STG Strip Tinning Holdings Plc

24 September 2024

Strip Tinning Holdings plc

("Strip Tinning" or the "Company")

Interim Results

Strip Tinning Holdings plc (AIM: STG), a leading supplier of specialist connection systems to the automotive sector, is pleased to announce its unaudited results for the six months ended 30 June 2024.

Despite experiencing short-term trading challenges consistent with those experienced across the automotive sector as a whole, this has been a transformational period for the Company. The three significant new nominations secured have increased the lifetime value of the order book by 181% and position the Company for medium term growth.

Key Financials:  

·      Total Revenues of £4.8 million (H1 2023: £5.6 million)

·      Battery Technologies sales of £0.3 million (H1 2023: £0.6 million)

·      Glazing sales of £4.5 million (H1 2023: £5.1 million)

·      Gross Margin of £1.7 million / 35.4% (H1 2023: £1.5 million / 26.7%)

·      Adjusted[1] EBITDA of -£0.8 million (H1 2023: £0.05 million)

·      Cash generation from operations of -£1.6 million (H1 2023: £0.1 million); cash balance of £2.0 million with no draw down against the CID facility

·      Completed £5.1 million fundraise in January 2024

·      Basic EPS[2] of (14.58)p versus H1 2023 (2.85)p

Operational updates:

·      New nominations received in H1 underpin medium-term growth prospects, with financial benefits starting to be realised from late 2025 onwards

·      The Battery Technologies ("BT") division secured a £43.0 million win with a leading Tier 1 manufacturer

·    The Glazing division won two "smart glass" PDLC nominations, together worth £18.6 million

·      Short-term challenges from customer launch delays, weak European car production, cost pressures and increased overheads to manage growth

·      Strengthened senior management team and continued investment into manufacturing capabilities

Outlook:

·      The Board is confident of meeting the revised guidance for EBITDA provided in the 16 July 2024 trading update

·      Long-term growth drivers remain despite near-term automotive market challenges, which are expected to continue into H2 and into 2025

·      Total lifetime sales value of all nominations has increased to £95.7 million, a 181% increase from the position as at 1 January 2024

·      Company sales expected to double by the end of 2026 with 85% nomination coverage already received

Adam Robson, Executive Chair of Strip Tinning, commented:

"This has been a transformational period for the Company with three significant new nominations secured increasing the lifetime value of the order book by 181% and positioning the Company for medium term growth. Despite experiencing short-term trading challenges consistent with the automotive sector as a whole, which has impacted financial performance in the current period, we are pleased to have made such excellent sales progress in H1, securing record nominations across both divisions. While we expect current challenges to continue into 2025, we expect to see steadily improving financial performance as our new sales programmes come into production in H2 2025.

"Our recent wins have given us great confidence in our market and investment strategy and provide a strong underpinning to our unchanged expectation of a doubling in sales by the end of 2026. Our immediate focus is on delivering the current commitments into production, which has required us to accelerate the growth in our respective launch teams for engineering, project management, quality, sourcing and sales staff, and to press ahead with investment in our production facilities."

A copy of this announcement will be available to view on the Company's website at www.striptinning.com.

Introduction

The first half of the year (H1) has been characterised by transformational, record nominations which underpin the medium-term growth prospects of the business, but also by challenging near-term market trading conditions which have impacted financial performance in the current period.

The new nominations received in H1 have a total lifetime sales value of £61.6 million and increase the total lifetime sales value of all nominations held by the Company to £95.7 million, a 181% increase from the position as at 1 January 2024 (when the nominations book was worth £34.1 million). The three nominations secured in H1 comprised the Battery Technologies ("BT") division securing a £43.0 million win and the Glazing division wining two "smart glass" PDLC nominations, together worth £18.6 million.

As previously announced, given the lead time of these particular projects and later than expected starts of production, the financial benefits of these wins will start to be realised from late 2025 onwards, therefore giving limited benefit to the FY24 financial performance. Sales arising from these nominations are expected by the end of FY26 to double the sales of the Company, for which we now have 85% nomination coverage.

Despite the significant wins secured in H1, we are facing challenging near-term trading conditions, along with the broader automotive supply sector. These include higher material prices, as copper in May reached levels last seen in 2022, and moderation of market demand from OEMs as they align inventory levels in response to lower market demand.

In addition, the size and complexity of our new sales successes, combined with the strength of our sales pipeline for further new nominations has led us to pull forward growth in our engineering teams. Resultantly, and as announced in July, the combination of these factors led the Company to revise expectations for FY24 and FY25. These revised expectations remain appropriate.

The market

In both the markets we serve, we are seeing good prospects for growth in terms of our new business sales pipeline. This is focused on high growth niches backed by our enhanced - product offering (notably manufacture of flexible printed circuits), despite weakening short-term call-offs against our existing nominations. 

