Velocity Composites plc (VEL.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Velocity Composites plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Jon Bridges. Good morning to you, sir.

Good morning, and welcome, everyone, to our presentation for financial year ending 31st of October 2025. I hope you're well and usual format around myself and Rob taking you through the headlines in the presentation and then picking up questions afterwards. So getting started, if we look, you see the headlines there, and we'll cover all the points and the reasons behind some of these numbers in a moment, and Rob will take you in detail through the financials. But essentially, revenue a little bit down due to some of the reasons that we'll discuss, but a lot of work gone on internally to drive gross margin, which again, we'll cover off in a moment. And if we look at the year in review, clearly, I think really 2025 industry-wise has been very similar to 2024 for pretty much the same reasons. Hopefully, as we go into '26, we'll talk about that in a minute, some of these issues will clear. But in terms of the industry-wise, we're seeing the Spirit reacquisition by both Boeing and Airbus obviously clearing and a lot more clarity there at the sites involved. And for us, what that means is a lot of the sites we're engaged with were sort of paused whilst that activity was going on in terms of any change activities. But again, as that clears, we'll look to pick those up properly now with the new owners. And so that big sort of reason for distraction, if you like, industry-wise has been cleared. Also good is to start to see the key programs like 737 MAX production rates start to increase, a little bit directly to us, but more importantly, for a wider customer base to be busier and obviously to get back to rates that were previously enjoyed and probably previously invested for by our wider customer base. And I think as well, we talked about defense. Defense, we're starting to see procurement activities ramp up and move from planned rate increases to real rate increases. And again, we hope that will flow through down to our supply chain and our customers as those kick in and move from planned increases to real live production increases. I think in terms of key programs like A350, we're seeing production rates pretty much flat through '25 as they were in '24. And as you may remember, we, as an industry, were looking to ramp up in '24, and we're still expecting that to happen and Airbus is still buoyantly talking about rates 10, 12 in the not-too-distant future. So again, '26, we are starting to see customers look to get ready for those sort of rates and the ramp-up activities involved. And looking forward into 2026, I think it's a word that's been missed for a while, but optimism does seem to start to return certainly to our customers as they look forward and these rate increases and defense production increases into '26, which will, of course, be beneficial. As we say, the distraction from the Spirit reacquisition from some of our customer base will clear, and we can start to get back to some of the activities we were prior to that, probably 2 years ago now. That defense sector lag, we're starting to transition into real volume increases. And again, we'll look to those certainly through '26. And as you know, we have sites in Europe, in the U.K. and in the U.S. as well. And wanting to capitalize on the capacity that we have in those sites, not only on the existing contracted business as that ramps, but also new business as that flows through. Although we do see some little sort of changes with some of the customers as they move from sort of legacy programs and transition forward into their sort of new volumes and also one customer that is looking to move some production from the U.K. into Mainland Europe. So again, we'll talk about that and what we're doing to support those customers and hopefully follow that work. But again, it does mean changes in the sort of local portfolios going forward. Thanks, Rob. U.S. operations. So as you know, we've been delayed for a little while now on the transfer of one of the key programs from a launch customer. Not to do with Velocity or Velocity services, more an issue between our customer and the OEM customer, which has delayed any change activities. Lastly, we're starting to see that clear finally and a lot more positivity from our customer and the OEM in terms of the transfer of that key amount of business in this year and actually talk discussions with the customer how we can support the sort of recovery in the ramp beyond previous volumes to support the wider program going forward. So I think that's been finally, a resolution comes to that package of work, and we'll see those volumes flow through in '26. We have actually started to engage at a lot higher level with that and other customers. So our launch customer in the U.S. that's clearly communicating the impact this has had on us and our business and investors who funded the key U.S. facility and the business that comes with it. So we've actually engaged at a much, much higher level, and that's obviously been fairly well received, and we've got a good plan and relationship going forward to not just get that original work contracted, but also look at additional business from that site that it's won in the meantime and also the wider group and leverage our performance and the relationship to assist that customer in the sites it has, both in the U.S. and in Europe. I think this wider industry optimism has meant that we can really step up and move new business activities from the sort of development and bid phase into serious engagement now as we look to close those relationships. And we've made a lot of progress in the U.S., some of which was delayed by the Spirit, Boeing, Airbus reacquisition. But the sort of good news is we have a good relationship with what will be our second customer in the U.S., part of a wider group, and we'll be announcing progress in due course there. But again, as we've always talked about, there is capacity in the U.S. facility and the investment has already made to deliver not just the existing business, but also additional business, too. So clearly, we want to utilize that investment and that capacity to deliver both on our launch customer and subsequent customers going forward. And then in Europe, through the year, we announced a contract renewal with our existing long-term defense customer earlier in the year. Again, it's been long-term business on key programs. And also a 10-year extension -- well, pseudo extension really, we've been doing some launch programs with that one customer site. And what we have now is a 10-year agreement for all the business on that site, and we're currently in the process of transferring that into our Burnley facility. So again, good piece of work, obviously, long-term work and on a key growing growth rate platform as well. And I think it's probably, again, more sign of customer optimism looking forward. That program has been around for -- we've been engaged with that customer for 8-plus years now. And again, only now do we -- post-COVID and post all the disruption and ramp-up delays, I think the optimism in the industry means that people are looking forward and signing these long-term agreements on key platforms. As I mentioned earlier, we have got a couple of U.K. customers that are going through a little bit of change, two very different reasons and activities. One is a customer who's looking to move work from the U.K. into Europe. And again, the full details of that have yet to be announced by the customer. But we're working with that customer to understand what that looks like. We've sort of got a reasonable picture for '26. But sort of '27 and beyond, again, we're engaged with the customer. We would clearly look to follow it using our forward stock location model. But as of today, we're just sort of flagging that, that change is coming. As we also know, it's clearly, we all know transfer programs can morph over time, but we remain close to the customer and support them in that, and we'll obviously support them wherever that full portfolio ends up in their organization. And then the second customer, mainly on legacy programs, those legacy programs have moved from sort of volume production to spares and repairs type production. And the sort of residual other programs with that customer, some of which they're looking to in load just to fill capacity within their facility. Again, neither of those two activities are commercially driven. We've been clearly stated to that by the customers. It's not about what the quality of Velocity products or the commercial offering of those products. I think it's just looking at the -- particularly the legacy side of things. There are a lot of customers with spare capacity and how they fill that across all their plants across Europe and beyond. They're looking to do it in any means possible. And certainly, one of the customers, the small amount of Velocity business that's looking to in load is part of multiple in load programs across all their value streams like sheet metal and others just really to bring as much work back into that fairly poorly underutilized facility, shall we say. So again, we'll manage that with the customer. We'll look to work with them and maintain as much as we can. Clearly, we've still got the spares and other business with them, but we'll balance that along with the new business work to offset it. Thanks, Rob. I hand over to Rob, who will take you through the financials.

