20 May 2008 07:00
20 May 2008
Torotrak PLC
("Torotrak" or "the Company")
Preliminary results announcement for the year ended 31 March 2008
Financial Highlights:
37% increase in revenues to £3.7m
26% reduction in operating loss to £(2.8)m
£5.4m cash received from licence agreements
£0.5m positive operating cash generated during the year
£6.7m net proceeds raised from Placing and Open Offer
Robust balance sheet - £11.5m cash at year end (2007: £4.3m)
Operational Highlights
Substantial new licensee in the truck and bus market secured as part of licence and engineering development agreements valued at £7m over three to four years
Tata Motors confirmed as an active new licensee following Indian Government approval
Production and sales of first transmissions commenced at Infinitrak in April 2008, as envisaged in our February Interim Management Statement
Two new licensees in motorsport
Dick Elsy, Chief Executive said:
"This has been an exceptional year of dealmaking with unprecedented levels of licence income. We have secured one of the most strategically important customers in Torotrak's history in the truck and bus market and our business prospects overall have strengthened considerably.
Most importantly, Torotrak has overcome the final obstacles to volume production in one of the most cost competitive markets, outdoor power equipment. Although we are approximately one year behind our original production plan, achieving our first sales in this market through our joint venture, Infinitrak, is a major milestone."
For further information contact:
Torotrak:
Dick Elsy, Chief Executive
Jeremy Deering, Finance Director
Tel: 01772 900938 or 020 7920 3150
Tavistock Communications:
Simon Hudson
Lulu Bridges
Tel: 020 7920 3150
Chairman's Review
Financial Strengthening and Results
We have seen a substantial flow of cash into the business from new equity funds raised from the Placing and Open Offer in August 2007 and also from new licensees secured in the second half of the year. As a result, our balance sheet has been materially strengthened, with £11.5m cash resources at 31 March 2008. We end the year in a robust financial position.
Revenues have continued to build significantly, with a 37% increase in the year to £3.7m (2007: £2.7m). We have contained operating costs at 2007 levels and hence have reduced operating losses by 26% to £(2.8)m (2007: £(3.7)m).
Largely as a consequence of the significant licence fees received from new licence deals during the year, operating cash flow turned positive and we generated a £0.5m net inflow (2007: £(3.5)m outflow).
Commercial Progress
New licensees and strengthening of business prospects
Substantial progress has been made in securing major new customers and licensees, significantly enhancing business prospects and delivering financially and commercially valuable agreements for the Group.
The benefits of the new equity funds that we raised are clear to see in the quality of outcome of negotiations that we concluded in December 2007 with our new customer, a major European manufacturer of trucks and buses, who signed licence agreements and development contracts valued at some £7m when realised over the next three to four years. We are also delighted to confirm that our licence agreement with Tata Motors became unconditional in March 2008 following its approval by the Indian Government. Additionally, we have secured two further new licensees during the year; Xtrac (a leading manufacturer of specialised motorsport driveline systems) and also an undisclosed Formula 1 team who are licensed to develop and use our technology in the fields of general motorsport and Formula 1 respectively.
Together, these four new licensees have paid a total of £5.4m in licence fees and stage payments during the year. To command such fees at this stage of the development of Torotrak's business is a strong endorsement of the growing value recognised in our technology. This unprecedented level of licence income has more than compensated for some other areas of our plan which have been impacted by more difficult trading and market conditions, for example with our tractor licensees who, as we reported in November 2007, are now expected to start series production in 2010.
Infinitrak
For any technology business, the transition from development into manufacture of its first product is always a challenging time and our joint venture (JV) Infinitrak has been no exception. This initial step into series production, and with a low-cost product, has been at times a demanding process for us and MTD, our JV partners in Infinitrak and one of the leaders in the global outdoor power equipment (OPE) market. I am pleased to report, however, that we have overcome the final obstacles to low-cost volume production that we previously reported and in April 2008, Infinitrak commenced the manufacture of the first saleable Twin-Toroidal Transmissions (TTT) at its production facility in the USA.
As this is the first series production of Torotrak technology, the importance of delivering complete product robustness and reliability is paramount. This requirement has driven us to be very cautious with the manufacturing launch process where we have placed priority on the delivery of a capable and repeatable manufacturing process, rather than on initial launch volumes. Our view is that the reputation of Infinitrak's first products will have a significant influence on subsequent adopters. I am pleased to report that, although the development, validation and launch process has taken longer than we anticipated, our caution has been rewarded with Infinitrak's first third-party customer order for transmission units, which will be featured in a specialised, commercial-grade lawn mower.
The delay in the start of Infinitrak production as reported in our February Interim Management Statement, together with current market conditions in the USA where there is evidence of softening consumer demand for product in the OPE sectors, is likely to result in approximately a year's delay compared to our original sales plan. We therefore expect significantly lower Infinitrak sales than initially planned for the year to 31 March 2009. However, we are confident that we will realise significant medium to long term value in this sector. Through our JV we now have a fully validated first product (the TTT) and an active programme to develop a second, lower cost product to address higher volume sectors within the OPE market.
Business Strategy
Torotrak's strategy is to deliver sustainable growth in shareholder value through profitable expansion in its core markets of outdoor power equipment, off highway, automotive and truck and bus. This span of markets is represented by a growing product and market portfolio which has been developed to broaden Torotrak's original and sole focus on the automotive market. Torotrak has also diversified its operating model from being a pure licensing business to one which seeks to gain value from its technology at each stage of customer engagement. This diversity of markets and earnings has been shown to be important in securing new customers and opportunities.
