX. But, again, they're high rates, you know, slightly smaller composite content, but still significant in in composite consumption. And then in the more COMPOSIT focused platforms, the Twin Isles, the sort of inter sort of intercontinental aircraft, we're seeing those being hit reduced by 50% of production rates and deliveries and then starting to recover through through next year and into 2024. But, again, just gives you a good flavor of the the Airbus and and Boeing split, the platform recovery, and the numbers that we expect, you know, those to recover to in that state.

14:47 Both both suppliers publish their data very regularly in their market forecast documents which are available on their website. It's a good summary and so you can see the impact and the recovery starts by.

15:04 And then longer term, what we're also seeing, we talked about this a little bit as well in the sort of full year back in January where, okay, we've had we've had COVID. It's been impacted. A lot of older fleet was retired. There'll be you know, as that recovery returns, there'll be the normal replacement cycle of those aircraft with with newer generation, higher COMPOSIT content aircraft. But also on top of that, you've got the the added targets and pressures of a real stronger net zero agenda now that's fighting the industry quite hard. And, you know, one of the the sort of advantages there certainly for for composites is that composites will be driving a lot of efficiencies, a lot of the lightweight airframes, you know, the longer higher efficiency, longer travel, but also, you know, much more efficient travel in the shorter journeys as well.

16:03 It's a very clear agenda within the industry to get to net zero by 2050, supported heavily. And I think, you know, just just by the the information flows that we're seeing from news, from marketing, from airlines, from aircraft manufacturers, huge push towards net zero and COMPOSITES have got a very, very significant role to play in this sort of decarbonization and the reduced emissions from air travel and the sustainability. And then looking forward sort of near term into h two, what are our priorities? What are we, you know, really focusing on as the recovery starts to glide?

16:44 Well, clearly, we're expecting UK new business to recover as, you know, customers are more engaged, as our customers are have been through their own restructuring plans and they start to look towards how they're gonna navigate the the recovery. And again, as we talked many times before, we see our services as key to helping them to recover as they look to build back differently and more efficiently from the the sort of reductions that they've seen through COVID. And as as Andy mentioned, you know, UK pipeline is still active and strong. And, again, we hope to bring updates through the second half of the year there. Also, as we've talked about, we've been able to restart business development further afield. And, you know, pre COVID, we'd had a lot of focus on North America. We see it as a very attractive market and a large market in terms of our services and the need for our services with a, you know, both a very, very strong

17:43 defense market and a strong civil market in composites as well. So, you know, as we said at the at the full year in January, you know, thankfully, that travel and engagement with customers has been able to restart and that's progressed very well. And we're expected to be able to announce progress again in in h two as that develops. And I think there's some of the questions talking about the sales cycle. You'll see as that sales cycle progresses and as we we go through that initial engagement through to, you know, getting data and understanding their current state, developing a competitive bid, and then also, you know, getting that through their their layers of their organization and sort of management and executive approval, and then moving more into the the sort of first article in the the onboarding phase as they look to, you know, turn off their existing internal supply of these these services and move to our, you know, more efficient external outsource supply.

18:40 So, yes, I think we've talked before. We can get into detail later about that. The length of that, not just the customer engagement cycle, but the whole customer onboarding cycle. And as we say, lots of activity in in North America. As Annie also said, the the planned investment has continued in our new business and technology. I think as a board and as an exec, we're very keen, you know, at the start of the pandemic to actually survive the pandemic as everyone was, but also to survive the recovery. And we had lots of discussions around how difficult that would be as well. You know, thankfully, the the the continued investment has has proven very worthwhile both in terms of people to help manage that start that recovery and manage, you know, some disruption in in the material supply chains, not necessarily in in pricing because, as you know, we we have a lot of flow through pricing, probably all flow flow through pricing from material suppliers into end customers.

