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Download preliminary results for the 17 months to 31 December 2007 in PDF format

Manganese Bronze Holdings PLC, the leading manufacturer of the distinctive London taxi, announces its audited preliminary results for the 17 months to 31 December 2007.

Highlights

• Operating profit before exceptional items of £5.6 million (12 months ended 31 July 2006: £3.2 million).
• Chinese Joint Venture finalised, all significant milestones met, on plan to start prototype production in mid 2008.
• New TX4 model successfully launched, excellent market acceptance, significant growth in sales and profits.
• On course to meet aggressive component cost reduction targets for Chinese produced parts for UK production.
• International market development team in place and sales orders advancing well to plan.
• Strong performance of service activities – retail, finance and parts.
• Significant increase in cash generated from operating activities.
• Increased dividend.

Commenting on the results, John Russell, Group Chief Executive, said:

“We are delighted with the improving profitability and significant increase in operating cash flow resulting from the success of the TX4 and the substantial progress we have made with our joint venture in Shanghai during this extended financial period.

“Our focus in 2008 is on maintaining and increasing the momentum of the TX4 in the UK whilst investing in primarily environmentally led product initiatives; putting the TX4 into production in Shanghai and achieving the challenging cost, quality, and timing objectives that we have set; creating the sales and marketing infrastructure to realise the international sales opportunities for TX4 and realising our vision to make the London Taxi a successful global icon. The successful implementation of these actions will generate a marked improvement in our future profitability.”

For further information:

CHAIRMAN’S STATEMENT

I am pleased to report that Manganese Bronze has had a very successful seventeen months to 31st December 2007, the highlights including the finalisation of our Joint Venture in China (Shanghai LTI), the successful launch of the TX4 taxi and an increase in profitability and operating cash generation.

Results for the year

The rather unusual reporting period is caused by our decision to align the Company’s year end with that of our Chinese joint venture, Shanghai LTI, and our joint venture partner, Geely.

In the 17-month period under review, just under 4,200 vehicles were sold which together with ongoing financing, servicing and parts supply, has generated sales of £144.5 million and an operating profit of £5.6 million. Cash generation, despite significant investment in the TX4 and in our new retail premises in London, has been strong, with operating cashflow of £8.4 million generated during the period leaving the Group with net cash balances of £10.3 million at 31st December 2007.

The Group’s net assets have increased significantly from £21.5 million at 31 July 2006 to £37.5 million at 31 December 2007. This is due primarily to the cost of the Group’s share of Shanghai LTI. The Group’s pension deficit has reduced from £4.7 million to £4.1 million notwithstanding increased longevity assumptions. The Group’s funding facilities are all of a long-standing nature and the Group has very little reliance on bank borrowings with net cash of £10.3m at year end.  

Reflecting the Group’s financial performance over the period, its strong balance sheet and prospects, the Board is recommending the payment of a final dividend of 1.50p per share.

Progress on China and International Sales

Our Joint Venture in China, Shanghai LTI, offers the best potential to secure the long-term profitable future for our Company. I am therefore very pleased to report excellent progress. Heads of agreement were signed with Geely in October 2006 and much effort has been successfully applied by both companies. The various regulatory and shareholder approvals were attained by June 2007 and we have now put in place the organisation and resources to achieve our targets of first prototype in mid 2008 and production for sales at the end of 2008. The joint venture will in one step allow us to solve our strategic issues in relation to significantly reducing our cost base and enabling substantial international sales. The construction of the joint venture with Geely, through their wholly-owned subsidiary Linkstate Overseas Ltd (which has an interest in 22.83% of the issued ordinary share capital of Manganese Bronze) aligns Geely’s interests with the success of our strategy.

Very encouraging progress is also being made with the development of our international sales and marketing capability. The market studies to identify and prioritise our target markets and customers were completed in 2007, a significantly strengthened team has been put in place and active prospecting in the identified target markets has commenced. Consequently considerable interest is being shown by a wide variety of customers in international markets. We have already signed memoranda of understanding for a total of 500 units with delivery starting in early 2009, clearly demonstrating the attractiveness of the Shanghai built product.

