Half Yearly Report

28 November 2012

Torotrak PLC (LSE: TRK)

("Torotrak", "the Group" or "the Company")

Half-Year results for the six months ended 30 September 2012

Financial and Operational Highlights

Financial highlights

·; £3.1 million cash payments received from Allison and Tata

·; Positive operating cash flow of £0.4 million (2011: £0.7 million)

·; Cash balances increase to £10.7 million (2011: £8.8 million)

Operational highlights

·; Next major commercial vehicle transmission milestone in Q1 of the new calendar year

·; V-Charge next stage prototype hardware on test, following substantial customer interest

·; New M-KERS design progressing, targeting system fuel economy of about 20 per cent, with installation in vehicle targeted for 2013

·; Strategy for accelerated growth and more direct control over introducing our technology to market announced today

Jeremy Deering, Torotrak's recently-appointed Chief Executive said:

"Torotrak's strategy to develop and then licence its core technology has built a business that benefits from material early-stage cash payments and a strong base of partners and licensees.

"The time is now right to adjust that approach to one of more aggressive, accelerated growth in order to capitalise on the substantial opportunity ahead that will allow us to introduce our clean technology into mainstream commercial and passenger vehicles worldwide.

"Our strategy now is to build growing, underlying earnings through our own capability to supply products containing our technology, supported by an advanced engineering services business of increasing scale. Licensing income will continue to represent a material additional layer of value, but not one upon which our business growth depends."

For more information, please visit www.torotrak.com or contact:

Notes to Editors

Torotrak is a leading developer of innovative technologies that reduce emissions and improve engine efficiency. Spanning the commercial vehicle and passenger car markets, our clean, mechanical products boost downsized engines, recover wasted braking energy, and optimally manage engine performance.

1. SUMMARY OF PROGRESS

1.1 Results summary

Results in the first half include £3.1 million of cash payments received from Allison Transmission Inc ("Allison") and Tata Motors ("Tata") for licensing and specialist engineering support. Together with our other engineering services income, this has resulted in a positive cash flow despite increased core technology development costs in response to the opportunities we see. Positive operating cash flow of £0.4 million (2011: £0.7 million) was generated, with closing cash balances of £10.7 million (March 2012: £10.5 million; September 2011: £8.8 million), representing a very sound funding platform to pursue our plan through to commercialisation.

Revenue recognised in the first half of £4.7 million (2011: £0.8 million) also reflects a net £2.7 million of licence income deferred from the year ended 31 March 2012, as well as £0.8 million of engineering services fees (2011: £0.8 million).

Operating costs increased slightly by £0.3 million to £2.9 million (2011: £2.6 million), reflecting mainly our programme of process improvement in all areas of our business. We have continued to invest substantially in research and development ("R&D") to improve our core technology, with £1.7 million total development costs (2012: £1.7 million). This is a significant commitment, in line with the value we see in growing our list of new patents. We have the capacity in future to release more resources to support income-generating activities when R&D reduces to anticipated future levels.

Profit after tax of £1.6 million (2011: loss of £2.0 million) benefits from the strong licensing position in the first half of the year. Results for accounting periods have always been influenced by the timing of licence payments. Our objective has therefore been to achieve a broad matching of development costs with cash inflows when measured over a longer, averaged period of time, ahead of recurring earnings as a result of commercialisation.

A more detailed analysis of the half-year results is included in the financial information at the back of this report.

1.2 Summary of other key milestones and progress since last reporting

A summary of progress is included below, with a more comprehensive review in Section 2.

Commercialisation of fuel saving commercial vehicle main drive transmissions (on and off highway):

·; Torotrak now engaged in representative size component parts testing

·; Design improvements to optimise package size

·; Allison's production-intent programme proceeding positively, with an important gateway due in the first quarter of the next calendar year, ahead of their final exclusivity option decision

·; Confirmation of fuel economy benefits in delivery and urban cycles by our undisclosed major European Truck and Bus Manufacturer ("ETBM"), corroborating our predicted results

·; Our engagement with ETBM continues to be constructive and their future direction with our technology follows a methodical product development approach, with the current programme remaining in development phase

·; We have reviewed the technology improvements in incumbent technologies, such as double clutch automated manuals and improved efficiency automatic transmissions, and fuel economy benefits remain compelling in our target segments

·; In off-highway, one licensee has achieved substantial field test hours with dramatically reduced parts count on a tractor main drive transmission