19:37 But our, you know, material suppliers have seen some disruption in their own business as they build back their people and plant capacity. So we've been able to work with them and our customers to manage that using technology, using that, you know, real time data to help drive scenario planning and to mitigate any effects of of delays in materials or challenges in the material supply chain. And that technology also helps us to then be more efficient internally, not just in existing business, but also drive more compelling business cases for new business and have that, you know, much more real time

20:15 sort of harder data in terms of the whole management of, know, customer demand, material ordering, material management, batch traceability, and then obviously managing that throughout production areas and, you know, being able to utilize much larger, more efficient nesting scenarios to drive that whole efficiency, the the whole of the supply chain that we manage for ours and our customers' benefit. And I think as, you know, as Annie mentioned, key to that is the full implementation of our digital manufacturing cell. That is really where all that technology comes to bear on the the production of the kits and where that, you know, a lot more data generated to be fed back into improvement activities. So, you know, that started and will continue into h two as we, you know, open up our capability internally to to do things much more efficiently, but also support new business and growth.

21:08 And then also how we deploy that technology, you know, clearly, our model has been focused around, you know, larger service centers in clusters of customers where we can support multiple customers. As we evolve and as that technology allows us to evolve, you know, it really does open up different ways of working. So one of the sort of next stage opportunities is what we call forward start location. So that's, you know, as we've driven our and driven to maintain our operational capacity through COVID. As we recover, the the key, obviously, is to, you know, utilize those facilities fully to derive as much efficiency from scale as we can. So this this forward stock locations allows us to really, you know, continue to load those plants and get as much efficiency as we can from them, but still be able to serve customers locally by having stock at their site, you know, manage locally on their site, and still give them the the great service and responsive service that they need.

22:11 So that's a model that's being deployed now with some real live business opportunities with current and new customers. But I think that'll be, you know, quite an interesting model as we go forward and give us a lot more flexibility in how we deploy and grow over the coming years. And then, you know, as we've also talked previously, the ultimate evolution of that is what we call more of a managed service model. So that is really using the technology centrally, but to have manufacturing mini manufacturing cells at customer sites, still control vials, still, you know, own vials, delivered vials, but being able to utilize, you know, some spare operational floor space at customers which still gives you that local service and local support as well.

22:59 So, again, that's gonna be clear output from all the technology development that's going on, both in terms of the digital sales, but also the the sort of core core modules of that that technology. And as Annie said, we also continue to develop new non aerospace applications, and we've had some, you know, small scale wins there as the technology and the the service model has been adapted to those. It's those wins really underpin the belief that that the business model that's been developed in aerospace can be, if you like, turned down and adapted for non aerospace applications. The core functionality is still the same and we'll continue to progress those through the second half as well.

23:47 So Andy, would you like to summarize or Yes. No. Thank you, John. So half year, as I said, just showed growth, and fairly significant, I guess, compared to many businesses, but, it's very much a reflection of those same contracts that we had through all the way through the pandemic starting to recover in The UK. The investments in the technology and we did have an investor day a while back, and we will probably we'll have more of those to demonstrate our technology to investors as well as to demonstrate it to customers.

24:34 You know, it has significantly been upgraded, and it is the sell of technology and service, which is key now to the success of the company. And that technology has a value in itself. Cash remains robust, and one of the questions that has come through is is what's the cash forecast at the end of the year? We we expect to remain around this 2,000,000 level of cash based on our current trading levels. And the key we recognize is winning that new business and converting it.

25:20 And there are tremendous number of opportunities. You know, we have, various types of pipeline and analysis, but we are engaged with, new business opportunities. So worth over 100,000,000 across The UK, Europe, and The US. And it's about converting that engagement and pilot studies and other, business cases into meaningful new business that they can, yeah, then grow and develop over time. So, I thank, my colleagues, and, we will now pass it back to to look at the questions that have come through. Fantastic.

26:09 Thank you very much indeed. Thank you all for your presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. Just while the team take a few moments to review those questions submitted already, I'd like to remind you the recording of the presentation along with a copy of slides and the published Q and A can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Thank you to everyone who submitted those so far. Can I just please ask you to read out the question where appropriate to do so and give you a response? Yes. So I'll read the questions. And then the first one, we've had some slides on this before on the r and r website around the sales process. But the specific elements which is new here, well, in that question, the first one is talk through the sales process, and John can do that again. But there are some slides that we published on the website that go through the different stages of that sales process.