Dividend

The Board is recommending the payment of a final dividend of 1.50p which follows an interim dividend of 2.25p and a second interim dividend of 3.5p. The total dividend for the 17-month period is 7.25p (12 months ended 31 July 2006: 6.0p, including a special dividend of 1.0p). The final dividend will be paid on 6 June 2008 to those shareholders on the register at the close of business on 2 May 2008.

Board/People

We were delighted to announce the appointment of John Russell as Chief Executive in March 2007. His depth of automotive and international business experience and, in particular, his sales and marketing expertise will be invaluable as we progress our controlled expansion into international markets.

Mark Devin was appointed Company Secretary in June 2007 on a part-time basis which, in turn, allowed Mark Fryer, Group Finance and Business Development Director more time to focus on his responsibilities as Deputy Chairman of Shanghai LTI and to support John Russell in developing the international market infrastructure to support our sales plans.

Sheng Yue Gui, Chief Executive Officer of Geely, and Siu Lun Lawrence Ang, Executive Director of Geely, were appointed as non-executive directors of Manganese Bronze in July 2007. They both have a wealth of international business experience.

A new Long Term Incentive Plan was approved by shareholders in November 2007. The scheme is an important component in incentivising the directors and senior managers across the Group and is linked to challenging profitability growth targets that have been set to exploit the potential for international growth that our joint venture SLTI enables. I am confident that the scheme will motivate the management to deliver significant value for all our shareholders.

This is a vital stage in the development of our Company and I would like to pay tribute to all our employees for their skill and resourcefulness in helping to continue the Company’s success as it broadens into international production and sales.

Current trading and prospects

Our new TX4 taxi has received an excellent market response and a strong endorsement from our customer base. Passenger demand for taxis remains healthy despite uncertainty in London’s financial markets. Sales in the first quarter are below last year due to this uncertainty and also in comparison with one of our best first quarter sales performances in the history of the Group following the launch of TX4.

We believe that the underlying appeal of the TX4 will continue to be strong in 2008. We are confident of delivering a profit performance at least in line with expectations for the current financial year with any market uncertainty being more than offset by the benefit of lower than expected start-up losses in Shanghai LTI.

Shanghai LTI remains on plan to deliver a step change in the Group’s prospects and financial performance.

CHIEF EXECUTIVE’S STATMENT

UK market

Sales in calendar year 2007 were up 23.2% on our sales in calendar year 2006 and total vehicle sales in the 17-month financial period to 31 December 2007 totalled 4,147. This excellent result was mainly due to the contribution from the new TX4 model, which was successfully launched in October 2006, and, in part, due to the successful run out of the previous TXII model. At the heart of the TX4 is a new Euro IV powertrain supplied by VM Motori of Italy.  This delivers significant improvements over previous models in terms of performance, refinement, emissions and fuel economy. In addition, the TX4 features a new braking system with ABS, improved suspension and a host of detailed improvements to benefit both the driver and passengers. The vehicle was subjected to over a million kilometres of rigorous testing prior to launch, the most extensive programme in the company’s history, to ensure it would meet the exacting quality, reliability and durability expectations of the taxi drivers and operators.

The success of the TX4 demonstrates the benefit of investment in market led product development. We will continue to invest in features and improvements to the vehicle that deliver tangible benefits to the drivers and passengers. In particular, the need to invest in further fuel economy and emissions improvements continues to be a key priority. Taxis currently play and will continue to play an integral role in the transport system of all cities. We will continue to work with all industry stakeholders to develop and implement practical, tangible solutions to the challenge of improving total environmental performance.

The success of the TX4 has contributed to a strong performance in our finance, parts and retail operations, a performance which we expect to continue in the future. 

Shanghai LTI

The Joint Venture with Geely Automotive to produce the TX4, a limousine vehicle derived from the TX4 and two all new executive saloon cars in Shanghai, has passed a series of significant milestones.

