TAX.L Regulatory News (TAX)

28 September 2011

Eco City Vehicles PLC

 ("Eco City", "ECV" or "the Group")

Results for the six months ended 30 June 2011

Eco City Vehicles PLC, a developer and supplier of eco-friendly commercial vehicles and the London licensed taxi, announces its results for the six months ended 30 June 2011.

Financial highlights

·; Total revenues decreased by 9.2% to £11.6m (H1 2010: £12.8m) as sales of the outgoing Euro IV Vito slowed ahead of the highly anticipated launch of the new Euro V model in April 2011

·; Gross margin at 13.7% (H1 2010: 17.7%), reflecting lower pricing of Euro IV Vito taxis to clear out inventory of outgoing model

·; After sales division revenue broadly unchanged at £1.6m with sales into Mercedes-Benz market up by 216% year-on-year, accounting for majority of division's revenue

·; EBITDA loss from continuing operations before non-recurring items amounted to £0.48m (H1 2010: £0.1m profit) primarily due to One80 Limited, ECV's technology subsidiary. Excluding One80 Limited, like-for-like EBITDA loss was £0.2m

Operating highlights

·; Total new Vito units sales at 171 (H1 2010: 234)

·; Launched new, improved Euro V compliant version of Vito London-licensed taxi, well ahead of tighter European Union emission regulations in 2012

·; Second stage manufacture of Vito in Coventry transferred to Mercedes-Benz

·; Developing Mercedes-Benz Light Commercial Vehicles (LCV) after sales dealership, further strengthening relationship with Mercedes-Benz

·; Gained service agency for Modec electric vehicles in London

·; Implemented restructuring plan to reduce annual cost base by £0.5m, with initial benefits expected in the second half of 2011

Outlook

·; Demand for new taxis has improved amid growing interest in the latest 'Blue Efficiency' (Euro V) Vito taxi, with its share of the London taxi market building momentum

·; On track to return to EBITDA profit in the second half 2011, driven by cost cutting, return to revenue growth and a recovery in gross margins vs. the first half

·; Well placed to benefit from new EU environmental regulations and 15-year age limit rules for London taxis from 2012, representing a potential replacement market of about 3,000 vehicles

Commenting on the results, Peter DaCosta, Chief Executive, said:  "Our first half results were affected by challenging trading conditions and a blip in new orders whilst customers waited for the much anticipated launch of our latest Mercedes Euro V Vito taxi.

"This new 'Blue Efficiency' version, with improved fuel savings, has been very well received by taxi drivers and customers alike, enabling the Vito to further differentiate itself from the old-style black cabs. As a result, new taxi sales have shown a solid uplift since its launch and our market share is on the rise again. While conditions for the automotive sector remain challenging due to economic uncertainty, the Group looks to the second half of 2011 and 2012 with cautious optimism."

Enquiries:

Overview

Trading in the first half was impacted by continued economic uncertainty and the highly anticipated launch of a new improved Euro V Vito taxi in April this year. These factors contributed to soft demand for the outgoing Euro IV taxis as drivers waited for the arrival of the new model, which is fully compliant with new EU vehicle emission standards coming into force next year and improves fuel economy even further.

Total revenues were 9.2% lower at £11.6m (H1 2010: £12.8m) with gross margin down to 13.7% (H1 2010: 17.7%) as the Group reduced prices of the outgoing model as part of a planned inventory clear-out. Since the launch of the new model order levels for both new and used vehicles have risen as the taxi trade becomes increasingly aware of the Vito's value proposition in terms of better quality, improved suspension and ride, passenger comfort, lower emissions and the cost of ownership. These benefits have helped to further differentiate the Mercedes-branded Vito from the old style black cabs.

The Group incurred a EBITDA loss from continuing operations, before non recurring items, of £0.48m (H1 2010: EBITDA £0.1m profit) principally due to lower revenue contribution from the Group's 59% subsidiary, One80 Limited, as a result of production delays from a change in suppliers for the upgraded rear wheel system in the redesigned Euro V vehicle, and the transfer of second stage manufacture to Mercedes-Benz in July 2011. One80 Limited's revenue is now derived from a licence fee per production unit, with a guaranteed minimum per annum.

