Talk Torque-Torc

I won't comment on the cynicysim and blinkered opinons of some of the posters on the BBs. Clearly it would be pointless posting information that was materially wrong - and saying that you can post stuff on a BB that is going to get looked at with a microscope - by you ! - with caveats - is like invading iraq looking for weapons of mass destruction. A pointless waste of time.

As someone here can't read a BB post without making it up like the Sun or Daily Mail I won't be bothering with any of his remarks, as long as it isn't libel. Frankly they can go build their own relationship with TRK as their choice words are sure to ingratiate anyone into making an effort for him. What kind of effort is another matter.

For the rest of you, the post is below. For the record - there was only one correction based around the intent for dividends.
Enjoy or indeed Fake Cough - as they say in Surrey.
-------------------------

This posting represents the sole opinion of the author and no-one else. It does not represent financial advice of any kind whatsoever, and contains no hidden messages. No Elves were harmed in the typing of this report and no inquests will be held. Happy Christmas 2006 !

---------------------------------

I'm not going to and won't attempt to go into a blow by blow account of the meeting. Mainly because there wasn't a lot of time for discussion, and most of it was simply a presentation and clarification of the interim report. We did not “chew the fat” and simply ran out of time.

Thank you to all who had submitted questions. Hopefully here you will recognise an answer - even if not referred to directly. I’ve checked through them all again after writing this and there is only a few I’ve missed. If in doubt do read the interim report. There is a lot in there.

Commercially - we were advised that Torotrak have themselves been advised by their customers that any publication of customer names into the public arena is met extremely seriously as a breach of confidentiality by the customers. So, the top tip is - don't go there, for the sake of your share price. I personally think it would be handy to call them Customer A, Customer B etc or Licence A,B,C just so we can make sure we are all talking about the same project - but these things are for the future. For now, we talk about the interim report.
-------------------------------------------------
Have a copy of the interim report with you whilst reading this from here :

and go to 2006 investor presentation



-----------------------------------------------------------------------
Right – slide by slide commentary:

1. Slide: Highlights
Start of Production for Infinitrak is in this Financial year (06), and the start of the 2007 calendar year. That’s somewhere between Jan-Mar 2007
Significant cost reduction has been achieved and aimed to be incorporated in products after first year.
Serious management and focus on control and conservation of the dwindling cash with a targeted +ve cash flow end FY09 i.e by March 2009 (current deals and progress being maintained)
First stage development of low-cost transmission for Asian manufacturer started 5 months ago. (July06) – refer to the earnings cycle chart slide for a feel as to where that is now.
-------------------------------------------
2.Slide: What has changed at Torotrak
Emphasis was made on the 60% billables and that R&D is now funded by customers
Risk is now spread across different markets not reliant on premium automotive.
The company shape has changed with customers now making almost all of the prototypes and paying for them once they have an application specification. This is an extremely positive step in terms of customer engagement and willingness to pay for this work.
-------------------------------------------
3.Slide: Business Model and Earnings cycle
Key to pictures - Red/orange colour = costs incurred by TRK
Green = Revenue generated by TRK
Previously everything to the left of the Licence payment point was TRK funded.
Now the design concept study and tech demonstrator is paid for by companies
This is a significant shift in the confidence that customers have in the technology and in their desire to have it. It isn't a "give it a go and we will have a look" its a serious - "this is our vehicle and we want to see a prototype working"
Start to finish timelines are different for different markets. OPE (i.e. MTD) only took 18 months, whilst it is anticipated that truck or Bus or passenger automotive can take 5 yrs. –As an example in the truck market the testing required of any new design would need to cover 500,000 miles on the test rigs. This takes time.

-------------------------------------------
4.Slide: Outdoor Power Equipment
Three TRK on the Infinitrak Board are, Elsy, Batchelor and Deering
FYI Some OPE applications have more than one IVT per vehicle.
Whilst 3rd party commercial estimates have been made at a 10% starting profit on an estimated $150 per transmission, this only gives a rough ball park estimate for the starting commercial deal between infinitrak and MTD. There is potential for this to develop as the commercial value of the IVT transmission becomes realised over the years and 3rd party sales begin. NB Torotrak get 50% of Infinitrak profits so thats roughly $7 per transmission (based on 3rd party data).
The manufacturing line and tooling for the IVT at MTD has been production tested. Production will commence sometime between January and March (inclusive).
For those of you who don't or have not set up a manufacturing line then here's a few of my insights. To produce 100k IVt's in a year - starting from zero, you might possibly need an average factory capacity run rate of 200k per year. So I understand the plan to be one of growth. Also from a manufacturing perspective - to grow you generally will have at least two manufacturing lines (in case of equipment failure) and then to grow capacity you re-order another complete set of tooling and put it in. My belief is that the first manufacturing line at MTD is just being proven out, and once that is complete more duplicated manufacturing lines (with lessons learnt) will be implemented - in order to grow the capacity.
To understand market volumes - we were advised that an unusually busy week at MTD can lead to a run of 45,000 snow blowers to meet seasonal demand. This suggests to me that MTD run quite a lean manufacturing and order system especially with regards to carrying warehouse stock of the completed product. This is generally a positive sign in terms of the overall management capability at MTD. i.e. they are not going to build 100k IVTs and let them rot in a warehouse.
It also demonstrates how much of a commodity item americans view snow blowers and basic ride-on lawnmowers, whereas in the rest of the world - they are seen as luxury items.