Heads of terms were entered into in October 2006 and the process of undertaking all necessary due diligence and obtaining the required regulatory and shareholder approvals was successfully completed by June 2007, slightly later than originally anticipated. In February 2007, Geely successfully placed 600 million new shares, which generated net proceeds of HK$609 million (£41.6 million) primarily to fund Shanghai LTI, of which the Group owns 48%. In June 2007 Manganese Bronze PLC issued 5.7 million ordinary shares of 25p (representing 22.83% of the issued ordinary share capital of the Company) to Linkstate Overseas Ltd, a wholly-owned subsidiary of Geely in consideration for their investment in Shanghai LTI.

To ensure the earliest possible start up of Shanghai LTI, we commenced the transfer of key intellectual property rights in early 2007.  Engineering and purchasing staff from Geely and Manganese Bronze began work on the project at the same time. By mid 2007, the project team was in place to deliver the first phase of the joint venture. The joint venture team includes a number of Manganese Bronze appointed executives in key positions who supplement the skills and experience of the Geely team and ensure that our quality targets are met.

The pace of the joint venture’s activity has increased as we progress to prototype production in mid 2008, and the key deliverables of the project continue to be on plan. In particular, the appointment of suppliers in China, which is critical for both Chinese production and for the delivery of cost savings for production in Coventry, is meeting our expectations in terms of both quality and cost. Testing and validation of components has taken place through 2007 and into 2008 and the performance to date indicates that we can meet our aggressive targets for cost reduction which are required to achieve the significant growth in profitability that is expected for 2009.

International Market Development

Studies were completed in 2007 to identify and prioritise the international market opportunities for the Shanghai LTI built TX4.  These showed that the market opportunity is significant and comprises three business models. Firstly, the sale of taxis to existing taxi drivers and operators to displace a competitive vehicle. Secondly, the development of new taxi regulations that will accommodate our vehicle with city and national authorities that want to create a better taxi service. Thirdly, operators and entrepreneurs that want to create a branded, high-quality taxi service to compete with limousine and private hire operators. In all cases, the appeal of our market offering is the combination of the capabilities and reputation of the TX4 vehicle and the international image and reputation of the taxi service provided in London.

A new team is now in place focused on developing the infrastructure to market and sell the Shanghai LTI built TX4 in international markets. Active market prospecting commenced in late 2007 with the aim of putting in place distribution and sales contracts to pre sell the commercial production, which is due to start at the end of 2008. The early success of our team has seen them already signed memoranda of understanding for a total of 500 vehicles with delivery starting in early 2009, clearly demonstrating the attractiveness of the Shanghai built product. We are, in addition, in discussions with around 20 international customers who have a significant annual demand. These discussions are advancing well and further updates will be provided with our interim management statement in May and half year results in July.

The international market development team is currently being strengthened with external recruits and in addition, the team is working closely with their counterparts in the Geely organisation to ensure that any efficiency opportunities are exploited and that the sales and marketing strategies of the two companies are co-ordinated effectively.

Mann & Overton

Our wholly-owned Mann and Overton retail operation in London moved to new larger premises in Brewery Road, Kings Cross in December 2006 to meet the anticipated demand for the TX4 and to improve the service provided to the drivers and operators in London. The facility is three times the size of our previous facility in Holloway Road. The demand for and success of the new facility were demonstrated by the lack of availability of qualified technicians to keep pace with the growth in service and repair demand. This issue was addressed by the international recruitment of highly qualified technicians from Eastern Europe. 

Results of the Birmingham Mann and Overton operation have been disappointing in recent years because of the age of the local taxi fleet and the lack of enforcement of regulations. A turnround initiative was implemented in 2007 and subsequently new management, process structures and operating methodologies were put in place. These actions, coupled with improved regulatory enforcement by the local authorities, have led to a marked improvement in performance by the Birmingham operation.

London Taxis North America (“LTNA”)

Much effort was applied by the new management team to address the underlying performance issues in North America, exploit the advertising and event marketing opportunity in the USA more effectively and prepare and plan for the future launch of the Shanghai LTI product. The exit from the low margin and difficult to control taxi media business was managed through 2007 and a new focus on event marketing programmes was put into place. Event marketing programmes involve LTNA providing fleets to blue chip marketing organisations and quality managing the operation of the vehicles. Active promotion of this improved service commenced in the second half of 2007 and a strong order book for 2008 indicates that we are on track to improve our financial performance for LTNA in 2008.