We aim to secure a repeatable pattern of earnings from our technology. This pattern covers the entire product lifecycle from initial engineering activity with a new customer through to production related income. Typically, engineering services revenue is accompanied by income arising from associated licence fees, leading ultimately to a realisation of value in our technology from production royalties or through a share in the profits from joint venture arrangements. This year has seen the results of considerable business development activity which has generated significant financial contribution from both initial licence fees and staged payments. We also continued to use our engineering resources to drive engineering services income, albeit at a lower level than last year due to the greater emphasis this year on business development activities and on building up customer relationships in new market areas. However, as we win new business, we are also establishing a more predictable earnings pattern.
Legislation and the Environment
It is clear that growing global pressures to reduce CO2 emission levels are creating significant opportunities for our business development activity and have helped to take us into new markets. This has been particularly evident in areas such as the truck and bus market, where there are now newly proposed pressures on manufacturers to meet stringent emissions targets and to make improvements in fuel economy.
Similarly, environmental pressures have also provided impetus to our business development activities, particularly in the area of motorsport where we have made a central contribution to the development of mechanical hybrid Kinetic Energy Recovery Systems (KERS). This initial focus on motorsport has already led to new opportunities for applying this technology in more mainstream areas within the automotive market.
Torotrak's credentials as a provider of accessible and efficient variable drive technology are continuing to be recognised as we work to raise our profile amongst government and legislators alike. We were very pleased to be featured in the newly published Government "King Review" on Automotive CO2 as a key British enabling technology for CO2 reduction. More recently, in May 2008, we have been successful in securing support from the Government's Technology Strategy Board (TSB) relating to our participation in a project to develop a mechanical hybrid KERS with Jaguar Cars Ltd and other partners.
We were also delighted to have received two awards during the year for our contribution to the development of mechanical hybrids in motorsport:
Motor Industry Association Teamwork Award
Professional MotorSport World Technology Award
Outlook
Torotrak's ability to command significant license fees in several different market sectors demonstrates growing awareness of, and confidence in, the value and relevance of our technology. We can now look forward to the further benefits that will be generated from our new long-term relationships in our new target markets, such as truck and bus, where we have commenced a substantial multi-year engineering development programme.
Whilst it is very encouraging to have delivered a year of positive operating cash flow, earlier than planned, this achievement needs to be seen in the context of our three year plan, where the substantial initial licence payments secured during this year are likely to be balanced by lower levels of cash inflow next year. Overall, our objective is to generate sustainable and recurring positive operating cash flow from the year ending 31 March 2010 onwards.
Chief Executive's Review
Introduction
The value of a technology business, such as Torotrak, is principally determined by the quality of its intellectual property (IP) and engineering capability but also depends upon its ability to convert its know-how and application skills into robust and commercially attractive propositions. In this context, the start of production and sales of our first products at Infinitrak, our JV business in the USA, for use in a highly cost-competitive market, is a major achievement for the Torotrak team and demonstrates that our technology is capable of series production and of delivering strong competitive advantage.
This first production also validates the broad reach of our technology into multiple markets and demonstrates that our diversification strategy is delivering results. The increased strength of our portfolio is reflected in the high quality of our client and licensee base which continues to grow as potential customers, as well as existing clients, draw confidence from this ultimate proof of the commercial viability of our technology.
Our strategy to diversify our markets compensates for inevitable shifts in market outlook, most of which are outside of Torotrak's direct control. The highly significant £7m licence and engineering services deal in our new market of truck and bus is an example of this. With our major new customer in this market, we have secured both short and medium-term contribution, although the ultimate prize is the potential for longer term value from royalty fees from high value transmissions. Contribution from this and from anticipated new business in other markets including fork lift trucks will help offset delays that may occur in other areas.
Market and Sector Review
Outdoor Power Equipment (OPE)
Torotrak's entry to this market is through Infinitrak which has been established to design, develop and manufacture transmissions for the OPE market. MTD, our JV partner and lead customer, enjoys a substantial share of the OPE market and has the capacity to take significant quantities of Infinitrak's transmissions, over a period of time, as the Infinitrak transmissions are adapted for use in more of the MTD product range.
Infinitrak has developed Torotrak's technology and the manufacturing process to produce toroidal transmissions which compete effectively on cost and performance against hydrostatic drives, the incumbent technology in the market. We reported in our Interim Management Statement in February that final testing and validation of Infinitrak's first unit, the Twin Toroidal Transmission (TTT), had highlighted a small number of production conformity issues which we expected to have resolved around the end of our financial year. We are pleased to report that our development and validation process has been successfully concluded and that, as a consequence, series production and sales of transmissions commenced in April 2008, representing an important milestone for Torotrak and Infinitrak. In this first series production run 500 transmissions will be built and will be incorporated into MTD's Cub Cadet range as an end of season introduction and will also satisfy Infinitrak's first order from a previously undisclosed third party customer.
This first external customer for Infinitrak is the UK based Advanced Turf Technology (ATT), which is a developer of highly specified, specialist mowers for use on golf courses. ATT has developed its new "Infinicut" range of commercial grade mowers using Infinitrak's TTT. We are delighted that Infinitrak is supplying this new client in such a demanding application and, although the initial order is modest (around 300 units), we expect to build on this as ATT's requirements become clearer and as it builds market share in this sector.
It is clearly encouraging that our work at Infinitrak has overcome the previously reported barriers to manufacturing implementation and has also secured the first external customer for the JV business. However, we recognise that the time to start production has taken longer than originally anticipated and that the ramp-up of series production will be more gradual than assumed in Infinitrak's original plan. With the 2008 build season for mowers drawing to a close at MTD, we expect to recommence series production in the fourth calendar quarter of 2008 when transmissions will begin to be built for incorporation in mowers for sale in 2009. At this stage it is difficult to predict MTD's order requirement due to an overall softening of consumer demand for OPE equipment resulting from the well publicised recent credit 'squeeze'. As a consequence, we expect the first year's production volumes to be significantly reduced compared to the initial JV plan representing about a year's delay, but the longer-term market potential remains as strong as we first thought, and the prospects for success have improved markedly as a result of progress during the year.
