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

Good morning, ladies and gentlemen, and welcome to the Velocity Composites plc Full Year Results 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 will publish those responses where it's appropriate to do so. Before we begin, as usual, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Velocity Composites plc. Jon, good morning, sir.

Good morning. Good morning, everyone. And again, welcome to our sort of FY '24 year-end presentation. We've got a slide deck prepared to take everyone through and I'll make a start on the results of the last year. So the usual presentation team, you've got Rob next to me here, CFO; myself here in Burnley; and Andy joining us, our Chairman, from Manchester. Essentially, we'll start with the usual format of the presentation. So in summary, clearly an important year as the industry starts to recover, albeit as we'll talk in a moment, there have been some challenges within the industry, probably very well publicized ones, which we can discuss and sort of cover in terms of the impact of those. But in summary, revenue up 40%, driven by some increases in Europe, but mainly from increases in the revenues from our facility in the U.S. as that project continues to onboard but also have full year effect of the programs that are already onboarded. And a lot of work within the business and all the teams really to drive in terms of getting the gross margin back to the levels that we desired. Really, and we'll talk about that in a moment, but a lot of effort and multi reasons for that. But again, a really positive step forward. But in turn has driven significant swings in the adjusted EBITDA and the reduction in the loss, which again is another big step in the right direction and sufficient cash reserves to carry on with our plans as we move forward. So I think it's important just to cover up some of the industry issues that we saw last year, but also look forward to see what the resolution of those and what the public information out there is in terms of the aircraft production rates, which in turn leads to higher volumes required from our customers and obviously high volumes of our products into our customers, fortunately. So 2024, pretty much 12 months ago now, a chain of events started really with Boeing. And again, no sort of direct impact, but again, indirect impact. Customers who support both Airbus and Boeing platforms and customers that we were engaged with in North America as well, particularly. And essentially what I'm sure most of you saw what happened, but there was issues with particular flight that led to significant oversight. It meant that production rates that were planned last year, particularly around the key 737 program weren't allowed to happen. And then in sort of response to that, Boeing announced that they were reacquiring Spirit AeroSystems, probably the largest tier-one in the world, previously part of Boeing. But in the meantime, [ it was a private company ], it also involved a lot of Airbus work as well. So then there was a period of sort of disentangling that Airbus work and getting Airbus happy with where that work has moved to, but then also everyone pretty much focused on either doing that disentanglement or managing the post-takeover. So that led to a lot of sort of distraction within that sort of direct side of business. But also customers we were talking to, as we say, supporting those programs we didn't see the expected rate increases. So again, that sort of influences their decisions in terms of key outsourcing projects like ours where we support growth or efficiency or areas where they need more capacity or floorspace. Apologies, I can't quite read the screen. So Rob's screen is [indiscernible] there. And then, of course, as we announced back in September, there was an expected rate increase on A350, which has moved to the right. Again, some customers had already started the activities to support that. We were supporting customers in that rate increase, but moving it to the right essentially meant that then there's a period of customers dealing with any [indiscernible] and inventory that have been built for that rate increase that we sort of had to work through sort of end of the year to manage that. So I think all in all, again, I also missed off towards the end of the year as well, there were some labor strikes in Boeing which actually stopped production of the 737 program for a period of time as well. So I think all in all, quite a difficult but interesting year in terms of 2024. But fundamentally, we still see those rate increases planned. We still see obviously aircraft being sold and the OEMs wanting to drive up production rates. And so really, as we look into 2024, you've got -- expected that Spirit takeover to conclude. And I think Boeing results this week sort of forecasting that to be sort of midyear. Coupled with that in that same results, they were again giving us a bit more guidance on 737 production rates and when they start to see them increase. Also rate increases discussed there on 787 going from 5 to 7 aircraft a month, again, 20% significant increase there. Also, key project in Europe for us is the A350, where we support multiple customers in the U.K. And again, we're starting to see rates forecast to move from sort of 6 a month in total across both variants to around heading towards 9 and particularly the -1000 variant from rate 1 to 3. So hopefully, and all indications are that 2025 is when issues are resolved and those rates starts to come back and actually get back to sort of the levels they were pre-COVID and beyond. Just a bit of a summary on the sort of progress within the organization through last year. We obviously talked a lot in the year around the sort of first class [indiscernible] processes as we onboard our customers' programs from the facility in North America. That progress has continued, and we did an update back in September where the FAI process for the final suite of programs has been delayed due to various reasons, but essentially the sort of OEM availability and then some sort of elapsed time issues, which meant that certain parts had to be redone. Nothing that we've seen so far has been on any issues with our kits or our FAI plan or anything in what we do. Really just procedural issues around what is quite a very intensive FAI process for an aero engine OEM and we have quite [indiscernible] safety critical components. So as you'd expect a lot more detail involved in some secondary structure. But again, that is progressing. The repeated FAI is happening as we speak and the customer builds parts with our kits and then that part gets assessed by the OEM and then we're approved to supply kits on that program. So again, nothing we've seen there is giving us any concern other than obviously the ops time, but these things will take the time that they're needed. We have very good support from both the customer and the OEM, approvals and it stays in the presentation as well. The big difference from the FAI that was done last year is we are in direct contact with the OEM now and helping to shape and drive the whole project management of that FAI process to completion. So that's positive. It's great that both the engineering teams in the U.K. and the U.S. is supporting that, and we expect that to complete in the first half of this year. One other thing that, again, gives us a lot of sort of satisfaction in terms of the pride of the team and how they're working is around -- and we now see the U.S. facility operating to the same quality and delivery performance to the U.K. site. Again, testament to everyone's hard work in terms of managing that knowledge transfer. And then that site whilst it's still awaiting completion of the third package of FAI is still sustaining those first 2 packages, again, to the very high levels of quality and delivery performance. So again, great cooperation with the customer and great sustained delivery there from the local team. And then in terms of new business, obviously, given some of the challenges we talked about on the previous screen, irrespective of that, work has continued at a reasonable pace there. And we have business cases that are [indiscernible] with some of the civil programs. But then we also talked about last year moving the focus on to defense programs. And again, work has progressed well through there. And as always, we'll update everyone when that progresses through to completion. But clearly, lots of defense spending, not just on military aircraft but on defense systems, missiles, drones. The whole suite is [ Composite ] based and particularly in North America, there's not a lot of larger non-civil aerospace organizations doing a lot of business with [ Composite ]. In Europe, again, as we talked about at the half year in our market update, a lot of activity in terms of some contract renewals where we have some price renegotiations around some of the inflationary factors that we've seen over the previous 3 years. Again, we probably benefited as we [indiscernible] from a period of low interest rates and low inflation. And clearly that's changed in the previous contract window. And 2 things really. One is we need to rightsize that with what has been -- we've experienced, but also move to more an annual price agreement. So we may sign 3-, 5-year contracts, which tend to roll and become -- once we're performing these services, they sort of continue indefinitely as long as we perform. But actually move to within those an annual price agreement where we can cover off both for us and customer benefit any inflationary pressures in year to match their sort of budgeting window and ours as well. So I think that's been a very positive step. We'd like to get that concluded. And again, it sort of makes a lot more sense for all of us to do that in a much smaller time frame rather than wait until the end of the contract. One thing that we also talked about previously is when we went live with our facility in North America, we implemented our Odoo-based MRP system from day 1 to avoid having to implement one and then update it with the planned switch to the Odoo-based system. It has worked really well in the U.S. It's been obviously [indiscernible] using that day to day. And then as part of the sort of standardization there, we're implementing that in the U.K. as well, to give us consistency, but obviously better data on the sort of normal transactional parts of the business alongside some of the sort of bespoke Velocity-owned IP software around more the sort of manufacturing efficiency nesting, material management, all the kind of stuff that we do as part of our service offering. In Europe, new business was focused on existing customers. And again, progress there both in the U.K. and Mainland Europe. And again, as always, we'll update as those move through to contractual stages. And in terms of existing business, as we said previously, clearly, the A350 ramp-up is key with multiple customers in the U.K. And we talked about the issues last year. January started a little bit differently in terms of starting to see those rates move forward in line with the expectations that we've been thrown down from Airbus. So again, key program to ramp up. Interestingly, the sort of delayed ramp-up, we've not seen anything to suggest that any of that was to do with any composite suppliers. It was sort of noncomposite reasons. We've seen various causes of that delayed ramp-up, the engines or [indiscernible] components, but [ Composite ] seems to be able to ramp up and meet those demands quite well. I'll hand you over now to Rob, who will take you through the financials in a bit more detail.