Production

We maintained an average production rate of 65 vehicles per week during the 17-month financial period. We were able to take advantage of our inherent manufacturing flexibility and adjust our build rate to balance good availability of product in the market place with optimised inventory levels and also to reduce the effect of market seasonality.

We continue to seek out opportunities for efficiency improvements and cost reductions in Coventry and a significant investment project was approved to improve the operation of the press shop. A total of £0.4 million is to be invested in a new press and associated process improvements which will come on stream in mid 2008. The investment will improve productivity, bring pressings that are currently difficult to source externally back in-house and provide significant quality and working environment benefits.

The health and safety performance in all areas of the business continues to be a key focus of the organisation and is of particular importance in the production operations. Our record is good, but there is no room for complacency and we continue to look for ways of improving the processes, policies, management and operating environment for the benefit of all associated with our business.

Warranty

The benefit deriving from the focus on quality, reliability and durability in the development of the TX4 is already evident in the warranty data. We will fully evaluate TX4 performance through the three-year warranty period and expect that our customers will enjoy a quality ownership experience and that we will be able to reduce our warranty provisions per vehicle sold in the future.

Summary

We are delighted with the improving profitability and significant increase in operating cash flow resulting from the success of the TX4 and the substantial progress we have made with our joint venture in Shanghai during this extended financial period.

Our focus in 2008 is on maintaining and increasing the momentum of the TX4 in the UK whilst investing in primarily environmentally led product initiatives; putting the TX4 into production in Shanghai and achieving the challenging cost, quality, and timing objectives that we have set; creating the sales and marketing infrastructure to realise the international sales opportunities for TX4 and realising our vision to make the London Taxi a successful global icon. The successful implementation of these actions will generate a marked improvement in our future profitability.

BUSINESS REVIEW

This review covers the 17-month period to 31 December 2007. It details our strategy, Group activities, key financial performance measures and the principal risks and uncertainties the Group faces.

Group activities

Manganese Bronze is the leading manufacturer of the distinctive London Taxi, employing just under 500 people predominantly in the U.K.   Over two thirds of our staff are employed in our main manufacturing site in Coventry with the majority of the remaining staff in our wholly-owned dealer group sites, Mann & Overton around the U.K. The Group has a 98% shareholding in London Taxis North America (“LTNA”), the distributor of the London Taxi in North America, based in Chicago, USA and a 48% shareholding in Shanghai LTI Ltd our joint venture to produce London Taxis, and other vehicles, in Shanghai, China. The Group provides retail and service through Mann & Overton as well as through a number of independently owned dealerships throughout the U.K. The Group also provides finance to taxi operators and owners through its partnership with Lloyds Bank plc which provides finance under the brand Black Horse Taxi Finance. Additionally, the Group also supplies parts to taxi operators and owners through its partnership with Unipart.

Statement of accounting policies

The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) in issue and effective for periods commencing on or after 1 August 2006.

Review of performance for the period

The table below sets out the key financial performance indicators (KPI’s) which are closely monitored by the directors and management throughout the year and which are measured against preset targets. These show performance for the 17-month period to 31 December and the 12-month periods to 31 July 2006 and 31 July 2005.

Revenue

For the 17-month period to 31 December 2007 total revenue was £144.5 million which included £106.9 million for the twelve months to 31 July 2007 (2006: £83.8 million) and £37.6 million for the five-month period to 31 December 2007. Sales volume growth has been driven by the launch of the TX4 in late 2006, new Mann & Overton premises in London and favourable economic conditions.

Operating profit

Operating profit before exceptional items increased by 72.3% to £5.6 million (12 months ended 31 July 2006: £3.2 million) with £4.6 million generated in the year to 31 July 2007 and £1.0 million in the following five-month period. For the first time, the Group’s results include a 48% share of Shanghai LTI start up losses. These are lower than expectation due to the nature of start up operation and high interest received on the cash balances within Shanghai LTI.