Excluding One80 Limited, the EBITDA loss on a like-for-like basis was £0.2m (H1 2010: EBITDA £0.1m profit)

Operational Review

New Taxis

Revenues from new taxis decreased by 24% to £5.4m (H1 2010: £7.1m) reflecting a reduction in sales of new Vito taxis to 171 in the first half (H1 2010: 234 units).

Based on Public Carriage Office Licence data, the Group estimates that the Vito accounted for a 21.1% (H1 2010: 26.8%) market share of new taxi sales in London in the first half of 2011, affected by sluggish demand in the first few months, and increasing after the launch of the Euro V. Sales of new taxis have continued to gain momentum in the second half, with the introduction of the new three-year agility leasing schemes for the Euro V, underwritten by Mercedes-Benz. This allows drivers to own and change vehicles every three years for £165 per week compared to renting a vehicle at circa £250 per week.

The introduction of the age limit for taxis in 2012 is anticipated to increase the potential market for new taxis as circa. 3,000 taxis, which are more than 15 years old, will not have their London licence renewed next year. 

Parts

The parts business was affected by distribution problems with parts for LTI taxis, resulting in a revenue decrease of 28.3% to £1.2m (H1 2010: £1.6m). Gross margins reduced from 23% to 19% following the introduction of lower discounts to the Group on parts supply for the LTI taxis pursuant to the new service agreement.

After-Sales Division

Revenues and profits from after sales service were flat at £1.6m and £0.1m respectively. Revenue from LTI taxis has decreased in the first half by 45% to £0.7m, with Mercedes-Benz revenue increasing by 216% to £0.8m.

The Group looks forward to investing in the Mercedes-Benz Light Commercial Vehicles (LCV) after-sales dealership to take advantage of the opportunities in London. In addition, ECV has recently been appointed the London service agent for Modec electric vehicles, which are principally used in the retail & distribution sectors. The Group is pursuing opportunities for further growth in these areas.

One80 Limited

One80 Limited's results are now consolidated following the acquisition of a further 25.7% shareholding in November 2010, increasing the Group's shareholding to 59%. One80 Limited's trading was affected by disruptions to production, as a result of the transition to the newly developed Euro V Vito taxi model and the transfer of the second stage manufacture to Mercedes-Benz, causing a significant reduction in units produced to 153. With Euro IV Vito taxis being discounted, the profit made by One80 Limited was also substantially reduced. Regional sales, stocking and warranty costs incurred resulted in a small loss at gross profit level. Costs of £0.3m incurred were in line with budget. Amortisation and depreciation of £0.2m were incurred mainly due to amortisation of development costs for both the original Vito taxi and significant further development costs for the new Euro V model. As a result One80 Limited's operating loss for the period amounted to £0.5m.

One80 Limited have a licence agreement, signed in July 2011, which provides a fixed licence fee per Vito taxi produced with a minimum guaranteed level of 450 per annum. The transfer of second stage manufacture to Mercedes-Benz, will enable One80 Limited to reduce costs. This is expected to move One80 Limited into an EBITDA positive position.

Non-recurring items

One-off non-recurring items of £0.2m were incurred due to minimum volume commitments with Penso City Vehicles Limited and related legal costs.

Finance income & Costs

Finance costs were broadly unchanged despite the increase in bank interest margins and interest on higher levels of vehicle stock, which have since significantly decreased. The Group, under IFRS, has provided for the fair value liability associated with the fixed rate swap. The fair value liability is estimated based on the differential between the fixed rate of 5.12% and the expected market rates until the termination of the swap in 2023.

Inventory

Inventory levels at the beginning of the period were high at £3.9m and have been subsequently reduced in the first half to £3.0m, due to the Euro IV stock build-up at the end of the last financial year which has been predominantly sold in the first half. The Group continues to limit its exposure to used LTI stock with the majority of vehicles sold through wholesale channels. Demand for used Mercedes-Benz Vito taxis remains solid resulting in a quick stock turn and resultant low stock levels.

