Surface Transforms Share Discussion Threads

[regandharry5] 25/7/2017 14:52

Can't think why one would want to put two different discs on the same axle, we are not talking Mondeo cars here.

[toffeeman] 25/7/2017 13:43

Nope problem is that Brembo are a tier 1 supplier (I think) and SCE are tier 2

[supernumerary] 25/7/2017 13:01

So you'd be allowed to mix two different disc types on the same axle? In a 600bhp motor? Mmmm...

[longshanks] 25/7/2017 12:27

For OEMs the rotors would be supplied, unbranded, by the tier 1 supplier.You the punter would see them as Porsche, Audi, Bentley etc brakes and wouldn't know if they were supplied by Brembo or ST.That is OEM supply, and why the testing is so exhaustive: it is the OEMs reputation at stake, not just STs.Naturally if the rotors come from ST, they will be stronger and operate at a lower temperature. But on a case by case basis it will not be easily discernible unless you know what you are looking for.

[supernumerary] 25/7/2017 11:56

Toffeeman - thanks for that, but I don't think it really helps me much ;¬(

longshanks - ditto. Are they the same, or not? If they're the same, where is SCE's ip used? If they're not, how does the punter know which he's got? I'd just like to understand how it's supposed to work in practice...

[longshanks] 25/7/2017 11:45

The need for dual-sourcing is actually all about security of supply and nothing to do with competitive advantage.A prerequisite for tier 1 automotive suppliers to satisfy VDA 6.3 is that all elements of their own supply chain is dual sourced.That process makes the supply chain robust and capable of supporting just-in-time production.Large OEMs looking to expand the usage of carbon-ceramic brakes to more main stream models need this security.Remember we are looking at a £100m market expanding to £2bn within 10 years.Brembo will need to raise their game to fully compete with ST because they will not be able to match size/performance criteria on some vehicles but for the vast majority of brands and models the rotor size from either supplier will be the same.Exciting times ahead.

[longshanks] 25/7/2017 11:34

Great news: and David at the meeting suggested they would look to fill all OO requests should they be oversubscribed.

[rivaldo] 25/7/2017 11:28

RNS out - great to see the Open Offer heavily oversubscribed, with 157% take-up....



SCE are "exploring alternative avenues to satisfy this additional demand". Hopefully they won't succeed and this unsatisfied demand will have to find shares in the open market!

[toffeeman] 25/7/2017 10:54

That's a good point SN and sorry for the following SoC no time to edit.

I actually believe this has been misinterpreted by many including Hardman.

IMO the real point is that manufacturers hate having just one supplier because it can dictate price and so the main reason why manufacturers want two or more suppliers is to increase their bargaining power.

From what I can see of the production process if all Porsche cars had BremboSGL and there was a problem SCE would take a long time to be able to substitute supply it's not instant. So there will not be dual supply - at best you would have SCE as an option at ordering the car.

I don't believe manufacturer will specify BSGL for one model and SCE for another.

The main investment case for SCE is that their technology produces superior brakes than Brembo SGL(at least that's what we believe) and so manufacturers will prefer SCE but will use Brembo's presence to hold down SCE prices (because Brembo SGL are better than existing standard brakes).

Brembo SGL know this (of course) and will be going hammer and tongs at matching the SCE product without infringing patents - they will have SCE products and re-engineered them to check on the feasibility of matching.

Now the problem is that two of the major shareholders of Brembo SGL are BMW and VW who would obviously wish their brands to specify BSGL rather than SCE and this presents a problem if SCE are better and cheaper.

Why would BMW or Rolls or Audi, Porsche or Bentley specify a component manufactured by a competitor - unless they had to?

So the four possible scenarios that I can see are:

1. SCE competes with BSGL for the non BMW/VW brands (basically A-M, Jag, Merc, Lexus plus the tiddlers like Maserati, Ferrari, Lambo et al).

2. BSGL sell their carbon ceramic brake operation to a big tier 1 supplier freeing up VW/BMW to source from where they wish.

3. BSGL can't match SCE performance so buy the company. Problem: anti-trust issues about supplying competitors

4. SCE can't get the required volumes to turn a decent profit and mosey on and then decline.

Take your pick - and pick apart please!

[supernumerary] 25/7/2017 10:17

Sorry, I don't really understand this dual-sourcing business. For that to work, components have to be either identical, or at the very least functionally indistinguishable from the two manufacturers. If that's the case, what's SCE's advantage in this situation?

[timbo003] 25/7/2017 07:58

Thank you Longshanks for that excellent account

I am so glad I made the trip, I never realized there were so many steps to the process and how much know-how is embedded in to each of the steps. It would surely take many £millions and many years for anyone to replicate.

