Torotrak PLC Regulatory News (TRK)

16 May 2005 07:01

Torotrak PLC16 May 2005 Monday 16 May 2005 TOROTRAK PLC PRELIMINARY RESULTS Torotrak plc today announces its preliminary results for the year ended 31 March2005. Highlights • Off-highway: strategy to broaden product and market portfolio increasingly successful including a series of agreements, announced earlier this month, with a new partner to exploit IVT technology. • Automotive: latest prototype production representative compact IVT transmissions installed and under development, as planned, in target customer's vehicle. • Revenues double again: trend should continue as significant financial and engineering resources applied by our automotive customers are combined with our activities in off-highway. • Continuing tight control of costs; down by further 12% this financial year: cash burn in line with expectations; £7.3m cash at end of year. Dick Elsy, chief executive, said: "We have established a new and wider customer base as we continue to execute ourstrategy to broaden the application of our IVT into the agriculture andconstruction industries. Supporting these new customers en route to market will,in turn, generate increased revenues for Torotrak. We expect the earlier revenueand royalty streams from this sector to provide a sustainable business platformfrom which the longer-term shareholder returns from high-volume automotiveroyalties can be delivered. Although the automotive industry is moving at its own pace, our customers areincreasing their resources in hardware, manpower and finance. This investment inthe development of the IVT technology is at a level which, in my experience,represents a serious intent to deliver." Contacts Dick Elsy/Rebecca Joyce Torotrak plc 020 7307 5330 on the day 01772 900900 therafter Stefan Williams/Paula Crymble Capital MSL 020 7307 5330 Introduction Torotrak's principal strategy is to generate royalty income from the high-volumemanufacture of our IVT technology by our licensed customers, the vehicle andtransmission manufacturers in the automotive and off-highway markets. Ourbusiness objectives are to maximise royalty income from the combination ofproduction volume and royalty rates appropriate for these markets. Our prime target remains the high-volume automotive market as this offers thehighest long-term shareholder return. In this industry, there is a highlystructured process between the transmission manufacturers and the car companiesfor the launch of new technology, the pace of which is dictated by the carcompanies. We are pleased to report tangible signs of continuing commitment bythe car companies and transmission manufacturers to the IVT technology as wesupport their progress to production. As a result, our consulting revenues have again increased this year and combinedwith our activities in the off-highway sector have led to a doubling of ourrevenue in line with expectations. In the last financial year, we have also continued to implement our strategy tobroaden the application of our IVT systems into a more diverse product andcustomer base by targeting the off-highway sector. This sector covers a range ofproducts from forklift trucks to agricultural tractors and constructionequipment. In general terms, the product development lead times in this sectorare shorter than in high-volume automotive, providing Torotrak with the abilityto access revenue streams from production royalties earlier. To secure this shorter-term position, we have engaged with the majority of theglobal off-highway vehicle and transmission manufacturers. With some we are atthe level of initial enquiry; with others we are at the stage of securing thecontractual and legal framework to enable them to exploit IVT technology; andone vehicle manufacturer is already at prototype testing stage. This broadening of Torotrak's business into off-highway has strengthened bothour short- and long-term positions. A primary business objective is to covercash burn through revenues from both this sector and from consulting, andachieve a cash neutral position. We believe that this will result in asustainable business, with automotive royalties delivering substantialshareholder return. Operational review Off-highway In line with our strategy to broaden our product and market portfolio we havebeen targeting the high-volume, medium-sized vehicle sector of the off-highwayindustry. As a first demonstration of success, we were delighted to announce on3 May 2005 the signing of agreements with a new partner, to enable them toexploit our IVT technology. This new partner is one of the major suppliers of transmission and axle systemsto the global off-highway vehicle manufacturers. It is also part of a group ofcompanies that manufactures agricultural vehicles. Another