Within the EV battery pack market, growth has slowed due to reduced government subsidies and softened consumer confidence. For H1 2024, the share of registrations in Europe[3] (EU, EFTA and UK, which are our major geographic markets) of battery electric powered vehicles (full and hybrid) increased by just 3.7% points year-on-year. However, this does mean that in H1 more than half of all vehicles registered contained a battery pack (50.9%). We believe that growth rates will increase again given the significant investments being made in new EV platforms and the continued pressure on governments and consumers to respond to global warming. 

Higher growth rates are being seen in the mid-market, our primary target market which comprises all lower volume vehicle or equipment platforms, typically with volumes under 50,000 units per annum in the sectors of high autonomous vehicles, performance cars, trucks, buses and vans, motorbikes, e-mobility solutions, off-highway equipment and static storage solutions. In the truck market, registrations in Europe[4] (EU, EFTA, and UK) of battery electric powered vehicles (both full and hybrid) increased by c.20%, up from 1.8% of all vehicles sold in H1 2023 to 2.2% in H1 2024. Investment in new electric mobility and delivery vehicles, from autonomous delivery vans to static storage packs also continues. These mid-market customers are highly attracted to working with European suppliers such as Strip Tinning that can provide local, highly responsive, full service, engineered solutions for their battery pack developments. This is evidenced by our growing pipeline of new business customers and vehicle programmes, which has increased from £80 million in April 2024 to £120 million today. There is of course a lag between this strong investment in new programmes and the resulting production sales, which will only come post launch of the new vehicles.   

Within our Glazing division, we are encouraged by our strong market positioning. We benefit from having a high share of higher specification vehicles that we supply to. This allows us to capitalise on the higher volume growth rates of these vehicle categories and higher product prices resulting from enhanced electrical functionality within the glazing products. That said, in the immediate term, growth is slowing. 

In H1, total car registrations in Europe grew by just 4.2% year-on-year, and this growth rate has been slowing over the period. In July 2024, growth was just 0.2%[5] and industry consensus is for registrations in Europe to be flat year-on year in H2 2024. This has led to de-stocking by OEMs which has had a negative impact on the call-off volumes we are so far experiencing in Q2 and Q3 of this year.  In the medium term we expect to see a rebound in demand as de-stocking ends and economic recovery improves across Europe. 

We also benefit from some favourable structural changes which are driving growth in demand for our glazing products. The use of larger glass panels in vehicles, especially in the roof, and the adoption of "Polymer Dispersion Liquid Crystal" (PDLC) "smart glass" in these panels is creating significant new product opportunities. With our growing capability to deploy flexible printed circuits (FPC) in our products, we are finding new connector applications such as in antennae and heating pads which support the sensors (e.g. cameras) mounted on the glazing which are part of the movement towards autonomous vehicle functionality. Consequently, we remain confident in our medium-term sales growth prospects, as illustrated by the progress made in sales developments during H1 2024, which will drive material future revenue growth.

Review of Operations

A key milestone was the completion of a £5.1 million fundraise in January 2024, predominately from supportive existing shareholders. This allowed us to accelerate the growth of our integrated new product launch teams to prepare for the launches of our new nominations, and to work on winning further nominations from our strong BT and Glazing sales pipelines. Over H1, we have increased our total staff headcount from 42 to 49 and we have created dedicated launch teams for each of our major new nominations.

Our senior management team has also been strengthened. Mark Perrins, who has led the operational turnaround of the business over the last two years, has been promoted from Managing Director to Group Chief Executive Officer. Rob Smith also joined in December 2023 as Chief Technology Officer and Kevin Edwards began his role as Group Chief Financial Officer on 1 August 2024.

Notwithstanding the aforementioned cost and sales pressures, we are pleased that gross margins in H1 improved year-on-year from 26.7% to 35.4%, primarily driven by the elimination of loss-making products and increased productivity.

Our key operational focus is to ensure the successful delivery of our growth plans. Accordingly, in H1 we started negotiations for the lease of a new building on our current site, which will increase our floor space from 29,287 square feet to 36,977 square feet. The increased floor space will provide enough capacity to launch all new products and to further increase production of certain products, notably more conventional Glazing connectors, for which we are actively seeking new nominations. 

Successfully securing additional new business opportunities in our sales pipeline is likely to require new production processes, lines, and factory space. With this in mind, we are applying to the government's Automotive Transformation Fund for a multi-million-pound grant to support additional capacity.  We are pleased to have been told that we have passed the Expression of Interest stage of the application process and we will now proceed to the detailed application phase.

We are also continuing our ESG journey.  Notable progress in H1 2024 has been the addition of further EV charging ports, taking our total now to 10. Additionally we have also made improvements to our chemical's storage and handling facilities.