On a related topic, there is a new interview on Director's talk with Hardman's analyst Mike Foster, who talks about the new factory and current prospects for the company.

[albert_einstein] 24/7/2017 17:26

Thanks Longshanks.

Superb analysis.

[graham1ty] 24/7/2017 07:56

Longshanks, hope all well with you, family etc.

Many many thanks for the detailed write up. If only everyone ( inc myself) reported properly on meetings, then PIs would find investing so much better informed.

So, many many thanks again

[longshanks] 21/7/2017 11:14

Feel free riv

[rivaldo] 21/7/2017 10:30

That's a superb summary longshanks, many thanks. Would you mind if I copied it onto another bulletin board?

[distill] 20/7/2017 23:55

quemaster
thanks about the RB/AM Adrian Newey tie-up, had not seen it, onwards and upwards

[goldman] 20/7/2017 15:14

Longshanks,
Thanks for putting such a good and detailed report together. I can vouch for it being factually accurate and that it gives a reliable and detailed description of all that we saw and heard.

The management team and staff are almost bubbling with enthusiasm and quite rightly so, they have worked hard to achieve the very happy position they're now in, i.e. OEM,s really solidly behind them and pushing hard to see Surface Transforms become a supplier of the very best Corbon ceramic brake disks available to them as a dual supplier.

As you have stated, with the forthcoming VDA 6.3 validation and the prospect of the OEM 3 contract following close on its heels the future does indeed look particularly bright.

[quemaster] 20/7/2017 12:42

Thank you Longshanks.
Regarding F1 Adrian Newey seems to be a fan of our brakes after choosing them for the Red bull Aston Martin collaboration.

[distill] 20/7/2017 11:05

longshanks, many thanks for your report/views and the time taken whilst only a very small invester I will be adding when funds available, I have kept the faith in this company, now a nice big F1 contract or am I dreaming?.
Again many thanks longshanks for your time and efforts

[longshanks] 20/7/2017 02:16

The new Surface Transforms factory is located in buildings that used to form part of the Eastman chemicals site in Knowsley.

At first I was unsure on whether I had the right location. A glimpse past the security lodge with its zealous security guard, convinced me that the sat nav had brought me to the correct place: 100m away, in 2 meter high red letters was the company logo proudly painted on a factory wall.

The building is much larger than the premises previously housing the company. There are a few offices at the "front of house" with a substantial factory floor space at the back. We were greeted in the large communal "board room" with all the board other than Kevin D'Silva on hand.

We were given a thorough candid presentation of the business, the factory move and an update on the commercial prospects/game changer opportunities. Kevin Johnson did most of the talking and seemed relaxed and at home in this environment. Occasionally David Bundred chipped in the odd comment to reiterate points. After the factory tour a tasty sandwich and presentation, the company gave all attendees a copy of the Hardman broker note.

For the factory tour, the visitors were split into two groups. I went with a group led by Kevin Johnson, the other group was led by David Bundred.

The first stage of the tour involved a walk through demonstration of the separate manufacturing processes. All of the equipment from Ellesmere Port has been relocated and all of it was very active. We saw how the PAN material was transformed from a roll of "cloth" into its layered, processed and machined final form. Manufacturing involves some patent protected elements with other elements using more standard processes and machinery. All processes though had some level of integrated company know-how used to streamline the manufacturing process.

I spoke to several of the operators on the shop floor. One I talked to had only recently joined ST having been made redundant at Bosch late last year. I asked him what he made of the company and his work. He said he really enjoyed the variety of work and the fact he was actively involved in all areas of the manufacturing process. For him Bosch is a company on the "way out" whilst ST is a company of the future. I got a similar story from the other operators - all were really motivated and enthusiastic about the business. Many are shareholders themselves and clearly want the business to be a success.

I have to say though, as someone involved in heavy industry myself - I wasn't overenthusiastic about the working plant. Whilst clearly working at or close to capacity, there was a lot of inventory on view. Lots of disks in various forms being held as idle intermediate inventory awaiting the next stage in the manufacturing process.

And yet - I needed a reminder that this is what is to become the SVP: the Small Volume Production cell. It is currently the only production cell.

We moved through a door, and my jaw dropped.

The next space can be best described as a tardis. A massive factory floor. Empty, but for the massive CVIST furnace grinning in the corner. A gaping open mouth at the front, hungry to be fed green rotors for chemical vapour infiltration. Impressive feed and exhaust pipes already fitted and, to the side, a layout drawing illustrating where all the new equipment is due to be installed. This space is a few months away from becoming OEM Cell 1. A space dedicated to efficiently churning out 20,000 disks per annum for OEM automotive customers.