27:11 But one of them is also a question, do we get designed in? I guess, what I'm designing on new platforms. One of the key things is that we target, customer facilities. Clearly, that can be in certain platforms, but our objective is to take over the entire facility's business. Once we do that, any new business, of course, that customer puts through that facility, we would love we provide the full service to support them in that, and that is a critical part. In terms of the new business that we're targeting at the moment, we obviously are trying to take over new facilities or facilities that have not used our technology before and get them to start to use it.

28:00 And that, is predominantly current business, but will involve some new business as well. And sometimes it's the new business which, they would want to experiment and try our process with, But we don't specifically get designed in. That is not our objective at the moment at the start of a new, platform or project because, the meaningful opportunities are to get people to convert, their current factories of all their, work to our technology and services. I mean, John, do you wanna do a quick, just a very quick talk through the gate process? Yeah. So as Andy said, the sales process can be quite lengthy for for obvious reasons. This is the front end of our customer's manufacturing process, so we need to get it right. They need to get it right for to keep the rest of the facility functioning.

28:58 And clearly, as well, it's a very regulated business. So, thankfully, you know, we want to fly safely. So in terms of how we handle raw material, needs to be very regulated as well. So in terms of the design in aspect of it, we designed in by keeping abreast of all the sort of global qualifications and specifications to make sure that our service meets them all. That's how we ensure that we're designed in per se by being able to be representative of all the potential requirements from from any new or current customer. And then in terms of the engagement process, because this work is already being done by the customers in house, there's no sort of, if you like, customer led formal process here.

29:43 It has to be, you know, really driven by us. So we've got a very, very well developed gate process for for all new business and and current business where, you know, there's that initial front end customer engagement, and this is all around building the relationships, getting to the point where you understand their current processes and current state, but then also working with the customer to get data to be able to start to work out what the future state could be with that customer, so by VELOSITI, and also turn that into the TCO model we've talked about at four years. So historically, we've perhaps supplied, you know, pricing and focused around that, where over the last year or so, we've really got that a lot more sophisticated, and we almost pretty much write the the new business case for our customers in terms of costing the current state, costing the future state, and showing and highlighting very clearly, you know, the exact scrutiny level or the the benefits of transitioning to a a VELOSITI process.

30:43 So there's that whole front end engagement. There's that whole big development, big creation phase. You sub you know, submit the the the the initial phase, and it's sort of it's not just, you know, a price list. There's a lot of and then the big document has contained, you know, how we plan to do it, how we plan to manage the transition, how we will sustain, how we meet with the quality approvals, all the usual, you know, not just what it is, but also how we how we plan to to manage that transition. Then following, you know, bid acceptance, you've then got all the the onboarding process. So there's a lot of first article work to to validate that our kits are the same as the customer's kits and the whole data transfer process has been successful.

31:29 There's that whole process of managing the condition of supply, how it gets delivered, when it gets delivered, you know, the the the packaging media, all the usual things to make sure that the kits interface really well with the customer's existing manufacturing facilities. And then, you know, how that's sustained, how we you plan to sustain that over the, you know, as Andy said, initial three to five year contract period. But ultimately, these are, you know, indefinite supply as, you know, we look to form a very, very long term strategic relationship with the customers. So, you know, that that whole maintenance piece and the sort of customer management piece and, you know, how we will support them on a long term basis needs to be addressed.

32:15 Yeah. And, of course, we we have a number of agreements with customers around innovation and technology, which don't necessarily, or don't necessarily get announced because, obviously, they're before presale effectively agreements. And we would only really want to announce meaningful, financial, orders rather than, you know, various sort of agreements which are are just pushing and and explaining our technology or giving people access to it so they can explore to see if will work for them. The next question is around diversity, and this is a good question.

33:02 Is and it's really saying, are there opportunities outside aerospace? And the answer is yes. Now we because of our capability and our qualifications and everything else and the work we've put in the last two years, we have to focus on aerospace because it's gonna it's a market. It's gonna double trouble in size from the pandemic position. And there is significant interest in demand, and we've got the credibility in that market, and it offers good margins and returns. So in terms of our focus today to get some meaningful improvement in results, aerospace is number one. However, in the background, we are also opening up really pilot or I'll call this more pilot projects with non aerospace customers, and we have them.