company in the samegroup is the world's market leader in a specific type of vehicle in this sectorwith over 50% market share. Our new partner has purchased the non-exclusive right to develop and manufacturethe IVT technology for its own and third party use as well as an option overglobal exclusivity for the right to produce IVT technology for the specific typeof vehicle in which their group is the world's market leader. These agreementssupport our partner's strategic plan to expand their transmission business andmaintain market leadership in their vehicle range. In financial terms, over the next two years these agreements mean that Torotrakwill receive in excess of £800k, including exclusivity and licence optionpayments, with subsequent royalties following start of production. The royaltyrates secured through these agreements meet our target for this sector. Theseries of agreements we have signed with this new partner represent a jointcommitment to take IVT to production. In developing our strategy for the off-highway sector we have recognised thatoff-highway vehicle manufacturers approach their transmission sourcing in asimilar way to the automotive industry: 80% of the transmissions used are builtby the off-highway vehicle manufacturers themselves with 20% purchased from agroup of established global transmission suppliers. Further, in off-highway,standardised components are integrated with the manufacturer's own parts tocreate brand-specific features and benefits. As a result, we have developed our business model to suit the needs of thissector. Through the creation of new licence agreements and the engineeringdevelopment of off-highway IVT systems, Torotrak is now able to offer theoff-highway vehicle manufacturers access to IVT technology in three ways: • Developing and manufacturing their own complete transmission system. • Buying a complete transmission from an established transmission supplier. • Using the cartridge, a self-contained variable drive standardised unit developed by Torotrak, to build directly into their own transmission. The agreements with our new transmission supplier partner allow them to exploitour IVT technology in both full transmission or cartridge forms. Another of our confirmed customers, a vehicle manufacturer in this off-highwaysector, has been developing its own complete transmission system and continueswith its prototype trials. This customer has confirmed its intent to progress toproduction by making its final licence down payment on 31 March 2005 but has yetto finalise its launch plans. Torotrak expects to earn consultancy revenue inthe current financial year as we assist this customer with the remaining vehicleengineering prior to pilot production. Further work with other major international off-highway companies includesTorotrak's support for engineering evaluations, transfer of our technology andnegotiation of legal and commercial agreements. We expect these activities tolead to further announcements in the current financial year. This momentum in the medium sized off-highway vehicle sector, characterised byvehicles in the 50 - 110kW power range, has led to a new opportunity. Throughgrowing awareness of our IVT technology, we have been introduced to amanufacturer of off-highway vehicles in the 5 - 50kW range. This is ahigh-volume market characterised by rapid product innovation and thismanufacturer has recognised that significant competitive advantage can be gainedby applying IVT technology. We have already started negotiations to form apartnership to bring together our technology and know-how with their low-costmanufacturing expertise to give both parties the opportunity to exploit thatadvantage jointly. Since we reported on the truck and bus sectors in 2004, a European-based busmanufacturer has now committed to a demonstration bus equipped with IVT to showto their customers, the main fleet operators. The first stage of this programmeis underway. Also, a European truck manufacturer, new to Torotrak, has initiateda study to determine how IVT can deliver their fuel economy and emissionstargets. Automotive Torotrak continues to be bound by the strict confidentiality terms that it hasentered into with its customers, which are common in the development of newproducts for the automotive industry. Our obligations relating toconfidentiality restrict the extent to which we can disclose specific detailrelating to the progress that is being made. Against this we have seen recentpublic recognition for IVT from one of our transmission manufacturer partners,ZF, who said: " ZF recognises Torotrak as an innovative and highly competent partner in FullToroidal Traction Drive (IVT) technology. We will continue in partnership withTorotrak to explore the full potential of IVT