Good morning, everybody. Just going into a deep dive on the income statement first. As previously mentioned, our revenue increased by 40% in the year, and that was mainly as the U.S. site ramped production on its programs for our main customer over there. We were particularly pleased with progress made on margins. Gross profit improved to 25.9%, up from 18.8% in the previous year. This was a significant achievement, and there were a number of factors. The key ones being a better mix of sales. The contracts in the U.S. were negotiated at better pricing. So we benefited from that increase in sales in the U.S. and the mix helped us there. The inflation adjustments that Jon has just talked about helped on the U.K. business. And we saw improved operational efficiencies. Again, in the U.S., we had better labor utilization, which helped drive the profitability. But we also focused on many day-to-day yield improvements, handling improvements and so on, to continually look to improve our margins. Administrative expenses in the U.S., we saw the first full year. That has now reached a sustainable level, and we would not expect a shift in the administrative expenses going forward. Adjusted EBITDA resulted for the first time since COVID-19. We saw an adjusted EBITDA of GBP 374,000, although clearly, we are still loss-making at the bottom line, but the loss significantly reduced. Moving on to the balance sheet. We had a relatively quiet year in terms of fixed static investment and with depreciation playing through, the noncurrent assets came down. Turning to the current assets. Inventories reduced from GBP 2.7 million to GBP 2.5 million, and that despite a 40% increase in business. So that was a major improvement in inventory turns and reflected the initial take on stage in 2023 of our contracts in the U.S. where we acquired material from our customer, and we worked very hard through the year to get the inventory turns up. Likewise, trade receivables, although we saw an increase in trade receivables on the back of the 40% growth, we were much more efficient in our collections, and we moved from 71 days receivables down to 53 days at the end of 2024. Trade payables reduced and that was in part as the improvement in inventory, better yields and so on. We actually need to buy less. So the trade payables will come down naturally. Noncurrent liabilities includes CBILs, and they reduced by GBP 0.5 million during the year, and there was a net reduction in assets obligations under finance lease that came down by GBP 300,000. Looking at the cash flow. As we continue to our growth cycle, there is a very close scrutiny on cash and cash management. This, in past, I explained when we looked at inventory, getting our inventory turns up to the 10x per year level from what our customers would have experienced previously at about 4x a year is a key part of that, monitoring our spend on administrative expenses, making sure that we are efficient as possible and we pay and we receive our cash from our customers on time is key. We did have net cash inflow from operations of GBP 370,000. That was helped by tax receipts from R&D tax credits. And we actually received 2 years' worth in the year because 2023, unfortunately, submission didn't go up in time. So we had a bit of catchup in 2024. We utilized cash from operations, partly in investing activities, and that is largely capitalization of R&D expenditure and in servicing finance, which is repayments of loans, repayments of lease obligations and interest payments. All in all, cash reduced from GBP 3.2 million to GBP 1.7 million. But on top of the GBP 1.7 million, we had undrawn facilities which are contracted up at GBP 3 million with our bankers in the U.K. So we have a fairly large headroom, which we monitor against. Having said all that, we continue to work very hard to make sure that we have sufficient cash in the business. You will notice the table on the bottom right there. Our net debt was -- we had gross cash of GBP 1.7 million and CBIL loans of just under GBP 1 million, giving us GBP 700,000 net cash. The position that we put on our announcement yesterday, the RNS announcement in January, is we have about GBP 1.6 million cash and net cash of GBP 800,000. So the cash position is largely unchanged from the year-end and we're operating cash neutral at the moment. However, we do need the facilities we have and the real cash generation will start once we onboard the final phase of the U.S. contract. I think that probably covers that slide. Thank you. I'll hand you back to Jon.

