Velocity Composites : Unaudited Half Year Results June 2021

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Velocity Composites plc Interim Report

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29 June 2021

VELOCITY COMPOSITES PLC

("Velocity", the "Company" and together with its subsidiaries the "Group")

UNAUDITED HALF YEAR RESULTS

For the six months ended 30 April 2021

Velocity Composites plc (AIM: VEL), the leading supplier of advanced composite material kits to the Aerospace sector, is pleased to announce its unaudited half-year results for the six months ended 30 April 2021 (the "Period" or "H1 FY21").

Financial Highlights:

• Sales volumes stabilised following impact of Covid-19 on Aerospace sector, with revenue for six months to 30 April 2021 of £4.4m (H1 FY20: £9.5m)
• Successful drive for technological, operational and cash flow efficiencies have been successful, with improved gross margin of 25.1% (H1 FY20: 20.5%)
• Adjusted EBITDA1 loss for H1 FY21 of £0.6m (H1 FY20: loss £0.3m)
• Operating loss before tax for H1 FY21 of £1.1m (H1 FY20: loss £0.6m)
• Cash at Bank as at 30 April 2021 of £3.5m including £0.7m of EIS funds2 (30 April 2020: £2.8m and including £1.2m of EIS funds)
  Since the period end Velocity has been successful in partnering with Close Brothers to secure an additional £0.6m net cash inflow through a Top-up CBILS and asset financing facility
• Velocity remains on track to move back into positive EBITDA during H2 2021

1 Adjusted EBITDA defined as earnings before interest, tax, depreciation, amortisation, impairment, adjusted for exceptional administrative costs and share based payments. The business uses this Alternative Performance Measure to appropriately measure the underlying business performance, as such it excludes costs associated with non-coreactivities.

2 EIS funds earmarked for EIS/VCT qualifying expenditure and is deemed to be 'employed' for those purposes in accordance with the relevant regulations.

Operating highlights

• The new Velocity partnership proposition has been utilised by both existing and prospective new customers, allowing the wider value of the Velocity service to be highlighted and recognised, particularly through the disruption of 2020-2021.
• Developments in the Company's core technology, particularly around real time supply chain/demand management, material efficiency and operational performance has driven improved service offerings to customers and internal margins.
• Following a period of development with a large, multinational defence group the Company achieved full approval to supply structural material kits for the F35 joint strike fighter programme.
• Strong pipeline of new business remains notwithstanding continued disruption for civil aviation customers and restrictions on the Company's ability to travel to international customer locations.

Current trading and outlook

Since period end significant progress has been made with three of the Company's largest customers, with whom contract extensions entered into during H1 FY21 secured future annual revenues of £8.1m at what are currently suppressed build rates. The Board remains confident in the long-term prospects of the Company, with Velocity well placed to capitalise on the underlying recovery of the Aerospace sector and to benefit from new customer acquisition as industry priorities refocus on supply chain efficiencies as the wider industry builds back from the impact of Covid-19. With the pipeline expected to continue to improve as travel restrictions are eased, the Board is now cautiously optimistic as to the prospects for an improved second half performance in FY21 and into FY22.

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Velocity Composites plc Interim Report

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Enquiries:
Velocity	[phone]
Jon Bridges, Chief Executive Officer
Andy Beaden, Chairman
Cenkos (Nominated Adviser and Broker)	[phone]
Russell Cook	[phone]
Ben Jeynes	[phone]

About Velocity

Velocity Composites is a manufacturer of composite material kits for the aerospace industry, delivering engineered kits for its customers to build component parts. The Company's clients include multi-national manufacturers of composite parts and assemblies, who in turn deliver to the world's leading civil and military aircraft manufacturers. The Airbus A320, A330, A350, A380, Eurofighter Typhoon, F35 Joint Strike Fighter, Boeing 737, Boeing 787 and V22 Osprey are all constructed using parts manufactured from Velocity's kits. The Company's business model reduces the operating costs of preparing composite materials ahead of their usage in the construction of an aircraft part and as such, its offering is disposed to being self- financing for aircraft parts' manufacturers. Velocity Composites also exports to Europe and North America.

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Chairman's Statement

Introduction

H1 FY21 ending 30 April 2021 saw significant progress with three of the Company's largest customers. With these contract renewals securing future annual revenues of £8.1m at currently suppressed build rates this has helped to secure the long-term prospects of the Company as well as leaving the Company well placed to capitalise on the underlying sector recovery.

Although December 2020 saw particularly impacted demand rates with prolonged customer site closures, this was partially offset by a successful March 2021. This saw development with a large, multinational defence group which enabled Velocity to achieve full approval to supply structural material kits for the F35 fighter and supports the ongoing strategy of diversification outside of Civil Aerospace.

The Group's liquidity position has also remained robust over the period, with the Velocity's cost-base now reduced in line with a £13.5m breakeven business and continued focus on lean stock management supporting the Company's cash flow.

H1 FY21 Financial Review

Revenue in the period was £4.4 m (H1 FY20: £9.5m) as the Company continued to see COVID-19 impacted production rates suppressing demand from its key customers. In addition, prolonged customer site closures over the Christmas period particularly impacted December 2020 performance. The Company, however, increased its gross margin by 4.6 percentage points to 25.1% (H1 FY20: 20.5%) as a result of successful efforts from management to further improve operational efficiencies and the new Velocity partnership proposition delivering higher value benefit to customers as all parties worked through the disruption.