This positive outlook is illustrated by MTD's appetite to progress with our joint plans for a second, lower cost Infinitrak transmission, which is expected to be competitive in a high volume area of the OPE market. This new unit, now in the design and early prototyping phase, has benefited substantially from the experience gained in the TTT development programme. Subject to MTD's product plans, Infinitrak expects to introduce this transmission during the 2009 calendar year.
Truck and Bus
This year we secured one of most important deals in Torotrak's history, entering into licence and engineering development agreements with a major European truck and bus manufacturer. Whilst the initial financial value of these agreements is significant, we are also delighted to be carrying out a substantial development programme with this client, one of the world's finest commercial vehicle manufacturers who brings significant potential for future volume sales and royalties. Although lead times in this sector are long, the impact of this deal for Torotrak is immediate. The major engineering programme is already underway and will continue to form a substantial part of our forward engineering services order book for several years.
The combined value of the licence and engineering development agreements is in excess of £7m over the next three to four years. This deal has been transformational for Torotrak as it:
Recognises the value of our technology in the form of a significant financial commitment from a respected industry player following two years of joint work and due diligence;
Illustrates the scalability of Torotrak's technology (from application in mowers through to heavy trucks and buses);
Provides a new route to market with Torotrak's technology being incorporated in a high value transmission;
Combines Torotrak's engineering resources with those of a recognised world leading commercial vehicle manufacturer to develop our technology for heavy-duty application.
Off Highway
Tractors
The market for small to medium-sized tractors has continued to be Torotrak's bridgehead into the wider agricultural market. This area is a strategic focus for us because the cost and performance benefits of our technology enable variable ratio transmissions to be offered in a sector of the market where existing technologies cannot currently be afforded.
The market potential for Torotrak's technology in small to medium tractors remains very strong. In back-to-back tests with vehicles drawn from our clients and their competitors, our technology clearly outclasses current powershift transmissions (the sector norm for premium transmissions) and even demonstrates superior driving characteristics when compared to the best of hydrostatic drives - the benchmark technology for larger, more sophisticated tractors.
We have used these advantages to good effect to build our profile in the agriculture sector. We have made good progress, for example, in rapidly growing economies such as India where the potential for new technology, offering the benefits of variable drive but at affordable levels, has been welcomed. We have also been very active with in-market demonstration of our two in-house tractors which are configured to demonstrate the full capability of our technology and the benefits it can provide for these markets.
We currently have three licensees in the off highway tractor market. Iseki and Carraro are actively progressing with the development of our technology in their respective transmissions. Both continue to demonstrate their commitment to series production, with each of them having prototype vehicles undertaking test and development work in preparation for market introduction.
The third licensee, Uzel, was initially a key part of our planned market introduction in small to medium tractor transmissions. However, as has become public knowledge, the Uzel group (based in Istanbul in Turkey and with major trading operations formerly quoted and managed out of the Netherlands) is experiencing financial difficulty. The general consensus amongst other companies trading with Uzel is that the underlying business remains strong and we are hopeful that a restructuring or re-financing of Uzel will be found and that they will be able to recommence their projects with us. Although this is a timing setback for us in the off highway market, it neither diminishes the value of our technology in this sector nor prevents us from proceeding with a revitalised Uzel.
Working in close co-operation with our customers and prospects in this market has enriched our knowledge of the industry needs and, as a result, during the year we have been able to better target the development of specific features and general capability of our technology in this sector. With this additional knowledge and confidence in our competitive advantages, we are seeking to develop this sector further in the year ahead and we continue to prospect for new clients, including potential JV partners, as we seek to have more control over the route to production in this market.
Fork lift trucks
We have made very promising progress within this new sector in the last year though our programme of work with a world-leading fork lift truck (FLT) manufacturer. This is an important strategic sector for our IVT technology which is a near-ideal fit with the requirements of a fork lift truck transmission, being capable of providing exceptional driveability, very smooth shuttling (rapid forward to reverse shifting) and precise low speed control - the key attributes sought by premium FLT manufacturers.
We now have a prototype transmission under internal evaluation in our lead customer's vehicle. We are due to deliver this initial prototype back to the customer shortly to enable them to carry out their own trials of this Infinitely Variable Transmission (IVT) equipped vehicle. This customer is keen to look at technologies which can provide cost-effective alternatives to the mainstream-sector norm of torque convertor powershift transmissions and the premium-sector hydrostatic drive. Early evaluation of our first prototype has confirmed that our IVT provides the competitive advantages as described above, and that it also delivers fuel economy benefits which are of value in the current and future FLT market.
The commercial case for our technology in this sector appears to be strong, with the cost of a transmission expected to be in the range between a powershift and a hydrostatic drive. This is a promising new market for Torotrak where we have clear competitive advantages and where we are working with a customer with a very strong market position.
Automotive
Main drive transmissions
Torotrak's principal activities in the market for main drive automotive transmissions are with the major Japanese tier-1 manufacturer, Aisin AW (Aisin), with whom we continue to work on engineering development programmes. As a market, automotive remains highly valuable, but our path to success requires a strong degree of cost competitiveness. In this respect, our credentials are now supported equally from progress in our other markets, such as low cost OPE, as much as from the original Torotrak foundations in premium car IVT.