Thanks, Rob. So just to sort of summarize what we're sort of looking forward to in FY '25. As we said, I think the A350 program rates are key and to start to see them move forward will be important not only for existing business, but also future business. As customers get busy, their facilities fill out and they look for ways to meet that increased demand and free up floor space and all the other benefits that Velocity bring. Obviously, completing the final contracted program for our facility in the U.S. is important. As Rob said, there's been a sort of company-wide real drive in terms of efficiency at every level in terms of not just our material efficiency, our stock turns, our overhead spend, really, to support that improvement in margin. We did pass obviously some of our labor inflation and energy inflation on, but we also have to be mindful that customers are looking for us to play our part as well in terms of driving that. But again, we think we've struck a really good balance there in terms of being more efficient ourselves but also managing the inflationary issues of the previous couple of years. Those that know the company will know that we're only talking about service inflation. The material that we purchase and sell is fully controlled from not only specification but also price. So any material inflation is automatically passed on as part of contracts anyway. Business development, we have some [indiscernible], shall we say, opportunities, which as the civil aerospace market sort of resolves and the rates increase, we can resurrect. But also some defense sector opportunities as well, which, again, is another significant utilizer of composite materials. And again, the drive really is around managing the business post-COVID as the rates recover to sort of pre-COVID levels. We have targets around margin, EBITDA [ and ROC ]. And again, we've made significant inroads into achieving those and continuing to build those into the business as we expand and look at different opportunities wherever we operate. I'll hand you over to Andy now with a final summary, and I'm sure after that, we'll go through the questions.