·; Our new Tier 2 licensee and partner, Univance, is providing a useful alternative source of component parts which we are jointly testing

Development of V-Charge - our new, cost-effective variable charging device that delivers improved performance for downsized engines

·; Second stage "V2" prototype now on rig testing with evolutionary design improvements to enhance responsiveness and increase efficiency

·; Continuing demonstration of our Version 1 prototype in our vehicle test platform, now at a cumulative nine OEMs. This has generated very strong interest. Next stages are to release quantitative test data and exchange simulation tools with OEMs

·; Market study confirms that V-Charge has compelling benefits in key market segments

·; We have engaged with five prospective commercialisation partners. Our approach is to use our own development and prototyping and supply capability in the advanced pre-production design stages, before committing to any licensing valuation; this is likely to be concluded in the next financial year

Development of M-KERS - a simple, mechanical solution to store braking energy and improve fuel economy

·; Second stage prototype commenced, focusing on delivering system fuel economy benefits of around 20 per cent

·; Initially targeting single deck urban buses, utilising valuable feedback from operators and bus OEMs. Vehicle installation targeted for 2013 and planned to be amongst the first to market. We continue to collaborate with Optare in this respect, but not exclusively

·; Collaboration project, "Flybus", has yielded valuable experience, although compromises in early stage hardware and delays from elements not under our control have prevented meaningful fuel economy test results from being generated, though proof of concept has been confirmed. Our focus is now on a new system design, using updated and representative flywheel and traction drive hardware and working directly with bus OEMs and operators

·; We are confident in our simulation results that show system fuel economy capable of around 20 per cent and our aim is to release quantitative data over the next 18 months

·; We continue to support our partners with M-KERS for cars, in particular the Volvo project, but our immediate investment focus for M-KERS is commercial vehicles

2. BUSINESS UPDATE

2.1 Commercial Vehicles main drive transmissions

On-highway

We continue to work with our licensees to develop the main drive infinitely variable transmission for production. Our proposition for this technology is a material fuel economy saving, at a compelling cost compared to incumbent automatic technology. In addition, our technology provides other favourable differentiating features, such as exceptionally smooth take off and deceleration, and reduced driver fatigue.

Our assessment of fuel economy benefits in delivery and urban commercial vehicles compared with fully automated transmissions (favoured in North America) and automated manuals (predominant in Europe) is an improvement of between roughly 10 per cent and 20 per cent, depending on the level of urban cycle involved. Positive fuel economy benefits are still obtainable on longer haulage cycles, but are currently in single figure percentages. Our current research and development work is looking at some new technology options to improve this in future iterations of production design, but our priority for launch is in the more material segment with greater levels of "stop/start".

Improved fuel economy is a key market driver for take up of our technology. Fuel is a considerable percentage of whole life operating cost and vehicle manufacturers are also being pushed to ameliorate fuel economy by 20 per cent by 2020, compared to 2015, in both Europe and the USA.

We agreed with Allison a £2.5 million acceleration of their final £10.6 million option, payable by April 2013 should they choose to maintain exclusivity in this field (exclusivity in this context means that we do not grant further licensing rights other than to the existing licensees for commercial vehicle main drive transmissions, which include our European Truck and Bus Manufacturer ("ETBM") and Tata). This was paid in August 2012 and we have converted half of this payment into engineering services support, which we believe is a commercially sensible approach to support Allison's programme.

Our assessment of progress with Allison on their production intent programme is positive, with compelling fuel economy benefits on the urban bus and delivery segments.

We consider the key elements required for successful commercial introduction of this transmission to be:

1. Supply chain quality - especially discs and rollers

2. Final production design, to maximise a trade-off between performance and package size/weight

3. Normal test processes as the programme proceeds

Our confidence levels are underpinned by considerable operator and manufacturer interest in Torotrak's IVT. This supports our view that there is a minimum future lump sum licensing potential of £8.1 million in this specified field (main drive transmissions for predominantly on-highway commercial vehicles), being the level of Allison's remaining final option payment after taking into account the £2.5 million advance payment. Allison contractually must make its decision by April 2013 if it wishes to enjoy continuing exclusivity. On top of this up-front licensing potential, there remains a more material future income flow from our contractually agreed per unit royalties when production commences.