Yes. Good morning, everybody. So I'll do a fairly high-level summary of what's going on with the financials. As Jon mentioned, revenue was down in the year, GBP 23 million down to GBP 20.7 million. It's a 10% decrease. However, you'll notice the gross profit actually increased and that as well as our gross margin went from just under 26% up to 29.5%. So our gross profit improved by well over GBP 100,000, GBP 140,000. So despite the lower sales, we're in a better position on gross profit. Our administrative expenses were flat on the year and actually trending down. And we've identified further areas of cost reduction. We actually implemented some savings in the back office right at the end of FY '25, which will benefit from a full year savings of through FY '26. This was in no small part due to us migrating our internal ERP system to a node-based system whereas our legacy systems were required quite a bit of manual intervention. Most of the systems now are fully integrated and tie up between functions. So we've been able to reduce our headcount. Operating loss improved in the year. Clearly, the drive is to get that to a positive, but we have made good progress to get that going in the right direction. And we also reduced our finance expense during the year. So year-on-year, a reduction in loss before tax. And more significantly, we actually improved the adjusted EBITDA. So we moved from just under GBP 400,000 EBITDA to just smidgen under GBP 1 million EBITDA. So good performance operationally. But clearly, we need the revenue to grow to start to generate full profitability. Moving forward. Looking at the balance sheet. Noncurrent assets did increase during the year. That was investment in capitalization of R&D activities. This is process developments, which we -- which are ongoing within the business to become more efficient. And also, we invested in a freezer store in the U.S. This is a very large freezer store because most of our raw materials have to be kept at frozen temperature and finished goods whilst they're on the premises need to be frozen as well. Inventories reduced. That was in part due to the lower sales, but more to do with the fact that margins have improved. So the profit we're making on each pound of inventory is improving. So you need less inventory to generate the same amount of sales. Trade receivables came down. That was effect of the lower sales, but also an improvement in our debtor days. We've moved down from 53 days to 44 days. And those both inventory and trade receivables, we continue to work on to get the best efficiency out of our balance sheet that we can. The current balance of the CBILs loans is $400,000, down from $500,000. We're now into the last leg of the repayments on loans. So we've moved -- and we've got 100,000 in the long-term period portion of those CBILs, long term means the first half of FY '27. So by this time next year, we will be more or less debt-free as far as the CBILs loan is concerned. Trade and other payables came down mainly as a result of the reduced sales, but again, due to the improvement in margins. Clearly, if you're buying less inventory, you're owing suppliers less money at any one time. Obligations under finance leases increased. This was as a direct result of the use of US freezer store. So under the world of IFRS, we capitalize those leases and we show the obligations under finance leases, both the short-term element and the longer-term. Moving to cash flow. The business generated cash from operations. You can see the net cash flow from operations was -- inflow from operations is just under GBP 1 million. And that underlying -- shows that the underlying business is cash generative and profitable. Where the money is going is investing in investment activities, that's the freezer store, R&D capitalization of those things and financing activities, which is the repayment of the CBILs loans, interest charges and lease obligations, which are being paid. Overall, a net decrease in cash of GBP 1.2 million, leaving us with a cash balance as at the 31st of October of GBP 400,000. Taking off the remaining CBILs loan, that left us in a net debt position of GBP 100,000. But I should advise you that we have an invoice discounting facility. The total value of the facility if we could draw down a little bit, it is GBP 3.1 million. So a significant amount of headroom. At any one time, we'll be able to draw down circa GBP 1.5 million of that. So there's a good amount of headroom. I would also comment that one of the things we're required to do as our all public company businesses is look at our -- whether we have a going concern status and we review our forecast going out over a period, and we look out over 2 years. And we've done a lot of modeling and testing. And in each of those tests, we confirm that we meet the going concern status and we're able to sign the accounts as going concern. And that's within the existing cash and facilities availability. I'll hand you back over to Jon now, who will summarize.