to meet the demanding requirementsof our automotive and off-highway customers". Endorsements of this kind help to signal the strength of the continuing businessrelationships which support our route to market with IVT. We are also able to report that, since the November 2004 interim report, thethree-way project to develop a production representative compact automotivetransmission with Equos and Koyo has moved into the next phase. Prototypetransmissions are being tested on rigs and are installed in the targetcustomer's vehicle. The current work phase is now focused on calibrating andoptimising the driveability and fuel economy of the target vehicle by the parentcompany of Equos. This work is customer specific development, with Torotrak nowearning revenue on a consultancy basis. We can also report that the technical evaluation between one of our existingtransmission manufacturer customers and a major global car company, begun in2004, has now concluded. The car company involved in the evaluation hasrecently asked Torotrak to undertake further development and modelling work toassess the performance of the new compact IVT in specific vehicles that theymanufacture. The transmission manufacturer that participated in the evaluation has completedits engineering work in support of the technical evaluation and is undertaking adetailed cost and business case study. Since the beginning of 2005 we havereached the stage where the focus of this customer has moved on from theengineering work to detailed negotiations with Torotrak. As part of thisprocess, we are developing the commercial and legal framework with thiscustomer. The long-term nature of the agreements resulting from thesediscussions, and the commitments and obligations contained in them, demandsnegotiation at the highest level in both companies. For us, these agreementsrepresent the basis on which our future revenue depends and for the transmissionmanufacturer, they represent the securing of their right to exploit our IVTtechnology. In addition, in November 2004 we reported that formal requests had been issuedby another global car company for transmission manufacturers to respond withtheir plans to develop IVT. The outcome of this continuing competitive bidprocess, if successful, will be a formally approved technology programme betweenthe car company and its chosen partner. Competition - automotive The benefits of Torotrak's IVT versus other variable drive transmission systemsin the automotive market remain unchallenged. With our close links to thetransmission manufacturers and car companies, we are aware of their futuretransmission strategies and it is clear that there are no emerging technologiesin this field to challenge Torotrak's position. Our previously reported fuel economy advantage over fixed ratio 6-speedautomatic transmissions has been further validated by a detailed study conductedfor one of our car company customers. This study, begun earlier this year,demonstrates that an IVT transmission can achieve a greater than 12% improvementin fuel economy with a corresponding 20% improvement in 0-100 mph accelerationwhen compared to the current 6-speed equipped vehicle. This combination of fueleconomy and performance gain is described by the global marketing director ofthis car company as "outstanding - this is just what we need - better fueleconomy and performance with no downside". This typifies the continuing requirement of the automotive industry to producean appealing and competitive product against a backdrop of fuel economy pressurefrom high fuel prices and fiscal penalties. The last financial year has seen increased car industry publicity around complexhybrid vehicles with most major manufacturers revealing vehicles and concepts atmotor shows and even introducing limited volume production. The industry view is that, in this decade, growth in complex hybrid vehicleswill be led by Japan with a strong focus on their home market. In Europe, thereis a commitment to the continued development of diesel engine technology. ThisEuropean approach is delivering a similar level of fuel economy to that of thecomplex hybrid vehicles emerging from Japan, such as the Toyota Prius. In NorthAmerica, the largest market, there has been no widespread adoption of eithercomplex hybrids or diesel and it is not yet clear which approach themanufacturers and car buyers will favour. The success of the technically complex hybrid Prius is well understood withinthe car industry but those following in Toyota's footsteps find that it isdifficult to establish a robust business case for widespread and profitableapplication, due to the high cost of this particular type of complex hybridtechnology. This uncertain market outlook represents a two-fold opportunity for Torotrak toassert