Aisin has shown longstanding support for Torotrak's technology. Until recently, this has been focused primarily on premium automotive applications. The last 12 months, however, has seen a number of changes and developments in the automotive market. With growing pressures for fuel economy improvement and greenhouse gas emission reductions, there has been a shift of emphasis in interest in our technology towards higher volume, smaller car applications. As reported in November, Aisin has asked us to conduct a design study to apply our technology to mainstream small and medium-sized cars and this initial study has now commenced. We are delighted that Aisin's appetite for developing our technology is now also directed towards smaller cars, a strategic target area for Torotrak and a prime focus in emerging economies.
This new work on small car applications is in addition to continuing prototype test and development work on the Epicycloidal Roller Control (ERC) configuration that we are completing for Aisin on a consultancy basis. Work on this ERC module, which we regard as a technology suited primarily to large car and sports utility vehicle (SUV) transmissions, is now being handled by Aisin on an independent basis as a result of their target customer deciding not to commit to a prototype development programme for a larger car IVT. ERC's success in large car and SUV applications therefore remains speculative, but we continue to invest in business and technical development for the premium car main drive transmission market with the support of Aisin.
Emerging economies
The Indian government's approval of the Tata Motors licence agreement at the end of March 2008, as envisaged in our February Interim Management Statement, has opened the way for starting technology transfer to Tata's engineers. This process, where Torotrak provides training for the client in our technology and know-how, is taking place both in the UK and in India. We are very excited to be starting our relationship with this ambitious, far-sighted and high-profile company at a time when its reach is growing substantially.
Tata is licensed to use Torotrak's technology across a broad range of their products from small cars to full sized trucks and construction equipment. The nature of the first application to a Tata product is yet to be determined but their selection process is underway. Once Tata decides on its first application, which is likely to be client confidential, we expect to provide engineering and technical support to the company's engineers as they progress through the full prototype and production process.
New technology - mechanical hybrids
This emerging area of the automotive market has generated considerable awareness of, and enthusiasm for, Torotrak's technology. Our traction drive technology is a key element in a mechanical KERS system where our transmission connects the vehicle's drivetrain to a flywheel energy storage device.
Our work with our licensee Xtrac and with flywheel system provider Flybrid Systems has facilitated the development of a mechanical hybrid system for automotive application. The initial market for this technology is the motorsport industry where Xtrac enjoys a prominent reputation as a specialist driveline and component manufacturer. In the working arrangement, Flybrid Systems provides the flywheel technology and overall system integration and Xtrac supplies variable drive CVTs based on Torotrak's technology. A number of these transmission units have already been supplied for test and development purposes to two Formula 1 teams for which Torotrak has received license fees and royalty payments. Whilst all Formula 1 teams work in secrecy, it is clear that several different types of system are being evaluated for the 2009 season when a change in the sport's regulations allows hybrids to be introduced for the first time.
At the time of reporting, the intentions of the two Formula 1 teams working with our technology cannot be confirmed although we know from test results that the system delivers the performance that we anticipated. Whilst future applications in Formula 1 remain speculative, we have already benefited from significant commercial exposure through our affiliation with the sport and from the high level of technical expertise surrounding this industry. The "profile" that we have secured has already opened doors in other areas of motorsport which we are pursuing jointly with Xtrac and Flybrid Systems.
The strategic, long term value of this sector to Torotrak remains speculative but it is an important area for us to target. The benefits of this mechanical hybrid system, including low-weight, compact size and high efficiency, are already recognised by the mainstream car industry to the extent that we are discussing potential applications with a number of target clients.
Our investment to date has been rewarded with our inclusion in a project being funded by the TSB with Jaguar Cars as the project leader and potential end customer. The consortium will design and develop the mechanical hybrid kinetic energy recovery system for use in a premium segment passenger car; the mechanical system is viewed as a power-dense and cost competitive alternative to other hybrid types. Torotrak's involvement in the project will include granting the other consortium members (Flybrid Systems LLP, Ford Motor Company Ltd, Prodrive, Ricardo UK Ltd and Xtrac Ltd) access to the Company's IP and know-how for the purpose of carrying out the project. In addition, we will support the project with analysis and design expertise relating to our variable drive technology which is central to the function and performance of the proposed system.
Financial Review
Overview
This is our third successive year of very strong revenue growth. Revenues increased by 37% to £3,685k (2007: £2,691k, representing 31% growth over 2006). The reduction of £1.1m in our operating cost base achieved in 2007 has been maintained during the year, with total operating costs remaining broadly at the same level. Underlying loss after tax reduced by £994k as set out below, a 32% improvement. Including the impact of last year's non-recurring, exceptional income of £225k in relation to the de-merger claim, overall loss after tax reduced by £769k to £(2,130)k.
| Year on year improvements
| Year ended 31.03.08 change over prior year £000 |
| Increased revenues | 994 |
| Increased development and administrative costs | (28) |
| Improvement in year on year underlying operating performance | 966 |
| Increase in finance income (interest income) | 89 |
| Decrease in tax receipt (mainly Research and Development credits) | (61) |
| Improvement in year on year underlying loss after tax | 994 |
| Decrease in exceptional income (de-merger refund claim) | (225) |
| Reduction in loss after tax | 769 |
Torotrak has had a strong year in terms of cash generation, with £5,378k cash received from licence agreements that included our four new licensees in the truck and bus, automotive and motorsport markets. In addition, we received strong support from our Placing and Open Offer which raised £6,741k net of expenses in August 2007. We ended the financial year with £11,549k cash resources (2007: £4,307k). This provides us with substantial medium term financial capacity to progress our strategic objectives at this critical point in time where the climate for funding has tightened considerably and as we progress on our path to commercialisation.
