Hardide plc (LON:HDD), the developer and provider of advanced surface coating technology, announced today its annual results for the year ended 30 September 2022.
Commenting on the results, Philip Kirkham, CEO of Hardide plc, said: “I am pleased to report strong revenue growth across all the Group’s end-use market sectors. In FY22, overall revenues increased by 39% from FY21, recovering to the pre-pandemic record level of £5.0m. This enabled a significant improvement in the EBITDA loss to £0.9m from £1.5m in the prior year.
“The new financial year has started well, with revenues in the first quarter ahead of those in the same period last year.
“Whilst the Board is mindful of economic headwinds, ongoing cost inflation and supply chain disruption, Hardide has been successful in recovering cost increases through selling prices, and revenues continue to grow from increasing customer adoption of our coatings. As evidenced by the recent action taken to improve working capital and reduce cost, the Board is focused on becoming profitable and cash generative.
“More broadly, the Board is seeking opportunities to drive significant value for shareholders and other stakeholders over the medium to longer term through further development and commercialisation of the Group’s unique high performance coatings technology, including co-operation with other coatings companies.”
Note: EBITDA excludes depreciation and amortisation of owned assets £0.9m (FY21 £0.9m), depreciation of right of use assets £0.3m (FY21 £0.3m), net financing costs of £0.1m (FY21 £0.1 m) and share based payment charges £Nil (FY21 £0.2m).
The Board is pleased to report the Group’s annual results for the 2022 financial year. Revenues increased by 39% from FY21, recovering to pre-pandemic (FY19) levels of £5.0m. Revenue growth was led by the oil & gas sector as the market began to recover from the downturn during the COVID-19 pandemic.
The combination of strong revenue growth and operational gearing led to a significant reduction in the EBITDA loss to £0.9m for the year, compared with the prior year equivalent of a £1.5m loss.
The improvement in revenues has continued in the current financial year, with revenues in the first quarter ahead of the same period last year.
Following recent strategic review, the Board is executing a two-stage approach:
(a) Focus on becoming profitable and cash generative. This will be driven mainly by increased sales to existing and new customers, utilising proven coating technology and existing production capacity, thereby benefiting from the Group’s strong operational gearing; and
(b) Developing opportunities to drive significant value for shareholders and other stakeholders over the medium to longer term through further development and commercialisation of the Group’s unique, high performance coatings technology, including co-operation with other coatings companies.
The mix of revenue to our main markets during the year was:
Sales to energy customers increased by 72% during FY22, including a 54% increase in sales to oil & gas customers. While recovery of demand from our traditional oil & gas customers is strong, it has taken longer than expected to be reflected in our sales due to supply chain delays caused by the shortage of raw materials and labour available to manufacture customers’ parts.
Of particular note is that we successfully completed laboratory and field tests for a major European oil & gas company with excellent results, demonstrating that the use of Hardide coating will provide longer-lasting ‘nodding donkey’ type land-based pumps. The 139-day field test showed no signs of wear, scratches or material loss on the parts. Post-period, large batch parts have been coated for operational field testing. Production orders are expected on successful completion of these tests in the current financial year. The broader market potential for an extended-life version of this well-established technology is considerable.
Further orders are expected in FY23 for the coating of wire mesh used in a new coated sand screen. Chevron Corporation published an exceptionally detailed conference paper in October 2022, at the prestigious SPE Annual Technology Conference and Exhibition in Houston, USA, reporting that the Hardide-coated sand screen achieves a 4x-6x increase in erosion performance and a 10x reduction in corrosion rate as compared to conventional premium sand screens. Over 3,000 feet of these coated sand screens have been deployed in wells to date, with more planned in 2023. This impressive performance is only possible because the unique properties of the Hardide coating mean that it is possible to coat the individual wires which comprise the multi-layer woven metal mesh. Developments are underway with other major companies on similar sand control applications.
Good progress has been made in diversifying the oil & gas customer base with sales spread across a broadening number of customers and with not one dominating divisional revenues.
The IEA World Energy Outlook 2022 cites global demand for energy from oil & gas continuing to grow to 2030, while renewable sources are forecast to account for nearly 50% of electricity generation. Concurrently, industry and governments are committing to transition from fossil fuels and reach net-zero targets. This evolution will provide additional opportunities for Hardide in the oil & gas and alternative energy sectors. The Group is pursuing these with vigour.
It is a strategic objective for the Group to increase the proportion of revenue generated from the alternative energy sector. Promising progress with development projects is being made, particularly in hydrogen applications.