Thanks, Jon. Thanks, Rob. Fantastic. So just reflecting on this last year, the key highlight for me and for the Board is that we achieved another year of 40% growth. And even with that, the current contracts still offer significant upside. If you look in the U.S., we've got a major program which we're onboarding. In that facility, there is other opportunities around defense to onboard programs in the future as well. And when I reflect on Trump coming into power, I can see onshoring back into the States and into that facility, potentially offering even more opportunity for us as we are based ourselves in the U.S. next to that major facility for that Tier 1 customer. And if you look in the U.K., our biggest program that we're exposed to in Airbus is the A350. And Airbus' own forecast say that they want to ramp up from production of 6 aircraft a month to 12 aircraft a month in the next couple of years. This year, they're trying to get up from 6 to 9. We'll see how that goes. And if they can achieve that, then that gives us again a major upside within our own business. The strength of the Board, bringing Rob on, you've heard him today, great focus on cash, very experienced in manufacturing. Everyone is really enjoying working with Rob and all his experience and strengthens the Board, as I say. And those business opportunities, I know everyone is waiting to see if we can land another major contract. We do work on those big contracts. They do take time. And we do believe that we will land other large contracts in the foreseeable future, ideally in the shorter term. But even if they are more modest, we can definitely grow this business significantly over the next 3 or 4 years. And the key point now is that we're hitting that margin of over 25%, which means that growth will be more profitable. Cash generation is starting to come through. And therefore, overall, we feel very positive about the future of the business, very positive about what we've achieved in the last year and the outcome and the outlook for the business. So I'm going to pass you back to questions and answers, and we'll try to answer all your questions.

[Operator Instructions] I'd just like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can all be accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But Jon, Andy, Rob, at this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great.

Great. Thanks again. I'll ask the questions, and I think Jon and Rob, you can answer them. I think the first question is really just for you, Jon, and Rob, you can chip in, is really saying, what is our order book? How does that work, the visibility? And is there any capacity constraints in that current order book at all?

Yes. Thanks, Andy. So obviously, with our customers, we have agreements. And then in terms of how that order book is flowed down to us, we tend to work to a 12-month rolling forecast, which is reviewed monthly in sort of very detailed commercial reviews between the 2 organizations. When that gets to sort of the 6-month horizon, we tend to look for a more sort of focused forecast with a plus or minus figure attached to it because that's the sort of window that we use to order the material. And clearly, we want to make sure there's enough material, but obviously not too much. And that's driven really by the raw material lead times for the program. And then the sort of next horizon is probably a 2- to 4-week fixed window where that allows us obviously to plan our manufacturing operations and respond to the customer demand [ in flow ]. So you've got this sort of rolling 3-horizon 12-month window pretty standard across all customers. And obviously, that's based on what they're told from or requested from their customers as well. So where we saw last year, where that moved, yes, the OEMs unfortunately on a very rare occasion can do that and move those rate increases to the right. So that's where we work with our customers to plan out any impact of that and smooth that particular material supply pipeline, but also meeting their operational needs and getting the kits to them as they need them. I think we're also realists and we've worked in the industry a long time. So we're also working with the customer, give the customer the opportunity to bring in any kits at short notice that they require and any kits where they may find that there's a defect in the material or a problem during their manufacturing process and they need replacement flies. So that short-term demand is also managed very closely to serve the customer effectively.

Great. Well, thanks, Jon. Next question, I think, a good one for you to answer, Rob, and it's a good question. You pointed out in the presentation that for the first few months of this year, roughly the first quarter that we've broken even on a cash basis. I think you meant that after repayment of debt as well. And the question is really, is that the current run rate for the next couple of quarters? Will it improve as we ramp up production in the second half of the year? What's your visibility there, Rob?

Thank you, Andy. Yes, we -- indeed, that cash breakeven was after debt repayment. Our short-term forecast is that we will be around the cash breakeven mark. [ Payments ] are fairly lumpy during the month. But on an underlying basis, we should be cash breakeven during the first half of this year. And then moving into the second half as the additional work packages slow down from our U.S. customer, we will move into cash generation.