Placing and Open Offer
We were delighted to have received the backing of existing and new institutional shareholders in August 2007 by way of a £5,000k firm placing (net of expenses) and that of our private and other shareholders who supported a £1,741k open offer (net of expenses), which was almost twice oversubscribed. This was not an easy time for the Company to raise capital, or indeed for investors to support that capital raising, but the success of this exercise has allowed the Group to pursue its business plan with confidence and has strengthened considerably our ability to secure substantial new business.
The raising of new cash gives us very real responsibilities to manage our cash resources wisely and to focus on growing Torotrak's value. A technology company, with a portfolio of products and opportunities at different stages on the path to potential commercialisation, will never be able to predict the future financial outcome of each of its opportunities with certainty. However, what is important is that the portfolio and range of market opportunities is sufficiently wide to allow the chances of overall success to progressively increase. This is the strategy that we set out in the July 2007 prospectus and a key objective of the fundraising. It is worth reminding shareholders of those key prospectus commitments and how we are progressing against them:
| Target | Progress |
| To strengthen our financial position and to conclude an agreement with a major new truck and bus manufacturer (two thirds of the funds raised were to be directed at this objective) | Licence and development agreements were signed in December 2007 worth £7m and with over 50% received up front in cash |
| Seek to form a new Joint Venture, focusing initially on the agriculture sector | Market and customer specific conditions have been unfavourable to conclude any deal this financial year. This remains a target provided the opportunity and terms are right. |
| Accelerate product development in Infinitrak to access wider OPE volumes | Development programme for a second, low cost product is substantially complete and has opened up a new area of the OPE market for significant future sales potential |
Key Financial Performance Indicators (KPIs)
Good progress has been made during the year in terms of the Group's KPIs which are used by the Board to review business performance. The KPIs and progress are described below with further commentary included in this section and in the Chief Executive's Review.
| Financial | Progress |
| Revenue growth | 37% growth |
| Increased efficiency of operating costs relative to revenues | Operating cost leverage is improving being at 175% of revenues compared to 238% in 2007 |
| Progression towards profitability | 27% reduction in loss after tax |
| Progression towards positive operating cash flow | 115% improvement in operating cash flow. Positive operating cashflow achieved one year ahead of target |
| Growth in shareholder return | During the year, the FTSE Techmark All share index fell by 11% and Torotrak's share price fell by 55%, a significant under performance relative to that index |
| Non financial | Progress |
| Progression to start of production and growth in sales thereafter | Infinitrak start of series production commenced, but later than planned and with the build of volumes likely to be more gradual |
| Signing up new licensees | Four new licensees and £5.4m cash payments received |
| Development of new intellectual property | Continuing development in low cost areas and new market applications |
| Utilisation of engineering resources to secure revenue or business development opportunities | 68% utilisation of engineering resource on customer and business development projects (2007: 65%) |
Total Shareholder Return (TSR)
Our strategic objectives are focused on the delivery of long term value to shareholders as measured by TSR. This requires demonstrable progress in our financial and non financial KPIs as reported above. In this respect, we have made strong progress in the year, although the delay in start of production at Infinitrak and the related uncertainties, clearly have had a negative impact on TSR. As we build volumes and confidence in Infinitrak in the forthcoming year to 31 March 2009, and develop the strong prospects from our enhanced customer lists, we hope this will be reflected in Torotrak's perceived value and TSR.
We strive to reduce uncertainty and potential share price volatility by providing a regular flow of information to investors, although market specific factors and short term price movements are clearly outside of our control. The release of information to investors, however, must be balanced with the need for us to progress negotiations and business development with a realistic level of commercial sensitivity to both Torotrak and third parties.
Our lead times to potential production in our key markets extend from the 'now' in the OPE sectors to 'within three years' in the off highway sectors through to 'greater than five years' in truck and bus and automotive markets. Our objective is to progressively increase confidence, and therefore value, of the longer term Torotrak markets and sectors by reinforcing and delivering success in the shorter term sectors and markets. In this respect, Infinitrak's importance in supporting our first product to market can not be underestimated.
Revenue
| Year ended 31.03.08 £000 | Year ended 31.03.07 £000 | |
| Engineering services | 698 | 1,757 |
| Licence and option fees | 2,978 | 147 |
| Sale of IP rights to Infinitrak | - | 787 |
| Royalties | 9 | - |
| Total | 3,685 | 2,691 |
Engineering services
Our engineering resources are valuable and indeed expensive assets, not just in terms of the annual cost of maintaining them, but also in terms of the significant level of accumulated experience and the opportunity cost as to where they are directed. With competing demand on those resources, it is vital that we balance the needs of generating immediate income with the need to build business development opportunities and to invest in future technology and intellectual property. 31% of engineering available time was directed towards business development opportunities (2007: 10%). 37% was employed on fee paying, engineering services (2007: 55%) and the balance was spent on projects to commercialise and develop our technology, mainly in conjunction with customers.
Engineering services income fell by £1,059k to £698k as a result of the higher activity on business and customer development described above and related to four main areas: the substantial completion of the fork lift prototype programme for a major customer; work on automotive development activity in conjunction with Aisin; continued support for certain of our off highway customers; and services into the motorsport sector. This profile of higher activity on business and technical development was anticipated when we reported last year and the impact has had significant pay back in terms of securing new licence agreements.
The substantial development programme with our truck and bus customer which commenced in February 2008 underpins the engineering services order book going into the year ending 31 March 2009. This is a three to four year programme and no engineering revenues have yet been recognised, in line with our accounting policy where we have taken a prudent view as to the stage of completion in these very early stages of this contract.
Licence and option fees
Revenue from licence and option fees increased by £2,831k to £2,978k. This reflects the substantial activity during the year and the material licence downpayments as described in more detail below. Of the £5,378k cash received from licensees during the year, £1,520k has been deferred to be recognised in future years .