itself as a comprehensive fuel economy solution that is relevant to carmanufacturers. First, our work with the car companies and transmissionmanufacturers has shown that the IVT can deliver further fuel economy advantagewhen combined with the advancements in diesel and petrol engines. Second, theIVT provides a mechanism for improving the business case of hybrids themselves. The combination of IVT with a cost effective parallel (simple) hybrid layoutprovides the principal benefits of a complex hybrid but at much lower cost. Thecar companies we are working with accept the co-existence of the simple hybridand IVT technologies. We are exploring the potential of this pragmatic solutionwith one of the global car companies already involved in the manufacture ofhybrid vehicles. Competition - off-highway In off-highway, currently only the very large, high-powered premium vehicles areserved with commercially viable variable drive technology. These are hydrostaticdrives that are expensive and mechanically inefficient. Some manufacturers havebeen trying without success to produce a lower cost hydrostatic drive topenetrate their high-volume, medium-sized vehicle sector. Currently, this sectoris served by less costly manual and powershift fixed ratio transmissions.Torotrak's cost effective and efficient IVT provides variable drive technologyat powershift cost. As a result, the vehicle manufacturers continue to see IVTas an opportunity to broaden their use of variable drives significantly. Technology The growing commitment to IVT from our customers in automotive and off-highwayhas led to an increase in the amount of customer applications' work by Torotrak.To complement this consultancy work, our internal research activity has beenfocusing on concepts to reduce further the cost structure of the IVT to reflectthe continuing downward cost pressure across the manufacturing industry. We have continued research to reduce radically the parts count and cost of a keyarea within our core technology, namely the control mechanism for the discs androllers that make up the variator. We are pleased to report that the low costconcepts associated with this work appear possible and are now being fullyproven and validated. We are confident that this work will have real benefit inproduction applications in both automotive and off-highway markets. Financial review Revenue Our customers in automotive and off-highway have continued to demonstrate thevalue of the IVT technology and are now committing financial as well asengineering resources. As a result, we are pleased to report that, in line withexpectations, revenue has more than doubled in this financial year from £244k in2004 to £534k. Licence down payments, which are received from each licensee during theirevaluation and development of the IVT before production starts, varyconsiderably in amount and timing. In 2005, licence income included the finaldown payment from one off-highway customer, giving it full rights to go toproduction. In the new financial year, we expect to earn contract income fromthis customer from vehicle engineering prior to pilot production. At the half year, we reported that under a partnership with one of ourcustomers, who provided us with hardware and prototypes, Torotrak providedengineering time in lieu of contract income. That phase of work is now completeand since January 2005 this customer has paid for applications engineering on acontract basis. This income is expected to continue in the current financialyear. As a result, the revenue trend started in 2003 should continue in the newfinancial year. This is underpinned by licence, exclusivity and option paymentsin excess of £800k due over the next two years, under agreements announced on 3May 2005. Development expenses and administration costs Development expenses, which include the cost of technical staff and hardware fortechnology development, have reduced by 12% to £5,096k from £5,758k in 2004.Hardware and prototypes are now being supplied to us directly by our licensees,contributing to this reduction. Internally, our development activity has been focused on the expansion of ourtechnology to meet the needs of our new customers in the off-highway market. Ofthe 12 new inventions we have secured in the last year, 6 are in off-highway and4 of these specifically adapt our technology for specialist agricultural use.Our commitment to further cost reductions in automotive has led to the creationof more patentable concepts which maintain the long-term competitive position ofIVT. This continual innovation benefits us in two ways: First, it underpins our long-term royalty income. By offering our licensees thiscontinuous stream of innovation we demonstrate the value to them of ourlong-term commitment to the