Battery Technologies

Sales in the Battery Technologies (BT) division have been weak in H1 due to delays in customer programmes primarily caused by customer driven engineering changes.  Sales in H1 24 were £0.3 million (H1 23: £0.6 million). These delayed orders, worth £0.4m, are expected to be largely delivered in H2.

This pause in sales has allowed more effort to be focused on preparing the BT division for the start of high-volume production for its new £43 million Cell Contact System (CCS) contract. Under the terms of the nomination, production supply will start in Q4 2025 with further pre-production revenues of over £1.0 million to be received over 2024 and 2025 for the supply of tooling and pre-serial parts. To date £0.3 million has been received to support initial tooling orders.

We continue to engage with a growing number of actual and prospective mid-market customers.   Today we produce production parts for three active customer programmes and samples for multiple programmes in development.

Our pipeline for new BT programmes is developing strongly, with leads exceeding our current ability to respond in all cases, a factor that emphasises the value of our strict mid-market focus and the significance of our plans to further grow our people resources.  At the current time, our top 12 sales leads (based on strength of engagement) have a total lifetime sales value up to 2032 of £120 million, with typical annual sales ranging from £0.5 million to £5.0 million and production nomination dates ranging from 2025 to 2026. 

Investment in our CCS production facilities also continues; notably with the delivery of our new £0.6 million laser welding line, which was delivered on 1 September.  During H1, the facilities have been certified to conform to the IATF 16949, ISO 9001, ISO45001 and ISO14001 quality standards and have been subject to and passed 5 customers audits.

In order to fund current operational demands, to meet the production targets set by the CCS contract already signed, and to be able to secure further nominations from the growing pipeline of BT programmes, additional capital expenditure will need to be made, and the Company is assessing the optimum ways of securing the funding required.

Glazing

Sales in H1 were £4.5 million (H1 2023: £5.1 million). We had anticipated a decline in sales as we exited the last of the of low-margin products from our previous portfolio, but sales in the second quarter fell £0.2 million short of expectations as the ramp-up of new products was slower than anticipated. However, now that the impact of the Russian invasion of the Ukraine on sales, materials shortages and price inflation has stabilised, as well as our internal margin improvement actions, gross margins have improved, from 27.1% in H1 2023 to 36.7% in H1 2024, although still short of our expectations. We have further reduced our shop floor headcount from 87 heads at the end of H1 2023 to 55 heads today, however we have faced other unexpected cost pressures, in particular from the cost of rising copper prices, adverse mix changes, and some loss of overhead absorption based on the lower sales. We are working to address this margin weakness with selective price increases, improved sourcing and further gains in productivity.

The notable development in the Glazing division has been our success in winning two major new nominations for the supply of an advanced connector to be used within Polymer Dispersed Liquid Crystal (PDLC) technology "smart" glass:

1.   Nomination with expected lifetime value of £6.3 million for which supply will start in Q3 2025 and run until 2035, with forecasted annual sales value peaking at £0.9 million; and

2.   Nomination with an expected lifetime value of £12.3 million for which supply will start in Q3 2026 and run until 2031, with forecasted annual sales value peaking at £2.8 million.

In "smart glass" applications, electrically activated layers within sunroofs, roof systems, windows, and visors turn car glass into a dynamically adjustable and responsive light-management system. The connector benefits from being built around flexible printed circuits (FPC) which give weight and packaging advantages within the vehicle roof space. This is a rapidly expanding segment of the automotive glazing market, with the new technology already being deployed down through the vehicle platforms from the initial prestige segment into mid-volume vehicle platforms.

Strip Tinning has had early success in the new PDLC market segment, and since Q4 2022 has been supplying glazing connectors for the panoramic roofs of the fully electric BMW iX vehicles. The Company is well placed for further successes, having invested in in-house FPC manufacturing capabilities as well as the required engineering know-how to satisfy increasing customer demand for more complex connector solutions.

The Company has now received four nominations in the "smart" glass market, which demonstrates Strip Tinning's first mover advantage within this growing segment and underlines our position as the supplier of choice for specialist connectors to the Glazing sector. The Company is now supplying smart roofing connectors to all the leading German automotive OEMs for use across a significant number of different prestige Electric Vehicle (EV) and Internal Combustion Engine (ICE) vehicles in their ranges.

The Glazing business will be looking to return to growth in 2025 with the new production nominations either already won or in the pipeline. We are intent on delivering growth in both sales and margins through a focus on higher value-added products and our selective pipeline for these types of products is developing strongly.  At the end of July, our top 12 leads (based on strength of engagement) had a total lifetime sales value of £25 million with many production nominations expected over the next 12 months.  We are optimistic that this will deliver net Glazing sales growth in 2025.