ETBM has recently verified the test data confirming the fuel economy benefits of our IVT. This licensee is licensed in the over 14,000 kg gross vehicle weight market, with larger production volumes in longer haulage and at the lower end of fuel economy benefits. However, in their delivery and more urban vehicles, our fuel economy results are substantial. As a vehicle manufacturer, this customer's product development processes are skewed towards whole vehicle programmes with a highly methodical approach to sub-system development. We await their next steps, but consider the confidence levels achieved in the fuel economy testing to be positive.

Off-highway

Whilst not a core market segment, activity in off-highway continues towards production. The first product, which was engineered by Carraro and presented to the public at the Agritechnika exhibition in 2009, is now undergoing field trials. This work, which includes ploughing and loading, is designed to evaluate durability and driveability. Engineers and farmers local to Carraro are undertaking the trials and have remarked on the product's ease of use and superior driveability. Torotrak continues to actively support the project.

2.2 M-KERS

M-KERS for commercial vehicles

Our mechanical hybrid, M-KERS, has advanced to the second stage of prototype development. System durability prove-out and fuel economy (FE) confirmation is scheduled for the end of calendar year 2013, with fleet trials commencing in 2014. This stage of product design has focused the architecture evaluation on production, with ease of manufacture and installation prioritised alongside the fuel economy and durability requirements.

There are a number of drive cycles specified by the different global operators of buses. We are developing a range of strategies in relation to engine, transmission and bus architecture to ensure that the M-KERS system can deliver FE benefits of around 20 per cent or more.

The range of bus architectures and weights varies dramatically around the globe, and so the team has developed a bus independent architecture to enable installation and application in a number of platforms, both as an original equipment fit or to support the extensive retrofit market.

The product is a very clever but simple piece of engineering, able to launch a bus from rest using mechanically recovered and stored braking energy. It provides a weight, packaging, cost and environmental benefit over electric hybrid alternatives. We are confident that there is a very valuable market for it, and that we have the capability to be amongst the first to market with a commercially viable solution.

The Technology Strategy Board sponsored "Flybus" project has yielded valuable results for the partners, but our focus going forward is on the next generation design, new control strategy and different hardware. We expect to be working with flywheel providers, including Ricardo and Flybrid Systems, to optimise the products capable of being offered to bus manufacturers and fleet operators.

M-KERS for Cars

We continue to support indirectly the M-KERS programme with Volvo Cars. The technology has been proven in concept form in our programme with Flybrid Systems and Prodrive, involving installation in 2010 in a Jaguar XF. We believe that the technology has great potential, but that for car manufacturers to take it up, the key issues will relate to cost and a validated Tier 1 supply route.

In passenger cars, the proportion of fuel saving in whole life costs is considerably less than in commercial vehicles. With legislation driving car manufacturers to improve fuel economy, their likely first choices will be the technologies offering best value for money in relation to cost vs fuel economy benefits. However, for the technology to be considered for first implementation in platforms, Tier 1 validation will be required.

We continue to support our partners in relation to M-KERS for cars, while our main investment focus remains on M-KERS for buses.

2.3 V-Charge for passenger cars

V-Charge, Torotrak's variable speed forced induction solution, is receiving considerable attention from vehicle OEMs as well as Tier 1 and Tier 2 suppliers.

The first proof of concept unit, V1, has completed a large number of objective demonstrations as fitted into our Renault Clio 1.2 litre vehicle. OEM and Tier 1 and 2 supplier personnel, from powertrain engineers up to senior executive level, have praised the car for its performance, driveability and quietness.

The second level of product, the pre-production unit, V2, has commenced testing. The various new designs included in V2, aimed at improving product efficiency and reducing cost, have been tested separately and the resultant learning applied to the V2 unit. The V2 testing programme is structured around a comprehensive design verification plan, which will culminate in defined performance metrics such as fuel economy, followed by systems durability testing.

The outcome of the testing will provide added validation to the newly developed V-Charge mathematical modelling tool, which will then be used to develop suitable application-ready architectures for defined customer programmes. These customer programmes will be specified through the team's on-going collaboration with a wide range of OEMs and Tier 1 and 2 suppliers.

The product's applications are extensive, and whilst the initial focus is on the sub-1.2 litre downsized engine market, where V-Charge can provide the driveability of a two-stage arrangement, it is also suitable for performance-oriented applications. The system can provide superior boosting as part of a multi-stage system on larger engines, and can also satisfy the demanding requirements of unique engine architectures featuring advanced valve timing cycles (Miller/Atkinson).