Phase 2 production will be for production volumes beyond the first 100k. It would seem that 100k transmissions in OPE is the "proving volume". After that its time to stick it in as many products as you can and the commercial floodgates are opened .i.e. other products being added to - but I emphasis that I am hypothesising here.
For me - I want to see the TRK milestone of 1 million transmissions in the world in any application - at that point it might be that it is regarded as a robust and reliable transmission by even the most doubting of automotive companies. My best guess is that is will take about 4 years to reach this point.

-------------------------------------------
5.Slide: Off Highway
Uzel, Carraro and Iseki are all active - paying their engineering consultancy fees and making progress. The project plans at Iseki changed favourably, but we don't know why and therefore can't comment on why, and also have not been briefed on when. Simple hydraulic IVT control is now on a cost competitive situation with manual gears.
Full electronic control is cost competitive with the most complex hydraulic gear systems.
Therefore customers have a cost competitive TRK IVT solution against any of their current transmission solutions.
24 months to production from the interim report for the two licensees was stated as the timeline to prevent the ambiguity where "two years" could mean 24 to 36 months. I am still unsure who the two licensees are out of the three in this sector referred to by this timeline statement.
Carraro have got prototypes and are promoting the technology to their customers (which is pretty much everyone last time I looked)

-------------------------------------------
6.Slide:Low Cost automotive
Don't mention the customer, don't guess the customer and don't guess who and then hassle the customer - keep out of it ! The customer doesn't want the publicity. For the records - It is FWD (front wheel drive) application. It is an underdeveloped asian economy (i.e. not Japan).
The technology "trickle up" has been done before with Honda in the USA - their mopeds became very popular (almost by accident – read the strategy section here: ) even though they were trying to sell their top end motorbikes. Without the moped sales the motorbike sales would not have started. IT was the companies flexibility to a changing consumer market that got them out of trouble.
The creation of a suitable IVT for the low-cost market application came about when TRK asked the engineers to design from the "lawnmower up" as opposed to the premium down. This has delivered a solution for the market segment. The application is a full IVT, and it could be that the Clutched-IVT (CVT actually - or TCVT) could also be a solution in this marketplace. I make a personal request here that they go and talk to Smart Cars - since their gearbox is widely regarded as the main failing point of the vehicle.

-------------------------------------------
7.Slide: Premium Automotive
Equos (Aisin) - Strong relationship and progress. Still Paying consultancy revenues. Technology demonstrators are up and running. The top chap is a fan of the technology - so that augers well for future business agreements and alignments.
The ERC gives such a cost advantage and performance advantage compared to the industry standard 6AT that it potentially brings forwards the adoption of IVT technology - when the customer has assessed the opportunity cost weighted against sweating its current 6AT investments which are still making them money. TRK are awaiting confirmation to progress with ERC development with Equos.

-------------------------------------------
8.Slide Truck & Bus
EU Emission targets for this sector start in 2008 but also there is a second point in the legislation from 2012.
There is a demonstrator transmission in a bus up and running now (that should make AGM fun-rides easier to accomodate). It is delivering 12% fuel economy and a very good passenger and ride experience. With a fully developed transmission we could see 16% improvement in fuel economy. This is clearly a significant cost advantage to the owners and operators of fleets, as well as the better passenger experience.
The timeline to market is approximately 5yrs with a following wind - the key date here is the EU laws and that means something starting next year 2007 would seem like a good probability - however - human nature being what it is - what is the betting on the budget being signed off late by a customer ?!?! so don't expect it that soon.

-------------------------------------------
9.Slide: Progress in earnings cycle
A potentially confusing slide because the market segments indicated move at different speeds along the timeline, and also different customers within those segments also move at different speeds. So - don't read it as a relative journey along the time axis, but simply a time-stamp then it helps to understand which market segments are where in getting nearer to production.