development of the IVT technology. Second, it extends our revenue earning life because our licences last as long asthe longest patent. As of now, our revenue earning life extends to 2025. Administration costs of £1,798k (2004: £2,033k) remain tightly controlled. Loss and taxation Interest receipts of £418k (2004: £522k) have benefited from increasing interestrates in the UK, although rates remain at a low absolute level. Research and Development (R&D) tax credit of £0.8m has been credited in respectof the 2004/5 financial year. The 2003/4 credit of £0.9m has been agreed withand received from the Inland Revenue during the financial year. The loss before taxation of £5.9m (2004: £7.0m) led to a loss per share of 4.46p(2004: 5.36p), in line with expectations due to the reductions in bothdevelopment and administration costs. International Financial Reporting Standards In line with new reporting requirements the group has adopted International Financial Reporting Standards (IFRS) to replace UK standards with effect from 1April 2005. We will report under those new standards for the first time thisfinancial year commencing with the interim report in November 2005. We do notexpect the adoption of IFRS to have a significant impact on our results. Capital expenditure and fixed assets Capital expenditure of £0.1m (2004: £0.1) remains at a low level. In the interimreport in November we reported that, in line with our policy of sound financialmanagement of the assets of our business, we would investigate the benefits of asale and lease back agreement on our freehold land and buildings. Followingthis review, the board concluded that it was in the interests of the group toutilise its assets to invest in further development of our technology and we arepleased to report that, subject to contract, we have agreed heads of terms tosell a freehold interest in the land and buildings. This will result in a cashinflow of c.£3.5m during the current financial year. At the same time, we willalso enter into a 20-year lease on the building at an open market rental of£280k per annum. This increase in costs will be offset by other planned savingsand we do not expect any overall increase in costs as a result of thistransaction. Cash flow and treasury The net cash outflow (movement in net funds) for the year of £4.4m (2004: £4.6m)is in line with expectations. At 31 March 2005 our cash resources were £7.3m. The increasing trend in revenuesapparent over the last few years should continue in this current financial yearas evidenced by recent contract gains and down payments due from licenceagreements. This, together with the inflow of funds from the sale of thebuilding and the tax credits above, means that we expect our net cash outflow tobe very low in the current financial year. Accordingly, the group remains wellresourced. We continue to maintain strong internal control over our cash balances withregular reporting of balances and cash flow forecasts. Our investment policyremains conservative with the objective of optimising interest receipts whilstmaintaining flexibility. Balances at the year-end are invested in money marketmanaged funds. During the year the group had no significant transactions in foreign currencyand exposure to foreign exchange risks was minimal. In the coming year asignificant proportion of our revenue is expected to be received in foreigncurrency and the group will use appropriate hedging techniques to minimise theimpact of exchange rate risks. Board changes With our strategy firmly in place and proving successful and the reshaping ofthe board over the last two years, our chairman, David Wallis, has decided notto offer himself for re-election at the annual general meeting on 21 July. Overthe eight years that David has been chairman he has seen the group grow from theearly days of technology development through the transition to a commerciallyfocused organisation. We would like to thank him for all the support he hasgiven Torotrak and wish him every success in the future. John Grant, who iscurrently chairman of the audit committee and has been our senior independentdirector since 1999, will become chairman of the board from the conclusion ofthe annual general meeting. As a consequence, David MacKay, a non-executivedirector since 2003, will become the senior independent director and chairman ofthe audit committee. Outlook In the last year, we have established a new and wider customer base as wecontinue to execute our strategy to broaden the application of our IVT into theagriculture and construction industries. Supporting these new customers en routeto market will, in turn, generate increased revenues for Torotrak. We expect theearlier revenue and royalty streams from this sector to provide a sustainablebusiness platform