The scale was impressive, but so was the design. The SVP is niche - it is inefficient - it is/was a pilot plant. The OEM production cells are serious high end manufacturing scale. Production will be lean with minimal intermediate inventory. They have one OEM production cell due to be commissioned this year - but elsewhere on the site they have space allocated for four more such cells. Excluding production from the SVP, the Knowsley facility has a potential capacity of 100,000 disks per annum.

----

An accusation often levelled at the company is that it promises jam tomorrow and never delivers. The new OEM Cell 1 throws that accusation firmly in the bin. The 2015 investment capital is being deployed not into research and development, not into spinning out a tenuous AIM listing, but instead into building a loom to spin carbon gold. A world class production line is being built in Knowsley to produce carbon ceramic disks in decent volumes, at a quality superior to those produced by their only competitor and at a cost that is not only competitive but allows them to promote the use of carbon ceramic brakes for lower priced car models.

Surface Transforms believes with good reason, that automotive carbon ceramic brakes will rapidly become a £2bn+ market, and that they will be able to maintain gross margins of around 50%.

Following issues in their supply chain a large German automotive OEM, issued, several years ago, a mandatory directive within its group of companies that all elements of their supply chain be dual sourced. As there are only two suppliers of carbon ceramic brake rotors, this OEM was left with the choice of either dropping Carbon Ceramic brake rotors as a fitted option or they nominate Surface Transforms as a second source. A key company within the group is one of the most high profile sports car manufacturers in the world: carbon ceramic rotors are nominated as standard on several of their models. It is not an option for this company to not use carbon ceramic brakes.

Over the last 18 months this one company has worked extensively with Surface Transforms in helping propagate the same dual sourcing policy throughout ST's own supply chain. They have sent a team of senior executives at three month intervals to evaluate progress - not out of any altruistic pursuit of better brakes - but because they need ST as much as ST needs them.

In total this OEM has spent a large seven figure sum on its part in the R&D. The end goal is for ST to be qualified to VDA 6.3 so that they can be nominated as a tier 1 supplier. The process has been long, the process has been arduous, but the process is rapidly coming towards an end with only a few outstanding punchlist items to clear. The next meeting is in September and there is a strong expectation that the company will be qualified to VDA 6.3 soon after.

Aircraft brakes were also discussed. The company was fully expecting to receive orders by now for the military aircraft - AirFrame 1. These orders haven't been lost - that is clear. The issue is that the lead supplier on this project is keen to have all items fully defined and whilst the ST brake rotors are one component that has been fully defined, there are a number of other items that need to be finalised. In this respect a delay in orders for ST is inevitable. Contractually, the tier 1 supplier in this process is exposed as they have made commitments to ST, but understandably ST are reluctant to press their legal rights.

Delays in nomination by automotive OEM 3 and in getting sales for the military aircraft have dented the confidence of some shareholders. But let us not forget the company was awarded an automotive OEM contract in January this year. A small one yes, but still a very significant one for a high profile car. Equally, whilst OEM 3 has yet to nominate ST for application on road vehicles they have nominated ST to supply brake rotors for their racing cars. They can do so because racing cars are not bound by VDA 6.3 selection criteria.

All in all - Surface Transforms is clearly now a long way through its transition from being a niche developer of exotic materials into a fully fledged manufacturer of a high-end, high-margin automotive component. The ducks are all lined up and I came away reassured that this was a sound investment. My feeling is that we will have VDA 6.3 at end of September and OEM 3 nominating ST for series supply on their 2019 model in October or November at or around the time that commissioning of OEM production cell 1 is close to completion.

[longshanks] 18/7/2017 10:58

Apologies. Had a busier than normal weekend and start to this week. I will write up my full thoughts in due course: but I would say foremost that the Hardmann note was written on the back of a very recent visit too and to my mind summarises the company's position extraordinarily well.

[toffeeman] 18/7/2017 08:44

It would be great if you could share more detailed observations Longshanks for reduction of cognitive dissonance purposes if nothing more!

Regards

[quemaster] 17/7/2017 22:10

According to the Hardman note and assuming no further delays we should have OEM 3 naming the model we are going on and nomination for OEM 5 before the end of the year.

OEM 3 (German) As announced in July 2016, Surface Transforms signed a preproduction
technology development agreement. A formal announcement of the
model and customer name is expected by Surface Transforms in late 2017 upon
completion of the test and finalisation of supply agreements.

OEM 5 (German) A competitor to OEMs 2, 3 and 4, late-2019 SOP is currently
scheduled; expected initial revenues of £2.5m, not far from the ongoing mature level
of sales. It has recently confirmed this date, continuing to test with positive feedback.

With OEM 5 i'm assuming the 2 year before SOP nomination period.