Other
Income from the sale of IP rights to Infinitrak of £787k last year represented the completion of obligations under the Infinitrak JV agreements and hence no income was recognized in 2008. Immaterial in financial terms, but emotively significant, is our very first invoice for royalties for £9k relating to the motorsport sector.
Cash and Cash Inflows from Licence Activity
The combination of the £6,741k net funds raised from the Placing and Open Offer and £526k positive operating cash flow, has boosted our cash balances by £7,242k to £11,549k at 31 March 2008 (2007: £4,307k).
Positive operating cash flow has been achieved as a result of £5,378k payments under licence agreements received during the year relating to: a substantial up front licence payment received from our new truck and bus customer; the initial payment received in relation to the Tata licence agreement following Indian Government approval during the year; a stage payment according to the terms of the licence from one of our off highway customers; and from two motorsport sector licensees signed during the year . The precise split of licence fees has not been disclosed at the specific request of certain of our key customers and doing so could be commercially prejudicial. The truck and bus customer has requested that its identity is not disclosed at this stage due to the highly competitive nature of the programme being undertaken and we are under similar obligations in relation to our motorsport customers.
Operating Cash Break-even Point and Positive Cash Flow Target
Our stated target has been to achieve the point at which cash flow turns positive in the year to 31 March 2009 and then to generate positive, recurring operating cash flow from the year ending 31 March 2010 onwards. This assumed linear progression towards positive operating cash flow has in fact been substantially outperformed with the generation of £526k positive operating cash flow in the current year to 31 March 2008. This is due principally to securing substantial licence downpayments from the agreements described above. Our business plan had assumed that licence income would be paid more evenly over a three year period. Whilst obtaining substantial cash payments up front is clearly advantageous, the consequence is that our cash flow in the year to 31 March 2009 is likely to be lower than planned. It is therefore sensible to review the cash progression going forward on an averaged basis over a two to three year timeframe.
Our expectation of a slower build of sales from Infinitrak (due to a combination of lower market demand and the previously reported delayed start of series production), together with the later than expected start of royalty flows from our off highway licensees (due to market and customer specific related issues) is putting pressure on the achievement of our target of operating cash break even in the year ending 31 March 2010. Our commercial objective is to seek further licensing activity to bolster cash generation and hence maintain our positive operating cash flow target. However, the timing of commercial negotiations can, as we have seen this financial year, have a material impact on annually reported financial positions. The overwhelmingly important objective is to have achieved material growth by that stage (the year ending 31 March 2010) in Infinitrak revenues and to have built strong sales momentum elsewhere. Although it remains our target to achieve positive operating cash flow in the year ending 31 March 2010, it is no longer a critical dependency because of the achievement of significantly higher cash levels earlier in our three year plan period.
Share Capital
26,182,153 new ordinary shares of 10 pence each were allotted in August 2007 in relation to the Placing and Open Offer. Hence, the ordinary share capital of the Company increased from 119,900,820 shares to 146,082,973 shares of 10p each at 31 March 2008. This increase represents 17.9% of the enlarged share capital.
At 31 March 2008 there were outstanding: share options to acquire 2,096,389 ordinary shares under the approved and unapproved schemes subject to performance conditions; options to acquire 420,729 ordinary shares under the sharesave scheme; and awards under the Long Term Performance Share Plan over a maximum of 4,728,308 shares subject to performance conditions. The theoretical dilution from all live options or contingent awards over shares is 4.96% (2007: 4.72%).
Financial Information 2008
Consolidated Income Statement
| For the year ended 31 March 2008 | Notes
| Group 2008 £000 | Group 2007 £000 |
| Revenue | 5 | 3,685 | 2,691 |
| Development expenses | (4,570) | (4,453) | |
| Administrative expenses | 6 | (1,873) | (1,962) |
| Operating loss | 6 | (2,758) | (3,724) |
| De-merger costs refund claim | - | 225 | |
| Finance income | 361 | 272 | |
| Loss before income tax | (2,397) | (3,227) | |
| Income tax credit | 7 | 267 | 328 |
| Loss for the year attributable to equity holders of the parent | 10 | (2,130) | (2,899) |
| Basic and diluted loss per share (pence) | 8 | (1.57) | (2.43) |
The results above derive from continuing operations.