from which the longer-term shareholder returns fromhigh-volume automotive royalties can be delivered. Although the automotive industry is moving at its own pace, our customers areincreasing their resources in hardware, manpower and finance. This investment inthe development of the IVT technology is at a level which represents a seriousintent to deliver. Consolidated profit and loss account for the year ended 31 March 2005 2005 2004 £000 £000 Turnover 534 244 Development expenses (5,096) (5,758) Administrative expenses (1,798) (2,033) Operating loss (6,360) (7,547) Net interest receivable 418 522 Loss on ordinary activities beforetaxation (5,942) (7,025)Taxation 801 859 Loss on ordinary activities after (5,156) (6,166)taxation retained for the financial year Loss per share (4.46p) (5.36p) Diluted loss per share (4.46p) (5.36p) Balance sheets as at 31 March 2005 Group Group Company Company 2005 2004 2005 2004 £000 £000 £000 £000 Fixed assets Intangible assets - Patents 989 877 - - Tangible assets 5,731 6,044 - - Investments - - 9,270 9,270 6,720 6,921 9,270 9,270Current assets Debtors 1,159 1,251 53,335 48,632Investments - Money market deposits 5,650 10,031 5,650 10,031Cash at bank and in hand 1,668 1,698 - - 8,477 12,980 58,985 58,663Creditors Amounts falling due within one year (637) (543) (2,882) (2,879) Net current assets 7,840 12,437 56,103 55,784 Total assets less current liabilities 14,560 19,358 65,373 65,054 Capital and reserves Called up share capital 11,729 11,718 11,729 11,718 Share premium account 48,009 47,997 48,009 47,997 Other reserve (2,705) (3,807) (2,705) (3,807) Profit and loss account (42,473) (36,550) 8,340 9,146 Equity shareholders' funds 14,560 19,358 65,373 65,054 Consolidated cashflow statement for the year ended 31 March 2005 2005 2004 £000 £000 Net cash outflow from operating activities (5,521) (6,818) Return on investments and servicing of finance Interest received 487 505 Net cash inflow from returns on investments and servicing of finance 487 505 Taxation 876 2,016 Capital expenditure Purchase of tangible fixed assets (79) (145) Proceeds from sale of tangible assets 0 13 Investment in patents (220) (184) Net cash outflow on capital expenditure (276) (316) Net cash outflow before management (4,434) (4,613) of liquid resources and financing Management of liquid resources Cash withdrawn from money market 4,381 5,248Financing Increase in share capital 23 23 (Decrease)/increase in cash in the year (30) 658 Reconciliation of operating loss to net cash outflow from operating activities 31 March 31 March 2005 2004 £000 £000 Operating loss (6,360) (7,547) Depreciation charge 372 602 Amortisation charge 86 98 Share award by Employee Share Trust 335 144 Loss on disposal of fixed assets 23 80 Increase in debtors (89) (26) Increase/(decrease) in creditors 112 (169) Net cash outflow from operating activities (5,521) (6,818) Analysis of changes in cash 31 March 31 March 2005 2004 £000 £000 As at 1 April - cash at bank and in hand 1,698 1.040 As at 31 March - cash at bank and in hand 1,668 1,698 (Decrease)/Increase in cash (30) 658 Analysis of net funds Balance at Balance at 1 April 2004 Cashflow 31 March 2005 £000 £000 £000 Cash at bank and in hand 1,698 (30) 1,668 Money market deposits 10,031 (4,381) 5,650 Net funds 11,729 (4,411) 7,318 Notes 1. The financial information set out above does not comprise full accountswithin the meaning of Section 240 of the Companies Act 1985. The financialinformation contained in this announcement in respect of the year ended 31 March2005 and year ended 31 March 2004 has been extracted from the financialstatements which have been audited and reported upon without qualification byKPMG Audit Plc and did not contain a statement under Section 237 (2) or (3) ofthe Companies Act 1985. The 2004 accounts have been filed with the Registrar ofCompanies, and the 2005 accounts will be filed in due course. 2. Taxation 31 March 31 March 2005 2004 £'000 £'000UK Corporation tax Current tax for the year 801 859 Foreign tax Current tax for the year (15) - 786 859 3. Loss per ordinary share Basic loss per share is based on the loss after tax of £5,156,000 (2004:£6,166,000) and 115.6 million ordinary shares (2004:115.1 million) being theweighted average number of shares in issue during the year. 31 March 31 March 2005 2004 Number Number Weighted average number of shares used in calculating basic and 115,577,949 115,107,042diluted loss per share 4. Copies of the annual report and accounts will be posted in due courseto shareholders on the register at 31 May 2005 and will be available from thecompany at 1 Aston Way, Leyland, Lancashire, PR26 7UX or via our website:www.torotrak.com This information is provided by RNS The company news service from the London Stock Exchange