Administrative expenses, excluding exceptional items, were reduced by £0.5m to £2.1m (H1 FY20: £2.6m) as cost improvements have become realised following the business's right-sizing drive in H2 FY20, continuing in FY21. This includes only £0.1m of furlough support through the Government furlough scheme and £0.1m hardship grant income from Burnley Local Authority. No exceptional costs were incurred in the period (H1 FY20: Nil)

Though the adjusted EBITDA loss in the period increased by £0.3m to £0.6(H1 FY20: loss of £0.3m), as a result of the continuing suppressed demand levels, this was significantly reduced from the second half loss of £1.9m in 2020 on similar revenue levels. Loss before tax from continuing operations was £1.1m (H1 FY20: loss of £0.7m), resulting in an increased loss per share of 3.0p (H1 FY20: loss of 2.0p).

Cash at bank at 30 April 2021 was £3.5m, compared to £3.3m at 31 October 2020 driven by focussed cash retention efforts within the business, particularly through lean stock management. Both period ends had the same benefit from the £2.0mmillion CBILS facility support. Since the period end, Velocity has been successful in partnering with the finance provider Close Brothers to secure additional CBILS and asset finance. This will further support Velocity's Covid-19 recovery plans with an additional Net Cash inflow of £0.6m and a similar 5 year repayment tenor as the existing £2.0m facility. Cash at bank includes an amount of £0.7m of EIS/VCT funds, which are allocated for investment in new production facilities in the US, mainland Europe and the UK. In addition to the CBILS, the Company has access to an Invoice Discounting Facility, which was undrawn as at 30 April 2021, but has current capacity of £1.6m based on outstanding receivables. The business remains in a net cash positive position, after deducting debt drawing.

Risk

In preparing these interim financial statements, the management is required to make accounting assumptions and estimates. The assumptions and estimation methods are consistent with those applied to the Annual Report and financial statements for the year ended 31 October 2020. With one exception, the principal risks and uncertainties that may have a material impact on activities and results of the Group remain materially unchanged from those described in the Annual Report. The exception is the risk of losing a key contract, which the Board now deem as a lower risk given the Company's three largest customers have all signed contract extensions during H1 FY21 for the next 3 years.

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COVID-19 continues to be a risk to the sector that is impacting demand heavily through greatly reduced civil air travel volumes. With the Company's cost-base now successfully reset to a £13.5m sales breakeven business and sales levels appearing to have stabilised during H1 FY21, Velocity is well placed to benefit from the longer-term market recovery. This is supported by the Company's robust liquidity position and unique offering to the market. In addition, management continue to develop opportunities to diversify into other sectors, such as defence, with progress having been made in H1 FY21 in supporting F35 production at several customer sites within the UK.

Outlook

In addition to the recent re-contracting of all major customers the new business opportunity pipeline for the Company looks strong, albeit with currently impacted production rates. The disruption in the industry has led to all customers re-evaluating their own operational footprint and as such significant changes to their supply chains have been deferred whilst the full effects of the pandemic were understood. As air travel resumes it is expected that build rates for the major aircraft programmes will begin to recover, firstly on the single aisle platforms (A320, B737), followed by the twin aisle platforms (A350, B787). With capacity at customers sites having been cut, the Board believe that the Company's technology driven enhanced service offering coupled with the highly operational gearing available for immediate deployment will open up significant opportunities as the industry increases its utilisation of outsourcing as part of its recovery. For example, Airbus recently announced that it had asked suppliers to prepare for an increase in A350 build rates for 2022 by 20% - from the current rates of 5 per month to 6. The A350 is a platform served by Velocity.

As the in-house technology developments drive further performance gains the Company is also working on additional ways to partner with customers and deploy its technology and services directly to customers' sites. This model is currently in final development and brings significant flexibility to the Company's proposition by allowing for a tailored approach to the exact customer requirements, without the need for large scale capital investments to support single customer locations. Discussions have begun with target launch customers with an expectation of this being a major 2022 opportunity for profit and margin expansion.

Despite the continued COVID-19 suppressed demand levels across the whole industry, the Board is now cautiously optimistic as to the prospects for an improved second half performance in FY21 and into FY22. With the organisational restructuring process completed and gross margins improving, the Company's cost- base is now beyond a target £13.5m sales breakeven position. With further new business wins and cost reduction activities Velocity is well placed to breakeven in H2 FY21, albeit in challenging and uncertain market conditions.

Andy Beaden

Non-Executive Chairman

29 June 2020

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Condensed consolidated statement of total comprehensive income

For the six months ended 30 April 2021

		Half year	Half year	Year ended
		ended	ended	31 October
		30 April	30 April	2020
		2021	2020	(audited)
		(unaudited)	(unaudited)
	Note	£'000	£'000	£'000
Revenue	3	4,439	9,502	13,561
Cost of sales		(3,323)	(7,558)	(11,237)
Gross profit		1,116	1,944	2,324
Administrative expenses excluding exceptional		(2,110)	(2,589)	(5,132)
costs
Exceptional administrative expenses		-	-	(341)
Other operating income		-	-	-
Operating loss		(994)	(645)	(3,149)
Operating loss analysed as:
Adjusted EBITDA		(559)	(259)	(1,925)
Depreciation & Amortisation		(224)	(218)	(517)
Depreciation on right to use assets		(151)	(108)	(246)
Share based payments		(60)	(60)	(120)
Exceptional administrative expenses		-	-	(341)
Finance income and expense		(65)	(40)	(98)

Loss before tax from continuing operations

Income tax income / (expense)

Loss for the period and total comprehensive loss

Losses per share - Basic (pence per share) from continuing operations

Losses per share - Diluted (pence per share) from continuing operations

	(1,059)	(685)	(3,247)
	-	67	117
	(1,059)	(618)	(3,130)
4	(3.0p)	(2.0p)	(8.0p)
4	(3.0p)	(2.0p)	(8.0p)

The notes on pages 9 to 12 form part of this interim report.