Consolidated Statement of Recognised Income and Expense
| Notes
| Group 2008 £000 | Group 2007 £000 | |
| Currency translation differences | 10 | (2) | 16 |
| Net (expense)/income recognised directly in equity | (2) | 16 | |
| Loss for the year | (2,130) | (2,899) | |
| Total recognised expenses for the year attributable to equity holders of the parent | (2,132) | (2,883) |
Balance Sheet
| As at 31 March 2008 | Notes | Group | Group |
|
|
| 2008 | 2007 |
|
|
| £000 | £000 |
| Non Current Assets |
|
| |
| Intangible assets | 1,154 | 1,027 | |
| Property, plant and equipment | 1,102 | 1,087 | |
| Investments | - | - | |
| Trade and other receivables | - | - | |
| Total Non Current Assets |
| 2,256 | 2,114 |
| Current Assets |
| ||
| Inventories | 32 | 46 | |
| Trade and other receivables | 517 | 1,326 | |
| Current tax | 514 | 268 | |
| Cash and cash equivalents | 11,549 | 4,307 | |
| Total Current Assets |
| 12,612 | 5,947 |
| Total Assets |
| 14,868 | 8,061 |
| Current Liabilities |
|
| |
| Trade and other payables | (2,525) | (755) | |
| Total Current Liabilities |
| (2,525) | (755) |
| Net Assets |
| 12,343 | 7,306 |
| Capital and Reserves |
|
| |
| Issued share capital | 9 | 14,608 | 11,990 |
| Share premium | 10 | 52,766 | 48,298 |
| Other reserves | 10 | (202) | (262) |
| Retained earnings | 10 | (54,829) | (52,720) |
| Total equity attributable to equity holders of the parent |
| 12,343 | 7,306 |
Cash Flow Statement
| For the year ended 31 March 2008 | Notes | Group | Group |
| 2008 | 2007 | ||
|
|
| £000 | £000 |
| Cash flows from operating activities |
|
| |
| Loss for the year | (2,130) | (2,899) | |
| Adjustments for: |
|
| |
| Sale of licence rights to Infinitrak | - | (787) | |
| Depreciation | 159 | 166 | |
| Amortisation | 68 | 154 | |
| Finance income receivable | (361) | (272) | |
| Profit on disposal of plant and equipment | - | (15) | |
| Loss on disposal of intangible assets | 40 | 122 | |
| Taxation | 7 | (267) | (328) |
| Decrease/(increase) in inventories | 14 | (46) | |
| Decrease/(increase) in trade and other receivables | 780 | (524) | |
| (Decrease)/increase in trade and other payables | 1,795 | (104) | |
| Cost of equity settled employee share schemes and bonuses | 428 | 389 | |
| Cash generated/(used) in operations |
| 526 | (4,144) |
| Income tax received | - | 629 | |
| Net cash generated/(used) in operating activities | 526 | (3,515) | |
| Cash flows from investing activities |
|
| |
| Acquisition of property, plant and equipment | (174) | (469) | |
| Proceeds from sale of plant and equipment | - | 16 | |
| Acquisition of patents | (230) | (235) | |
| Finance income received | 381 | 266 | |
| Net cash (used) in investing activities |
| (23) | (422) |
| Cash flows from financing activities |
|
|
|
| Net proceeds from the issue of share capital |
| 6,741 | - |
| Proceeds from issue of share capital by Infinitrak | - | 805 | |
| Net cash generated in financing activities | 6,741 | 805 | |
| Net increase/(decrease) in cash and cash equivalents | 7,244 | (3,132) | |
| Cash and cash equivalents at start of year |
| 4,307 | 7,473 |
| Exchange loss on currency translation | (2) | (34) | |
| Cash and cash equivalents at end of year | 11,549 | 4,307 | |
| Cash and cash equivalents held in the JV not under direct control of the Group | 92 | 234 |
Notes to the Financial Information
1. General Information
Torotrak plc (the Company) is a publicly traded company and domiciled in the UK. The address of itsregistered office is 1 Aston Way, Leyland, Lancashire PR26 7UX. The Company is listed on the London Stock Exchange.
The Annual Report and Financial Statements for the year ended 31 March 2007 have been delivered to the Registrar of Companies and are available on Torotrak's website www.torotrak.com and the Annual Report and Financial Statements for the year ended 31 March 2008 will be posted to shareholders and made available on Torotrak's website in June 2008.
The auditors have reported under section 235 of the Companies Act 1985 on the Group's statutory accounts for the years ended 31 March 2008 and 31 March 2007 and the auditors' reports were unqualified and did not contain any emphasis of matter paragraphs or statements under Section 237 of the Companies Act 1985.
2. Basis of Preparation
This preliminary announcement does not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985. The financial information for the year ended 31 March 2008 has been prepared under the historical cost convention and in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS.
3. New Standards, Amendments to Standards or Interpretations
(a) Standards, amendments and interpretations effective in 2008
IFRS 7, 'Financial instruments: Disclosures', and the complementary amendment to IAS 1, 'Presentation of financial statements - Capital disclosures', introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group or Company's financial instruments, or the disclosures relating to taxation and trade and other payables.
IFRIC 8, 'Scope of IFRS 2', requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group or Company's financial statements. The Company already applies an accounting policy which complies with the requirements of IFRIC 8.
IFRIC 10, 'Interim financial reporting and impairment', prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at the subsequent balance sheet date. This standard does not have any impact on the Group or Company's financial statements.
IFRIC 11, 'IFRS 2 - Group and treasury share transactions', provides guidance on whether share-based transactions involving treasury shares or involving Group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and Group companies. This interpretation does not have an impact on the Group or Company's financial statements.
(b) Standards, amendments and interpretations effective in 2008 but not relevant
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Group or Company's operations:
IFRS 4, 'Insurance contracts';
IFRIC 7, 'Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies'; and
IFRIC 9, 'Re-assessment of embedded derivatives'.
(c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group and Company
The following standards, amendments and interpretations to existing standards, that are relevant to the Group have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2008 or later periods, but the Group and Company have not early adopted them:
IFRS 8, 'Operating segments ' (effective from 1 January 2009). The standard is still subject to endorsement by the European Union. IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009, subject to endorsement by the EU. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which the segments are reported, will reflect the internal reporting provided to executive management. As the financial report contains both the Group consolidated and parent company financial statements prepared under IFRS, the Company will not be required to present segment information.
4. Segmental Analysis
In the opinion of the directors, the Group operates in one primary segment being the business of the design and development of traction drive Infinitely Variable Transmission (IVT) systems. In the opinion of the directors, and given the early stage of commercialisation of the Group's intellectual property, the Group does not currently operate in markets or geographical segments that are materially distinguishable in terms of risks and returns.
5. Revenue
The Group has eliminated unrealised profits on sales made to its joint venture against gross revenues.
| Revenue | Group 31 March 2008 £000 | Group 31 March 2007 £000 |
| Gross Revenue | 3,685 | 3,508 |
| Elimination of unrealised profit on licence sales to the Joint Venture | - | (787) |
| Elimination of unrealised profit on services for the Joint Venture | - | (30) |
| Revenue per the income statement | 3,685 | 2,691 |
Revenue from licence sales to the Joint Venture (JV) relates to the contribution of intellectual property to the JV in accordance with the JV agreement. The gross revenue has been eliminated so that only the element that relates to the other venture party remains.