In 2013, Torotrak will build two new demonstration vehicles using the latest engine architectures to showcase the potential of the product to a wider audience.

2.4 Core Technology development

Development, innovation and the lodging and granting of patents continues apace through our core technology area, which is responsible for:

·; Developing mathematical engineering models using the latest modelling tools, to expedite architecture development for the various applications, or performance envelopes for main Torotrak product groups

·; Developing core and allied technologies and lodging patents

·; Durability development of the variator disc and rollers and traction fluids with alternative suppliers, and for value engineering programmes

The modelling tools enable our product groups to streamline design and development, supporting them to test different scenarios around the product before it reaches the CAD stage. This can range from identifying a specific V-Charge architecture to suit a specific customer's set of requirements, to predicting the fuel economy on a specified test cycle for M-KERS. As the global leader in traction drive technology, we will use these modelling tools to provide services for customers developing applications with our existing products, and also provide modelling services to the wider industry.

Amongst an array of new technologies, the team has recently reached concept readiness after achieving sign-off testing of the 'low cost roller control' for V-Charge. This is a patented technology and is one of the key factors in enabling V-Charge to reach the cost targets required for high volume engine manufacturers. This is one of several patents the team have filed, with 7 new patents filed and 5 granted in 2012.

We continue to develop the durability of our core technologies, including working with key suppliers and partners on discs, rollers and traction fluids for different applications, and to reduce costs as the team focuses on production readiness. Working with our partner, Univance, the team has completed qualification testing of several disc and roller specifications, and the joint teams are progressing work on value-engineered parts. Additionally, Univance is working with several Torotrak partners and licensees to develop discs and rollers for production. The teams are developing good working relationships, and there is considerable synergy in the strategies of each company. We see great potential in this new revenue share partnership model.

Torotrak is widely recognised as a global leader, independent approver, and test specialist for traction fluids, and as such we are working with a range of fluid manufacturers.

2.5 Test and build facilities and services

Our build and test department is the foundation of our work, underpinning development of our core technologies and products. In the last 12 months, we have continued to invest in upgrading rigs and IT hardware and software, as well as improving the physical layout consistent with our future plans. New rigs have been fitted in the durability cells and the recently-commissioned light and medium run rigs have been instrumental in developing the new content for V-Charge and M-KERS.

3. STRATEGIC REVIEW

3.1 Introduction

Given the significant opportunities that Torotrak is pursuing, we have reviewed our current business approach and concluded that the time is right to adopt a model that is more active in capitalising on opportunities for our core technology.

3.2 Licensing Business Model

Torotrak has in recent years diversified its technology portfolio to focus on specific markets where its technology is most competitive. We have successfully positioned ourselves for growth in value in:

·; Main drive transmissions for commercial vehicles

·; M-KERS for cars and commercial vehicles

·; V-Charge for passenger cars

This progress has been underpinned by license payments and engineering services income, to maintain a financially viable business in the development phase. Our goal has been to commercialise our technology mainly through licensing arrangements, with the objective of obtaining future recurring royalty payments on production.

This strategy has succeeded, providing an exceptionally strong base of licensees and partners who have provided substantial cash inflows. This income has funded our development and allowed us to maintain significant cash balances of £10.7 million as at the half-year end.

The benefit of this business model is that our licensees bear the main investment in bringing our technology to market. However, there are two key disadvantages. The first is that signing up an appropriate licensee can take a significant amount of time and can require considerable investment of engineering and business development resources. The second disadvantage is that, having signed up licensees, the pace of investment and their choices and priorities are outside of our control. Hence, the financial benefit of an apparently lower risk, lower investment route to market as a licensor must be weighed against the very real cost of ceding control to others as we strive to bring our technology to market.

3.3 Licensing's future role as a valuable addition to product and advanced engineering sales

We have agreed that, given (1) the strength of validation that we have of our technology and of the market opportunities, (2) the need to move quickly if we are to capitalise on those opportunities and (3) the lead times from concept launch to production, we can create better and more certain value by taking greater control of investment and decisions in bringing our technology to market.

We have concluded that the Company's priority going forward is to build a sustainable level of earnings from product sales and engineering services. This business model is capable of providing strong growth and a high return on total capital invested. Our licensing payments will remain material and valuable, but we will manage this part of the business as providing substantial upside and not as a dependency; in the short term, it will remain an important element of cash contribution.