Thanks, Rob. So again, looking forward, clearly, completing the transfer of the business with our launch customer in the U.S. is key. And as I mentioned earlier, we're seeing a different support level there from the -- beyond the site with the senior leadership of that organization and utilizing that both at that -- completing that transfer and also on other opportunities where we can work together to grow and support that customer. And then really manage those work transfers that we talked about and program supporting with the customer to see where Velocity can support wherever that business is manufactured from. Supporting being able to respond to those sort of both existing business and new business opportunities is utilizing, as we've mentioned before, the capacity in our existing facilities, but supporting customers by forward stock locations. These are much smaller sort of scaled either freezers or support structures on site with customers where much, much more lower investment than having a full production facility. We have production facilities with capacity. So the forward stock locations allow us to work with customers like we are with the second customer in the U.S. and the sort of big customers in Europe to actually support them closely by the forward stock location, but everything manufactured centrally where we have the know-how, the capacity and the infrastructure. So that's what we're looking to sort of implement going forward. And also, that's supported by VAMOS. Again, if you look at our previous way of working where we'd sign an agreement and then we'd have to wait for the sort of transfer to complete and that customer would have to wait for the transfer to complete for the benefits to flow. With VAMOS, it's much more of an immediate transfer of initially the sort of material management side of things, where the customer gets a benefit, we get revenues and everyone is on a much more sort of driven transfer program. And if that does get curtailed for whatever reason, there's revenues there already and benefits for the customer as well. So we are sort of tweaking those services as we roll out into new customers served from our hubs. And the cautious optimism of the industry is perfect. I talked about it in the annual report about the sort of environment for customers to take up the business cases that are on offer as they grow, as they get busy and really focus on customers who are growing, on growing platforms, geographically stable with diverse portfolios across civil and defense is what we're focusing on as we expand both in Europe and North America. I think that covers the main bulk of the presentation. So I think what we'll do is we'll go straight to the questions.

So Question one, in terms of augmenting the sales effort. Yes, I agree. It's a relatively small team. But again, our customer base and potential customer base are relatively small numbers, and we are focusing now at senior level engagement rather than site level engagement. We sort of recognize that sites have their time scales and priorities. But what we offer really is of interest at the corporate level where the cost savings, the inventory reduction and the cash that, that the inventory reduction frees up is really more suited to the sort of corporate level. So yes, it's a good question. It's something that we review very frequently in our Board meetings. And I think there will be some updates there through this year as we sort of ramp up that senior level engagement to turn these costly business cases into contractual agreements. It looks like question 3 from Paul L.

Financial question. I'll address that.

Over to you then, Rob.

So as I mentioned when we went through the balance sheet, so thank you, Paul L., for submitting the question. You comment on the inventory and trade payables coming down from FY '25 -- between FY '24 and FY '25 and what the flow that is going through FY '26. Now you'll appreciate we can't comment on FY '26 because it's not in the public domain other than I'll give you a flavor for what's going on. So FY '25, and we continue to bear down on inventory and push up margins. So one of the big reasons why inventory came down was the improvement in margins. As margins improve, you need to buy less inventory to get the same sales. How the first 3 months of FY '26 has progressed, as I said, we can't comment on that specifically without advising all investors at the same time. However, there is a weighting through the year as the transfer of programs in the U.S. lead customer comes through. As Jon mentioned, we currently got about 40% transferred. We're expecting to get the majority of that work transferred by the end of the year, and it transfers during the year. So there will be a second half weighting. But the drive on inventory and receivables continues. We would look to get more and more out of the balance sheet that we can.