Several Hardide coating variants were tested at Cranfield University involving a process for the manufacture of ‘green’ hydrogen. The results are encouraging and details of the testing are confidential to maintain patentability of the application. A grant has been awarded by the Henry Royce Institute to fund further testing. In another hydrogen application, a customer is testing the permeability of the Hardide coating for use on components in a hydrogen compressor. Subject to positive results, this opens up a large range of opportunities for Hardide coatings in hydrogen storage and distribution.
The increase in sales expected to our manufacturer of products for the solar cell industry has been lower than expected in FY22 due to the exceptionally high energy prices. Demand for their product is increasing and they have already expanded capacity and expect to ramp-up production in 2023. Sales of our coating on its components will increase directly in line with their production volumes.
Two high-value production orders of coated gas turbine blades were delivered to Ansaldo Energia S.p.A. in Italy and repeat orders are expected in 2023. Developments are also underway on additional applications.
Currently, the Group is working on projects with five power generation companies in the UK and overseas. These are based on Hardide’s recently patented coating for blades and vanes for turbines.
EDF Energy is in the process of evaluating the results of resonance tests on the Hardide-coated blades for steam turbines before proceeding to the next stage of development.
Demand increased in this sector by 10% from FY21. This was led by a 39% increase in sales to our major industrial pump customer in North America. However, there was a reduction in revenue from the airport X-ray equipment manufacturer due to the COVID downturn. Recovery in demand for their machines has been slow but is projected to increase throughout 2023. Developments are still taking place with the large EV manufacturer on components used in the battery production process. Testing is underway on multiple industrial applications with a large customer in the Far East.
The Group has been developing opportunities in South Korea following a trade visit organised by Innovate UK in October 2019 and attended by the Group’s Technical Director. Further progress will require local expertise and to this end, a local partner with extensive experience of selling high-value coatings has been identified and with whom the Group has now signed a marketing agency agreement.
Aerospace sales increased by 24% during FY22, with regular orders being received to coat components for the Airbus A320, A330, A380, A400M and the Beluga transport aircraft. Additional applications are currently in development and testing. Orders continue to be received for the BAE Eurofighter Typhoon. Further orders are expected in FY23 for the Lockheed Martin F35 Lightning II fighter. Technical discussions and trials are underway with several other OEM and maintenance, repair and operations (“MRO”) companies for applications including landing gear, door mechanisms and peripheral engine components.
In its Global Services Forecast for 2022-2041, Airbus expects aftermarket maintenance activity to recover to pre-pandemic levels in 2023 and to double in value to $230bn over the next 20 years. Over this time, we expect that many additional applications for Hardide will be approved. Airbus has also increased its 20-year delivery forecast outlook in support of a firm market recovery.
Post-period end, the Group received full supplier approval from Leonardo Helicopters (“Leonardo”) to coat flying parts. The first production order has been coated already. These are for components used in helicopter gearbox transmission systems. They are part of an existing aircraft upgrade and will reduce ‘in-service’ costs and extend component life. Leonardo is one of the UK’s leading aerospace companies and one of the biggest suppliers of defence and security equipment to the UK Ministry of Defence. This approval is expected to open up other opportunities within the wider Leonardo Group and the broader helicopter market.
Hardide exhibited at the Singapore Airshow in February 2022 and at the Farnborough Airshow in July 2022, increasing its exposure in the aerospace sector.
Accreditations and Research & Development
In July 2022, Hardide’s UK site achieved Nadcap Gold Merit status, the highest accreditation available for commitment to continual improvement in aerospace quality. The UK site was also re-certified to environmental standard ISO 14001 for a further three years.
Fundamental experimental work on the development of a new coating variant that would open additional markets for Hardide has been completed. Preliminary assessment has shown the new coating could be patentable. Further development work will be necessary to scale-up and characterise the coating and the Group is looking to secure grant funding for this.
Our most recent patent covers the enhanced Hardide coating with improved mechanical properties and its new applications, including turbine blades and vanes. This has been granted in the UK and registration of the equivalent patent is progressing in 10 leading industrial countries.
Following the financial year end, Robert Goddard, the Group’s long-serving Chairman stepped down as part of a planned Board succession and was succeeded by Andrew Magson.
On behalf of shareholders and the Board, we’d like to put on record our immense thanks and gratitude to Robert for over 14 years of invaluable service and leadership to Hardide as Chairman, without which the Group as we know it today would simply not exist. He leaves the business well positioned for further growth. All at Hardide wish Robert the very best for the future.
The significant improvement in the Group’s recent performance would not have been possible without the hard work and dedication of all our employees. The Board would like to express its thanks and gratitude to everyone for their contribution to the Group’s ongoing growth and development.