We are committing to manufacture and supply product ourselves in high value segments where transaction values are high. Manufacturing and assembly capability will be gradually introduced during 2013, for readiness in 2014. Lower initial volumes mean that the management of this transition and change is controllable from a capability, funding and quality assurance point of view. With critical sub-assemblies being designed for manufacture by Tier 2 supply partners, we will ensure that manufacturing investment and required skills are kept in a sensible balance.

Where we do not aim to supply product around our core technology ourselves, our licensing strategy in future will seek a higher balance of up front licence fees rather than act as a "banker" to long-term royalty flows. We believe that this will create good opportunities for exposing valuable IP segments, with risks and rewards of full commercialisation in those areas best placed with the long term manufacturers and developers of the technology. Elsewhere, we will still consider longer-term royalty agreements with those partners with which we expect to engage regularly, and develop complimentary business relationships.

We will also move to increase our visible prototype hardware to demonstrate the benefits that our technology can bring, with more vehicle test platforms and more quantitative test results. This will be supported by a further commitment to grow our advanced engineering services over the coming three years, to take advantage of the support needed as new technology is introduced, and to achieve greater critical mass to support wider IP creation.

The increased operating costs and fixed asset investment required by the change in strategy is estimated at up to £2.5 million per annum over the next two to three years (before any customer recoveries). Our intention is that this will be funded by our licensing inflows in the short term, and in the medium and long term by the planned revenues and profitability from product sales and advanced engineering services.

3.4 Our strategy

Our direction going forward will separate higher unit value, lower volume markets such as commercial vehicles, from lower unit value, higher volume markets such as passenger cars.

Common to both types of market will be our approach to:

·; Invest in more prototype hardware and demonstration equipment, and focus on more quantitative test data from facilities that will be considered best in class

·; Develop simulation tools and models that can be shared with Tier 1s and OEMs to help validate our key product claims

·; Take a full system integration role in our target markets and segments, but taking IP ownership or rights in key areas

·; Invent and develop our expertise beyond full toroidal traction drives

·; Grow our applications and advanced engineering support capability, with the intention of substantially growing engineering revenues over the next 3 years to create the underlying base to support the above

·; Continue to patent and protect our IP robustly, whilst ensuring commercial agreements protect our know how and define commercial relationships

Specific to lower volume, high unit value, markets such as commercial vehicles

·; During 2013, we will put in place manufacturing and assembly capabilities to supply fully engineered product, or sub assemblies, into OEMs or retrofit markets. We envisage annual production volumes of 100s leading to 1000s initially, with our financial investment dependent upon the scale of sub-system procurement from partner companies. In all scenarios, this will be of relatively modest scale and will be funded from existing cash resources

·; Our engineering designs will take into account more substantive customer requirements and feedback from operators from the outset, as well providing for the separate procurement of specific-sub assemblies from manufacturing partners

·; We will consider complete sub-contract manufacturing if this makes economic sense for higher volumes

·; Licensees such as Allison Transmission Inc continue to be a preferred route where there is a clear investment path and access to substantial per annum production volumes

Specific to higher volume, lower unit value, markets such as passenger cars

·; We will assemble and manufacture lower volume supplies into niche segments of the market, e.g. performance vehicles, where this helps provide good credentials and assists referencing for OEMs for higher volume applications

·; We expect to agree repeat development contracts with OEMs and Tier 1s for advanced engineering services, to whom we will also licence products for volume manufacture

·; Elsewhere, we will target high value up front license fees for developed IP for high volume manufacture, rather than rely upon long term royalty streams as the most substantive element of return

3.5 Timing

Increasingly strenuous environmental regulations around the world are driving the need for fuel saving technology for both commercial and passenger vehicles. In Commercial Vehicles, USA mandatory legislation requires a 20 per cent CO2 reduction by 2020 starting in 2015; in Europe, the trade body ACEA has the same voluntary target. In passenger cars, USA legislation requires a fleet average of 35.5 miles per US gallon (6.63L/100km; 42.6 Imperial mpg) by 2016 - a staggering improvement of 5 per cent per annum from 2012; in Europe, emissions reductions to 130 gms per km are to be achieved by 2015 and 95 gms per km by 2020, meaning an improvement in fuel economy of just over a third over a 13 year period. These requirements will drive entirely new purchasing behaviour by manufacturers for fuel saving technologies, in an industry known to favour conservatism. Both passenger car and commercial vehicle OEMs will be seeking breakthrough technologies that deliver lower fuel consumption at an acceptable cost to consumers; the slow adoption of electric vehicles suggests that there is a clear space for lower cost technologies that deliver tangible benefits.