Cash balances and funding

Cash balances at 30 June 2011 were £0.3m (30 June 2010: £0.03m) while borrowings reduced from £2.9m to £2.8m during the period.

The Group is trading within its banking facilities and covenants

Risks and uncertainties

The Board of Directors continuously identify, monitor and manage potential risks and uncertainties relating to the Group. The risks are inherent in all business. The list below sets out certain risk factors which could have an impact on the Group's long term performance. The list is not presumed to be exhaustive, and by its nature is subject to change.

The main risks arising from Group's operations are credit risk, interest rate risk, liquidity risk, competition risk, dependence on key personnel, loss of franchise dealerships, and breakdown of internal control due to fraud or error. The Directors review and agree policies for managing each of these risks and they are summarised below:

Credit risk

The Group's credit risk is primarily attributed to trade and other receivables. The maximum credit risk exposure of the Group comprises the amounts presented in the balance sheet that are stated net of provisions, where appropriate. A provision is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of future cash flows. The Group does not consider these counterparties to be a significant credit risk.

Interest rate risk

The main risk arising from the Group's cash deposits and borrowings is changes in interest rates. The Board's policy toward cash deposits is to deposit cash short term in interest bearing bank deposit accounts. The Group entered into an interest rate swap to fix the interest rate on the mortgage for its manufacturing facility in Coventry for the duration of the mortgage

Liquidity risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.

Short term flexibility is achieved through overdraft facilities with Barclays.

Competition Risk

The dominant market sector for Group revenue is the sale of Mercedes-Benz Vito taxi and the servicing of London taxis and other commercial vehicles. One80 Limited, the Group's subsidiary, owns the intellectual property rights for the rear wheel steer technology which enables the Mercedes-Benz Vito to meet the conditions of fitness and hence provides a barrier to entry for the regulated markets. Nevertheless should another manufacturer produce a vehicle that meets the Conditions of Fitness of the Public Carriage Office of Transport for London or Conditions of Fitness regulations are reduced, then KPM would face additional competition for London taxi sales. Such competition would represent a material risk. However the Board are not aware of any new entrant to the market place at the current time.

In addition, the Group is in the process of bringing new products to market that will reduce the overall reliance on taxi sales and so reduce the impact on the Group should a new taxi be brought to market by a competitor.

Dependence on key personnel

The Group depends upon the expertise and continued service of key executives and other personnel. The Group ensures that the key personnel are retained by offering competitive pay and provide long term incentives by granting them share options.

Loss of Franchise Dealership

During the prior year the Group had its LTI dealership terminated, having been notified during the previous year. The after-sales servicing, repairs and parts contract has been renegotiated with LTI and continues along with a dealership for used LTI taxis. The impact of this event is minimal. The continued success of the Mercedes Benz Vito now forms the majority of revenue for both sales and After-sales segments. One80 Limited, licences the IP on the Vito taxi with a minimum guaranteed number of units per annum.

Internal control

The Group does not employ an internal audit team but ongoing review of systems and adherence to these systems is undertaken by the finance team and reviewed by Directors.

Outlook

The introduction of Euro V has got off to a solid start, with the Board confident the vehicle will offer significant benefits over the Euro IV and further widen the gap over its rival. Mercedes-Benz have completed the takeover of the second stage manufacturing of the Vito taxi resulting in them taking control and responsibility for the complete production of these vehicles.

Despite continued economic uncertainty, trading has improved since the launch of the Euro V Vito taxi. The Group is on track to achieve EBITDA profit in the second half, driven by higher revenues, cost cutting and improved gross margin compared with the first half. With new taxi sales regaining momentum, the Vito's share of new London taxi sales has also returned to previous levels.

The Group also expects new flexible finance for Vito taxis, together with the age limit for London licensed taxis and EU vehicle emissions regulations coming into effect on 1 January 2012, to give fresh impetus to demand. As a result the Board continues to look to the future with cautious optimism.