33:58 And but we where we're looking there is to also ensure that we will target where they can have become large customers, and also that, the marginal return makes sense. There's no point, going down a particular industry, which, for example, may, you know, be able to use our technology, but their their materials are, very inexpensive versus the type of materials that aerospace use. Therefore, the benefits of our technology are not commercially as great to that customer. And, therefore, it is a matter of targeting, sectors which, will benefit commercially significantly for us and for our customer. But there are there, you know, high end, high performance automotive, various other markets such as the as we see in in some of the pictures, you've got wind energy.

35:05 And, you know, it is our part of our strategy long term to develop out velocity to be have a meaningful element which is outside our space. And then the next question was, what catalyst can we expect to see in near term in terms of news flow? That should really be around advancement in the opportunities, the new sales business opportunities as they go through the gate process. And that's that's really what should be the next elements of our news flow. And then the next question which has just come in is which I'll read out is about manufacturing trends expected that manufacturing trends to be manufacturers yeah. To be providing whether the manufacturers will have will look to have our technology in their facilities or whether we will supply

36:36 to go just to supply from our facilities. And I would expect that larger facilities, customer facilities, could adopt, the sorts of models we've been developing where we would put our technology into that facility, to ensure, there's a maximum level of efficiency that only works when it's a very large facility, where we can have a bespoke solution for it. And the question will become, whether, ultimately, the customer's own staff would actually perform most of the tasks within our manufacturing process, and that is certainly one of the options that we, are able to provide even today, so that you are really supplanting that tech into remote locations around the world.

37:35 And we're not ourselves having to think about all the other logistical issues around hiring staff and everything else. But we can provide what we call a managed service. And that that is part of our long term strategy. At the moment, clearly, we have capacity in The UK, and we would like to fill that capacity back up again. So, the pre pandemic, we would probably have been accelerating that service model, managed service model more quicker. But now you've got spare capacity in The UK, what we really wanna do for The UK in particular is, fill our current facilities. As we move into The States and elsewhere, you'll find that there will be hybrid models being used where we'll either be close to facility or even within a customer's facility to maximize the benefits and minimize the overhead costs.

38:40 Just looking through there's a couple of questions for same cost. The one I'll do is I'll pass them on to Stankos rather than, you know, we we we answer them. I don't think it's appropriate for us to to answer them directly. I think you've actually pretty much covered off everything you can there. And, of course, if there are any further questions that are submitted, the team will have the ability to review those questions. We'll publish responses where appropriate to do so on the investor meeting company platform. Andy, perhaps before redirecting investors to provide you with their feedback, which I is particularly important to you and the team, can I perhaps ask you for a few closing comments? Yes. So, again, the message is the same. You know, we are advancing significantly our services and offerings. I think everyone agrees that, the market size is going to rapidly increase again over the next few years.

39:34 And it's about us taking up those opportunities that, exist today and developing them in other markets as we go forward. And I think that combination should enable velocity not just to grow, but the value of of velocity within supply chain, and then hopefully its value as a as a business should significantly increase as well. And we're always conscious that there are people who have invested, on the IPO. And since then, there's been a few, you know, bumps in the road. But you have to remember that as a board, me and John as the senior directors are also personally invested in the company and, you know, take shareholder value and investors' interest very, very seriously.

40:25 And, I'd just therefore like to thank those investors that have supported us for what has been a a difficult, challenging period in the industry. And, you can see as we come out now, we have a better, stronger business, actually, far more advanced and, can offer very significant commercial solutions to, what I see as a very exciting industry going forward. So thank you all again, listening today. We're always open to questions and engagement with investors, And we also have the support of our Nomad at SENCOSP and who are also there to help and support investors.

41:12 So thank you. Thank you very much indeed, Andy, and thank you to the rest of the team. If I please ask investors not to close this session, it should be automatically redirected to provide your feedback in order that the team can better understand your views and expectations. This will only take a few moments to complete, and I know it's greatly valued by the company. On behalf of the management team of VELOSITI COMPANY PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you, and good morning to you.