Finance expense

The net finance expense has increased by £0.2m to £0.6m as a result of the extended financial period and higher average discount rates increasing the net interest charge on the pension liability. Net finance expense was covered 8.6 times by operating profit.

Earnings per share

Earnings increased by 22.8% to £3.4 million for the 17-month period (12 months ended 31 July 2006: £2.8 million). With a significant increase in the number of shares in issue, due to the share issue to Geely, basic earnings per share has increased from 15.02p to 15.89p.

Net assets

Group net assets have increased by £16.0 million to £37.5 million at 31 December 2007, due to the Group’s investment in SLTI represented by 5.7m shares issued at a fair value of £2.50 per share. Due to a small number of shareholders owning the majority of the shares, average daily share dealings being less than 0.04% of the total number of shares, restrictions placed on Geely trading the shares, and an independent valuation of the Group’s investment in SLTI, £2.50 per share was considered by the directors to be a better indicator of fair value than the market value as at the date of issue. Net cash at 31 December 2007 was £10.3 million (31 July 2006: £12.9 million) with net funds of £3.2 million (31 July 2006: £2.6 million).

Operating cash flow

Net cash from operating activities increased significantly to £8.4 million (12 months ended 31 July 2006: £1.1 million) due to improved profitability and improved working capital levels.

Dividends

The Board is recommending a final dividend of 1.50p which follows an interim dividend of 2.25p and a second interim dividend of 3.5p. The total dividend for the 17-month period is 7.25p. In 2006 the interim dividend was 2.0p followed by a final dividend of 3.0p.  In addition a special dividend of 1p was paid in December 2006.   The final dividend will be paid on 6 June 2008 to shareholders on the register at 2 May 2008.

Pensions

The Group’s pension deficit, for an old closed scheme, reduced by £0.6 million to £4.1 million. Contributions of £1.7 million during the period and strong equity returns have been almost offset through use of increased longevity assumptions. These assumptions are disclosed in note 35 of the notes to the consolidated financial statements.

Financing

The Group funds its operations through a mixture of retained earnings and asset finance facilities with very little reliance on bank borrowings. Funding operations and liquidity management are handled centrally by a small head office finance function with funds lent to subsidiaries as required.

The Group’s net cash resources are £10.3 million at 31 December 2007 (31 July 2006: £12.9 million) and comprise money market deposits with interest received at the prevailing market rate.

The Group’s asset finance facilities comprise a stocking loan facility of £13.4 million (31 July 2006: £13.4 million) which is provided by Lloyds TSB Group PLC and attracts interest linked to the Finance House Base Rate. This facility was utilised by £7.0 million at 31 December 2007 (31 July 2006: £9.2 million) and is secured on the stock of finished vehicles.

The Group’s overdraft facility of £2.5 million (31 July 2006: £2.5 million) is provided by HSBC Bank plc and has not been utilised during the 17-month period.

Risk

The Group is exposed to a variety of risks in the conduct of its business operations. Each year the Group conducts a formal review of those risks and reports these to the Board of Manganese Bronze Holdings PLC. Mitigation action and strategies to reduce the likely impact are agreed and put in place wherever possible.

The Group centrally maintains a wide range of insurance to cover major identified insurable risks, including (but not limited to) those relating to product liability, business interruption, damage to property and equipment, motor trading, fleet operation and employment.

Whilst it is not possible to either completely record or to quantify every individual risk the Group faces, below is a summary of the risks the directors believe are most significant to the Group’s business and future performance.

Regulatory

Taxis operating in London must currently comply with the Conditions of Fitness laid down by Transport for London’s Public Carriage Office.   Outside of London the regulation of taxis in the U.K. is controlled by local authorities, some of whom have voluntarily adopted the Conditions of Fitness requirements. If new requirements are imposed on the way in which taxis are regulated, or amendments are made to the existing Conditions of Fitness, this could have a material impact. The Group mitigates this risk through investment in our vehicle, lobbying for the benefits of our vehicle and through maintaining our relationship with key regulatory bodies.