Eco City Vehicles plc

Condensed Consolidated Statement of Comprehensive Income - unaudited

For the period ended 30 June 2011

Eco City Vehicles plc

Condensed Consolidated statement of financial position - unaudited

As at 30 June 2011

Eco City Vehicles plc

Condensed Consolidated statement of changes in equity - unaudited

As at 30 June 2011

Eco City Vehicles plc

Condensed Consolidated statement of cash flows - unaudited

For the period ended 30 June 2011

Eco City Vehicles plc

Notes to the Condensed Consolidated Interim Report

1. General Information

Eco City Vehicles plc is a company incorporated in the United Kingdom and listed on the AIM market. The address of the registered office is Hemming House, Hemming Street, London, E1 5BL.

The Group is engaged in the sale and service of new and used taxicabs to owner operators of licensed taxis in London and the provision of related services and the sale and service of low emissions vehicles to business users. During the interim period the Group continued to operate from a single site in East London from where it conducted its operations. The premises in Coventry, owned by Eco City Vehicle Plc, is partially sublet to One80 Limited, the Groups' technology subsidiary, and one other tenant, with the remaining area to be used to facilitate geographic expansion.

This unaudited condensed consolidated interim report is presented in British Pounds Sterling, the currency of the primary economic environment in which the Group operates. The Group comprises eco city vehicles plc and its subsidiary and associated companies as set out in the Note 3 of the Parent Company's financial statements, for the year ended 31 December 2010

This unaudited condensed consolidated interim report does not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2010 has been extracted from the statutory accounts for that year, which have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified and did not contain a statement under Section 237(3) of the Companies Act 2006.

2. Accounting policies

Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS and IFRIC Interpretations) issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act applicable to companies preparing their financial statements under IFRS. Practice is continuing to evolve on the application and interpretations of IFRS. Further standards may be issued by the International Accounting Standards (IASB) and standards currently in issue and endorsed by the EU may be subject to interpretations issued by IFRIC.

The financial statements have been prepared using the measurement basis specified by IFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the detailed accounting policies below.

The preparation of financial statements, in conformity with general accepted accounting principles under IFRS, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimate differ from those estimates.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these consolidated financial statements.

Eco City Vehicles plc 

Notes to the Condensed Consolidated Interim Report

Going Concern

The trading conditions have been challenging so far in 2011, with lower new vehicle sales than the comparative period due to customers eagerly awaiting the launch of the new Euro V Vito, which occurred on 2nd April 2011. Since the launch of the Euro V Vito market share has gained momentum and returned to previous levels. The introduction of the age limit in January 2012 will result in circa 3,000 taxis over 15 years old not having their licence renewed.

After-sales and parts continue to face challenging market conditions although opportunities exist with light commercial vehicle work and electric vehicle work as an agent for Modec vehicles.

The Group is also implementing a rationalisation plan which has commenced and will reduce annualised costs for the Group by circa £0.5m.

The Group has prepared detailed rolling forecasts taking account of actual results to date and current information on trading, on a prudent basis. The Group also consider sensitivities to these forecasts to review the impact on the results and cash balances.

Since the year end the Group has secured the availability of further funding from the KPM-UK Taxis Plc Discretionary Pension Scheme with £0.1m drawn down in August 2011 and remaining availability of £0.5m.

Based on the Group's plans which include receipt of further funds and after making enquiries, the Directors have a reasonable expectation that the Group will have adequate resources available from funds generated from trading and financing to continue operations for at least 12 months from release of this interim statement. The interim accounts have therefore been prepared on a going concern basis.

3. Non-recurring items

Eco City Vehicles plc

Notes to the Condensed Consolidated Interim Report

4. Finance income and costs

Eco City Vehicles plc

Notes to the Condensed Consolidated Interim Report

5. Earnings per share

Eco City Vehicles plc

Notes to the Condensed Consolidated Interim Report 

6. Borrowings

7. Adjustments to cashflow