6. Operating Loss
Operating loss is stated after charging/(crediting) the following:
| Group 31 March 2008 £000 | Group 31 March 2007 £000 | ||||
| Amortisation of intangible assets - patents | 68 | 154 | |||
| Abandonment of patents | 40 | 122 | |||
| Profit on disposal of plant and equipment | - | 15 | |||
| Depreciation | 159 | 166 | |||
| Operating lease payments | - land and buildings | 280 | 280 | ||
| - office equipment | 3 | 12 | |||
| Operating lease income | - land and buildings | (92) | (31) | ||
| Research and development costs expensed as incurred | 4,570 | 4,453 | |||
| Foreign exchange (gain)/loss | (2) | 20 | |||
| Auditors' remuneration |
|
| |||
| Audit services | - audit (Group) | 49 | 38 | ||
| - audit (Company) | 4 | 5 | |||
| Non-audit services | - tax services | 21 | 8 | ||
| - Corporate Finance (ii) | 171 | - | |||
|
|
|
| |||
| Administrative expenses |
|
| |||
|
| Group 31 March | Group 31 March | |||
| 2008 £000 | 2007 £000 | ||||
| Administrative expenses - Normal | 1,702 | 1,786 | |||
| Non-recurring administrative expenses: |
|
| |||
| Interim Finance Director (i) | - | 176 | |||
| Additional costs paid to PwC relating to the refinancing | 171 | - | |||
| Total administrative expenses | 1,873 | 1,962 | |||
(i) Additional employment costs during the absence of previous Finance Director due to illness.
(ii) Corporate Finance
In addition £328k was paid to PwC for the role as sponsor, financial advisor and reporting accountant in respect of the share placing. This amount forms part of the total amount of £769k that has been charged to the share premium account (see note 10).
Normal administrative costs represent gross central service salaries and the administrative portion of director's salaries (including pension and share based charge), central services' administrative costs, legal, audit and patent renewal costs.
7. Income tax
| Group 31 March 2008 £000 | Group 31 March 2007 £000 | |
| UK corporation tax |
|
|
| Current tax for the year | 246 | 363 |
| Prior year tax | - | 75 |
| Total UK Corporation tax | 246 | 438 |
| Overseas tax |
| |
| Current tax for the year | 21 | (110) |
| Total tax | 267 | 328 |
8. Loss per Ordinary Share
Basic and diluted loss per share of -1.57p (2007:-2.43p) is based on the loss after tax of £2,130,000 (2007: £2,899,000) and 136.0 million ordinary shares (2007: 119.3 million) being the weighted average number of shares in issue during the year.
|
| 31 March 2008 Number | 31 March 2007 Number |
| Shares issued and used in calculating basic and diluted loss per share | 135,929,977 | 119,299,841 |
In accordance with IAS 33 the number of shares used in the calculation excludes the weighted average number of shares held by the Employee Share Trust of 495,664 (2007: 600,979).
9. Share Capital
|
| Number | 31 March 2008 £000 | Number | 31 March 2007 £000 |
| Authorised |
|
| ||
| Ordinary shares of 10p each | 250,000,000 | 25,000 | 200,000,000 | 20,000 |
| Allotted and fully paid | ||||
| Ordinary shares of 10p each | 146,082,973 | 14,608 | 119,900,820 | 11,990 |
10. Reconciliation of Share Capital and Reserves Attributable to Equity Holders
|
| Share capital £000 | Group and Company share premium account £000 | Group and Company other reserve £000 | Group accumulated loss
£000 | Total equity
£000 |
| At 31 March 2007 | 11,990 | 48,298 | (262) | (52,720) | 7,306 |
| Loss for the period | - | - | - | (2,130) | (2,130) |
| Share placing | 2,618 | 5,237 | (i) (345) | - | 7,510 |
| Expenses of share placing | - | (769) | - | - | (769) |
| Currency translation differences in JV | - | - | - | (2) | (2) |
| Shares awarded at cost price | - | - | 405 | (405) | - |
| Shares awarded at market value | - | - | - | 428 | 428 |
| At 31 March 2008 | 14,608 | 52,766 | (202) | (54,829) | 12,343 |
(i) Purchase of shares by the Employee Share Trust.
11. Financial Record
For the years ended 31 March
|
| 2008 £000 | 2007 £000 | 2006 (iii) £000 | 2005 (ii) £000 | 2004 (i) £000 |
| Revenue | 3,685 | 2,691 | 2,054 | 534 | 244 |
| Loss on ordinary activities before taxation | (2,397) | (3,227) | (6,196) | (6,057) | (7,025) |
| Loss on ordinary activities after taxation retained for the financial year | (2,130) | (2,899) | (5,762) | (5,271) | (6,166) |
| Basic and diluted loss per share | (1.57p) | (2.43p) | (4.91p) | (4.55p) | (5.36p) |
| Total assets less current liabilities | 12,343 | 7,306 | 9,832 | 14,560 | 19,358 |
| Equity shareholders' funds | 12,343 | 7,306 | 9,832 | 14,560 | 19,358 |
| Net cash outflow from operating activities | 526 | (3,515) | (4,269) | (4,645) | (6,795) |
| Management of liquid resources | 7,363 | (2,586) | 229 | 4,381 | 5,248 |
| Increase/(decrease) in cash each year | 21 | (808) | (80) | (30) | 658 |
Notes: (i) presented under UK GAAP (ii) as restated under IFRS (iii) as restated for proportionate consolidation of Infinitrak.