Thanks, Rob. Question from Daniel B. How much of the FY '26 revenue is contractually committed? Without an exact number, the sort of most of it really, if not all of it, Rob, is pretty much contractually committed. And again, looking at production rates, we've been -- on the side of caution there and sort of assumed fairly flat production rate year. And as I'm sure you appreciate, a lot of our forecasting is based on the forecasting from our customers as well. So we've taken a relatively prudent approach. But again, as Rob says, was the big transfer from the U.S. and getting that done is an important part of that, which we have a lot more confidence around and have a committed time line with the customer. And yes, anything new to that, we'll get updated to the market accordingly.

So back to Paul and more financial questions. First question is about going concern modeling and you ask, does this assume full use of invoice discounting facility? So one of the things we have to do is a thing called a reverse stress test, which says at what point does your cash run out if you reduce the sales level. So we've modeled that if we reduce sales down to 75% and make no other mitigating cost savings, so it's a conservative number, cash would run out if we were at 75% and nothing else changed. That does assume full use of the invoice discounting facility. This is a very highly unlikely scenario and is part of the modeling exercise we have to do to get the accounts through the audit.

I think we missed the question actually.

I don't think so.

Key milestones.

Sorry, we did miss the question. We'll go back to Chris.

Key milestones, I think, as we've talked about, obviously, getting the U.S. project complete delivers that. And then really turning some of the live business cases and the activity that's already been completed and sat there with customers into contracts. And again, as the industry sort of begins to ramp up and get busier, that's -- the feeling is certainly that the ability to do that will greatly improve because we've seen -- some customers -- current customers, as we've seen are not that busy and on different programs, whereas all our focus on new customers and growth customers are on expanding programs, but also on a diverse portfolio. So that's where our focus will be. And as we move through those, that's obviously delivers the sort of what's asking the question there, but even just delivering what we've already contracted gets us to that position. [indiscernible], so can you see that? You answered that one. Sorry. That's the next one.

So again, Paul, I'm trying to interpret your question. I'm not sure I fully understand what it is. So I believe what you're asking is have we included increased production from our U.S. site from the contract? And the answer is that hasn't transferred yet. Yes, we have. It is through the year and is at the latter point of the year. So that comes in later in the year. There is some runoff on legacy program -- well, there is legacy -- runoff of legacy programs in the U.K., which we factored in. So the guidance that's in the market for FY '26 does take account of those activities. Yes, there is a process for qualifying production, which transfers to us, and we are in process on that at the moment. It's called first article inspection, and we are going through that, and we're on a time line that's been agreed with the customer, which transfers the work during the year.

Thanks, Rob. A question from Simon G. What share of the business goes through U.S. plant? Rob, do you have the numbers?

Yes. So through FY '26, the U.S. plant becomes the larger of the two plants as the work transfers in from our lead customer and the legacy work starts to dip off in the U.K. I believe it's about 55% U.S. and 45% U.K. And there is a subsequent question on the European customers.

You mentioned the European customer.

So we've assumed no revenue to Mainland Europe in the current market forecast, which are out there. And we see that, that will be a case of ramping into FY '27. We haven't indicated FY '27 numbers as yet because there's quite a few moving parts of the jigsaw, which we need to close out over the coming months, and we're looking to put guidance out at the half year in sort of 3 months' time.

That's great, Rob. Jon, if I may just jump back in there as you have addressed all the questions from investors today. And of course, the company can review your questions submitted today, and will publish those responses on the Investor Meet Company platform. But Jon, before I redirect investors to provide you with a feedback, which is most particularly important to the company, could I please just ask you for a few closing comments?

Yes. Thank you, and thank you, everyone, for joining us. As we say, it's '25, we hopefully see the sort of the end of the sort of post-COVID malaise really in the industry. We've seen a lot more cautious optimism with our customers. We have, as we mentioned, progress in the U.S. with the second customer. Progress in completing that key transfer of work with a key customer, which we want to utilize that relationship in Europe as well and really move some of these business cases into the -- from the engagement stage into the contractual and delivery stage because, again, the services are needed and will be even more needed as customers get busier and need to meet some of these challenging rate increases.

Fantastic, Jon, Rob, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Velocity Composites plc, we would like to thank you for attending today's presentation, and good morning to you all.