Markets

The demand for taxis is affected by the general prevailing economic sentiments and conditions, particularly those in London. This risk cannot be fully mitigated although a combination of high-quality vehicle offering and increased export sales can go some way to reducing this risk.

Competition

In markets not impacted by the Conditions of Fitness the Group competes with a variety of alternative vehicles.   In these markets the Group has successfully won back market share since the launch of the TX4 in October 2006. The performance of the Group will continue to be very closely linked to the success of the TX4 until such time as the Group is selling the new vehicles produced by Shanghai LTI.

Technical change

In order to remain competitive and meet regulatory hurdles the Group must commit regular investment in internal and external research and development. This will increasingly become relevant as the Group seeks to produce more environmentally friendly derivatives of existing and new products.

Product quality and liability

The Group is exposed to certain product liability risks which could give rise to financial liability in the event of failure. The Group seeks to mitigate this risk through selection of the highest-quality suppliers, maintenance of demanding quality systems in our assembly and service operations and through quality accreditation. The Group maintains insurance for public and product liability and self insures against the risk of product warranty.

Reliance on suppliers

The Group relies on suppliers for all key components for the TX4 other than the vehicle chassis, fuel tank and body panels which we manufacture in Coventry. The Group is often reliant on a single supplier for its requirement for a particular component placing the Group at risk of product delays. The Group has insurance against loss of supply from key suppliers due to natural disasters / events and seeks to mitigate the remaining risks by seeking alternative supply from China.

Raw material / utility prices

The nature of the Group’s business means that fluctuations in raw material prices, particularly steel and energy, can have significant impacts on profitability. The Group seeks to mitigate this fluctuation through competitive tender and through seeking longer term supply.

Disruption to production

The Group could be impacted through loss of production in our main facility in Coventry through equipment malfunction, theft of key equipment, strike or natural events such as fire, flooding, and wind. The Group has controls in place to mitigate these risks, however, in the event of failure, the Group’s insurance provides cover for business interruption.

Relationship with Geely

The Group will become increasingly exposed to the operation of SLTI and its partner Geely. Geely is itself controlled by Mr. Li Shufu, the Chairman and Executive Director of Geely. The ongoing success of SLTI will be reliant on the Group’s continued good relations with Geely and Mr. Li Shufu in particular.

China

SLTI is based in Shanghai, China. The Group, therefore, will increase its exposure to new business practices and methods of working and will need to adapt accordingly. SLTI will also require the commitment of key staff which is being managed through appointment of key staff both internally and externally who are either Chinese Nationals or who are experienced working in China. The Group remains exposed to the extent to which the People’s Republic of China’s government regulates the automobile industry and the pace of economic liberalisation.

Chinese vehicle / component supply

The Group will become increasingly reliant on components imported from China and these will need to meet the Group’s exacting standards. In addition the Group’s international sales will be increasingly dependent on the quality of product exported from China. The Group is seeking to manage this through significant investment in facilities, high-quality personnel and tooling as well as through appointing high-quality suppliers.   The Group is also seeking to utilise its U.K. quality systems in the Shanghai facility.

Foreign exchange risk

Whenever possible, foreign exchange risk of a transactional nature is hedged using forward foreign exchange contracts. This is a particular exposure for LTI, where the single highest cost, other than payroll, is the cost of engines which are charged in Euros.

Translational risk arising from the consequence of applying different exchange rates to net assets denominated in currencies other than sterling and not being an exposure that results in actual cashflow, is not hedged. This is a particular exposure for SLTI, which has cash deposits in US dollars.

Funding risk

The Group relies on the continued availability of its existing bank borrowing facilities and asset financing facilities. In addition, SLTI will require additional funding, over and above the initial equity investment, to fund future vehicle development and working capital. Geely and the Group will seek to fund this in China with security over the business or assets of SLTI.

Pension Plans

The interaction of, among other things, increased life expectancy, equity market performance and reduced interest rates have had the continued impact of increasing the funding requirement for the Group’s closed defined benefit pension scheme. In conjunction with the scheme actuaries and trustees of the scheme, the Group has an agreed funding structure in place. The increase in funding contributions could have an adverse impact on the Group’s financial condition.