Whilst the Board is mindful of economic headwinds, ongoing cost inflation and supply chain disruption, Hardide has been successful in recovering cost increases through selling prices, and revenues continue to grow as a result of increasing customer adoption of our coatings. As evidenced by the recent action taken to improve working capital and reduce cost, the Board is focused on becoming profitable and cash generative.
More broadly, the Board is seeking opportunities to drive significant value for shareholders and other stakeholders over the medium to longer term through further development and commercialisation of the Group’s unique, high performance coatings technology, including co-operation with other coatings companies.
Sales revenue recovered strongly across our key markets, increasing by 39% to £5.0m. Despite inflationary cost pressures across the supply chain, including an almost twofold increase in the cost of energy, the Group improved its Gross Margins from 36% in FY21 to 37%.
The Group’s EBITDA loss was £0.9m (FY21: £1.5m loss) reflecting the increased revenues at improved gross margins.
The statutory loss before tax was £2.3m (FY21: £2.9m).
Net assets at 30 September 2022 were £5.5m (FY21: £6.9m), the reduction mainly reflecting the losses incurred during the year. Non-current assets, including right of use assets, were £7.2m (FY21: £7.7m). Hardide is well invested and therefore depreciation exceeded capital investment during the year. Capital expenditure was £0.3m (FY21: £0.3m), largely relating to upgrades to the older reactors in the UK.
Inventory levels were at broadly the same level as the previous year at £0.5m, despite the increase in sales. The main inventory item is process gas, and inventory movements year on year are often attributable to the timing of gas deliveries.
Trade and other receivables increased to £1.0m (FY22: £0.6m) as a consequence of the increased sales over the last two months compared to the equivalent period in 2021. The level of overdue debts was £0.1m higher than the previous year, although this related to one customer that paid shortly after the year end.
The cash outflow from operating activities was £1.0m, compared to £1.9m in FY21, reflecting the improved trading performance. Capital expenditure was £0.3m (FY21: £0.3m), with the level of capital expenditure required going forward mainly associated with health and safety improvements and maintenance upgrades. There is no immediate requirement to invest in capacity in either the UK or US facilities.
The overall cash outflow for the year was £0.8m (FY21: £1.2m).
Borrowings and right of use lease liabilities, at £3.1m, remained at a similar level to FY21.
The cash balance at the end of the financial year was £0.7m (FY21: £1.5m) whilst net debt, including lease liabilities was £2.4m (FY21: £1.5m), and excluding lease liabilities was £0.4m (FY21: £0.6m net cash).
To strengthen its cash position and provide greater working capital flexibility and headroom, the Group has recently raised new funds as follows:
In addition, the Board recently put in place a series of initiatives to improve working capital and reduce costs by £0.3m-0.4m by the end of the first half of the current calendar year. This will provide additional headroom, improve profitability, and help to underpin delivery of expectations for the financial year to 30 September 2023. Opportunities to further strengthen the balance sheet are also being considered.
The directors have adopted the going concern basis in preparing the financial statements after assessing the principal risks and having considered the impact of various downside scenarios compared to the Group’s base case financial plans, the pace of sales growth and the level of profit margins for a period of at least 12 months from the date of signing the Annual Report. Whilst the macro-economic position is highly volatile, making scenario planning difficult, the directors have considered various impacts on sales, profitability and cash flows and believe that the Group will have adequate resources to continue in operational existence for the foreseeable future.
The directors considered how the current economic climate, including external forecasts of lower economic growth or recession in 2023, higher interest rates and inflation, may affect the performance of the business; from the supply chain to the ability of our customers to operate. A major disruption caused by such factors would most likely result in reduced sales volumes and require significant action in relation to operational cost reductions, working capital management and control over capital investment. We considered the sensitivity of sales volume reductions over a substantial part of our 2023 financial year and also into 2024. The revenue and operational leverage impact of such a volume loss would have a significant negative impact on the performance of the Group, albeit cash would be released from lower working capital requirements and lower capital spend. The scenario modelling indicates that the Group would have sufficient cash reserves over the foreseeable future. In addition, the Group has a successful track record of raising additional equity finance, if required, to support solvency and growth. The directors therefore believe that the Group is reasonably placed to manage its financing and other business risks satisfactorily, and have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the date of signing of the Group financial statements. Therefore, they consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
On completion of the move to the new UK site in 2020, targets were set in FY21 to reduce emissions per £m of sales by 15% from this baseline year. In FY22, these targets were exceeded considerably on every measure. More broadly, the use of Hardide coatings contributes to the sustainability agenda by significantly increasing the operational life of coated parts, thereby reducing waste and improving efficiency for our customers. The Group is committed to high standards of ethical behaviour and strong governance. Full details are within the ESG section of the annual report.
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