-------------------------------------------
10.Slide: Summary
The route to production at the bottom is actually the likely order that they will reach production. Additionally we have to remember these are market sectors, not customers, so once one customer has reached production in a market sector then another customer in the same market sector might reach production later. It is simply a statement as to the sequence each sector will take to get to market, not the sequence of customer orders.

-------------------------------------------
10.Slides: Financial stuff
We didn't do a numbers drill down (thank god).
Infinitrak will be cash positive in FY08 (that’s two years away, we are in FY 06 now)
The Infinitrak profits will make a material difference to Torotraks financial report and bottom line.
If infinitrak needs extra funding - then I understood that would be unexpected - since it is cash positive and making money - it should be able to fund its own growth.

If a significant commercial opportunity did arise and significant additional funding was required to deliver on that opportunity then - and only then - would the option to issue more shares be taken. But on balance - given what I know - it seems unlikely to happen, but prudent to have the option - just in case the fairy god-mother does walk through the door and the opportunity needs to be taken.

Torotrak has estimated that they will be cash positive in FY09. That is obviously a forecast based on what they know now. So I don't know if this factors in customers hitting optimistic timelines or not. I would guess that by now they are taking things quite conservatively when stating financial revenues !

When asked what the companies aim in 5 years time was between growth or dividends - the response was predominantly growth and that the board had not discussed the matter of the timing of dividends to be able to give a meaningful answer at this stage.
The alignment on rebuilding the share price through project delivery along with revenues that are covering costs in the short term precludes any dividend payment. The plan is to keep a tight operation at Leyland and if customer demand increases then there are many options including, but not limited to increasing charge-outs, using customer resources, targeting the most profitable projects.


-------------------------------------------

My personal investing and perspective on TRK

I'm investing for medium term captial growth and depending on my situation in the future, may or may not retain TRK stock for dividends in the long term.

What did I take away from monday ?
I saw a company with a robust short term engineering and manufacturing plan. A management team that has been working hard to ensure the revenue security and commercial deal with MTD, and a product which can and will work. With projects in the pipeline, the medium term future can be reached, but as has been said at other meetings "we are where we are" - this unfortunately puts the reins of power back into the TRK customers hands. With the Infinitrak deal, we are starting to be where we want to be - which is generally a better place - I want to see the reins of power grasped firmly by the TRK management.

Innovation is strong, bottom up thinking can penetrate the marketplace and deliver confidence in the product (Honda have done this before in the US via Mopeds). Product scaling from Trucks to Busses will put the squeeze on from both ends of the power ranges and the car market will sit in the middle. If ERC goes in via Aisin - I would expect some significant commercial deals for exclusivity to be requested by the customer, and then some fast moving from their competitors. Legally - IVT represents a genuine emissions legislation solution - will the US manufacturers wake up to this or will Equos steal their thunder...

Strategically - 5 years and beyond - there are several possibilities, all of which need to be considered and analysed. Joint ventures produce more capital growth - and when they work deliver more revenue and security for the parent companies - but they are a higher business risk to get started. Does TRK have the funding now to enter into another JV ? It would be scandalous if the management took too many steps too quickly and revenues didn't support that growth rate. Would that trigger the call for 10% funding - I don't know - but I do know that a call for funding would only be done in a positive situation. Is the shape of TRK to be a conglomerate of JVs with production sub-contracted out to the business partners, or is there a preference to run licensing deals and deliver a simple fee based revenue stream ? How does this look to the different market segments and what would fit better with the OEMs standard supplier agreements? There is no clear answer to this - but some significant planning needs to be done once the management have a chance to get their face away from the coal face with MTD and Infinitrak after production has started.

Commercially - Infinitrak is starting production very soon. The point of being able to answer the question "have they sold any" will soon be a "yes - and..."
This builds a much more robust commercial position for the product. However you can never stop marketing, it doesn't matter if you build millions, but if no-one knows then there is no point. So what is the next big commercial milestone ? I think that is when there are 1 million TRK IVTs in the market. This - based on 100k,200k, then 300k in the first three years production at Infinitrak, with other deals coming on board - means that it should happen within 5 years - easily.

For me the magic million mark is the real deal. No doubting Thomas in the other OEMs is going to be able to put up much of a fight when IVT is that well proven - 1,000,000 units in the market, robust, working and doing their job. Its easy to sit in a meeting and say - "there are 1 million out there already - would you like to be part of this ?" when challenged - that would put the reins of power firmly back in the hands of TRK.

Share price: So, yes, I'm still invested. I believe the share price will chug its way north as the more risk-averse investment companies see the financial stability, management direction, capital growth and product development, as well as a robust product doing well in the market. But I'm not holding my breath for dividends.

---------------------------------

Cheers
WTPooh