Great. Thanks, Rob. The next question is what percentage of our revenues, roughly the balance between the U.K. or Europe, it's mainly the U.K. and U.S. And the question specifically is how much do you expect the U.S. market could generate revenues over the forecasts that are out there?

Yes. It probably picks up on another point I sort of missed on your earlier question around capacity as well. So capacity-wise, we see about GBP 70 million of absolute capacity across all 3 sites, if we run 3 shifts 24/7. Clearly getting up to those levels has its challenges, but it's a good market to say the absolute ultimate capacity. U.S. and Europe, we're probably looking to split 50-50 where we can. But as people know that when we onboard new programs, they can be quite positively lumpy in terms of the size of them and the way they're sort of digested. So that might swing a little bit either way. But capacity-wise, it's split pretty much 50-50 across Europe and North America, and that's what we want to utilize.

Brilliant. Thanks, Jon. So the next question is actually -- has come in as a similar-ish question, but it's really just saying, do we have sufficient capacity for the new opportunities that you've described? And I think you've answered that question, really, haven't you, Jon, saying that it is actually about filling that capacity, GBP 60 million, GBP 70 million that we've got at the moment before major investment in any new facilities. So I think, Rob, you pointed out that we've made a major investment over the last few years in that capacity and we've not had to add to that in the last sort of 6 months.

We don't have any significant capital expenditure plans, but we have bits and pieces in replacing and renewals, but no major drawdown in requirements to spend on new facilities. The opportunities in the pipeline will be serviced from the existing premises with existing equipment. We will clearly need more people, but no [ fixed assets expense ] [indiscernible] big ramp-ups in capital expenditure over the coming years that we're seeing currently.

Yes. I think we tend to add some freezer capacity, don't we, as we grow as well, but that we can even lease that if we needed to.

That's correct. And in relative terms, adding a freezer is a lot less expensive than standing up a whole new plant. So that's possibly the only minor constraint, but freezers are available commercially short term. So it's not a particularly challenging constraint, if you call it a constraint at all.

Brilliant. Okay. So the last question I've got at the moment here is a more strategic one, Jon. It's really saying, as you see this upturn in production rates, do you think it's more likely that customers will need or want to outsource work to us?

Yes. I mean it's a very good question. And I think absolutely, we saw it pre-COVID. Obviously, COVID has been a bit of a leveler for everyone in the industry in terms of period of low production rates. But as those rates recover, customers have lost capacity, they've lost people know-how and contracted in their sort of footprint as well. So as they build back with those doubling of rates really over the next few years, then absolutely, that's when we offer that ability to meet that rate increase without having to go find all those people and build more floor space and everything else and allow our customers to focus on [indiscernible].

Perfect. Jon, Andy, Rob, if I may just jump back in there. Thank you very much indeed for your time in addressing all of those questions that came in from investors this morning. But Andy, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments just to wrap up with, that would be great.

Great. Well, thanks, everyone. And thanks for listening to our presentation, which is on the 2024 results. And we should just reflect that the industry had a few issues last year, yet we still grew at 40%. We had to adjust our forecast later in the year because Airbus, in particular, had to change its production plans. We did that as quickly as possible, and we had to work with customers to help through some surplus inventory as well. And that's all part of the service we look to provide to the customers. But it doesn't deflect from the long-term opportunity. There's a long-term growth here in this business. Yes, there'll always be little ups and downs. But when we look back on what we've achieved in the last couple of years, 2 years of near 40% growth year-on-year, and we're very optimistic for further growth this year based on the contracts. And if we can see that uplift being achieved by the OEMs, which they need to achieve, then we'll see further growth in the current contracts. Add on top of that new business opportunities and expanding customers that we're working with and it's a great opportunity for this business. I still believe one day, we'll measure this -- we can measure this business in the hundreds of millions rather than the tens of millions. It takes time. But what a great opportunity this business has when you're looking at its end markets. How many of the U.K. manufacturing businesses have that sort of opportunity and we're already achieving this sort of growth in the environment that we're in today and can promise that type of growth in the future. So I really thank the team that we have and the management and the Board and all their support and investors' support and understanding. We are always open for investor visits, engagement within our investors and listening to your thoughts and ideas as well. But we're very confident about the future.

Perfect. Andy, that's great. And thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but 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. That now concludes today's session. So good morning to you all.

Thank you.