In addition, there are clear moves towards more representative drive cycles such as the worldwide harmonised light duty test cycle (WLTC), which set new challenges for car makers, and may put fuel economy claims under scrutiny as test cycles become increasingly aligned to real world fuel consumption. These test standards for CO2 reduction may expose some technologies as not being so green or clean when measured under more realistic driving conditions.

This climate presents clear opportunities for Torotrak, but in order to benefit from the "push" conditions for fleet CO2 reduction, we need to hit some clear time windows for acceptance and to secure sufficient interest to be able to design for specific future vehicle platforms. Failing that, we need to have achieved sufficient interest in the level of benefit to have earned "placeholder" status in OEM production plans.

Whilst Torotrak technology remains in concept prototype form, or as a validated design, it is competing for investment against technologies that may be inherently less efficient or more costly, but which are seen to carry lower risk as they are at manufactured hardware stage. Our revised strategy with self-manufacture and greater investment in demonstrator platforms, supported by more comprehensive engineering support available for OEM vehicle programmes, seeks to reduce the gap between perceived new technology risk vs. alternatives, whilst seeking to widen the gap in terms of demonstrable benefits.

3.6 The benefits

Specifically, we believe this approach will:

·; Accelerate progress in M-KERS for buses and other commercial vehicles. In these segments, where unit values are high, but where initial volumes may start in the 100s leading to 1000s, there is a good opportunity to supply product ourselves and target attractive returns on a controllable level of growth and risk. Manufacturing in this area will go hand in hand with relationships we are already building with component and sub system suppliers. We will ensure that we have either licensing, supply or alternative arrangements with other technology providers.

·; Accelerate validation and market acceptance of V-Charge for cars. We should not rely upon any individual Tier1, Tier 2 or OEM to sponsor or promote our revolutionary new product. Our strategy is to target specific market segments where we compete most strongly, and to align ourselves with partners where our commercial interests converge. In order to do this, we intend to increase investment in multiple vehicle installations within those different segments, to produce quantitative test results and provide OEMs and chosen suppliers with a product that carries good validation and physical demonstration capabilities.

In this area, we also intend to target lower volume supply into niche segments initially in the 100s and then 1000s, as a further means of boosting confidence in the market and promoting take up of the technology.

·; Allow us to aggregate and satisfy demand in fragmented but high value off-highway markets.  As the results from an off highway licensee's progress with its tractor IVT Torotrak transmission show, we have some compelling benefits to offer the off-highway market. To succeed here, we must aggregate the known demand in the market by providing a credible source of product and support for interested off-highway OEMs, who could not afford to undertake a development and build programme of their own.

·; Expand opportunity through greater technology scope. Our business is to solve some of the biggest problems being tackled by vehicle manufacturers - namely, how to improve efficiency and reduce CO2 emissions.

In doing this, our engineers and designers tackle whole system issues and are often working at the forefront of development outside our "core" area of full toroidal traction drive.

Where we can develop IP in areas related to or dependent on our core technology, we will consider that to be fully within the scope for potential IP creation and protection. We will also take an active position of managing other technology providers as lead system integrator, taking defined rights in areas that are key to any supply of product and our technology by the Company in the future.

·; Creating growth in development capability of our technology and derivatives around it through a targeted expansion in the provision of advanced engineering services. Many of the above acceleration or growth objectives require the creation of greater critical mass and support capability. This also helps create better leverage of investment and operating costs.

We are therefore targeting material growth in advanced engineering services, commensurate with a level of predictability in our future order book.

This strategy will broaden and strengthen our engineering and IP creation ability, and contribute to a level of growth in earnings allowing us to take advantage of our growing expertise in new technology areas.

We also aim to use our increased engineering capability to support work on more diverse test platforms, and to create stronger relationships with OEMs and other partners, with whom we expect to create recurring earnings in both engineering and in potential licensing income flows.

3.7 Our financial and commercial targets

We will seek to:

·; Create a growing level of earnings from engineering services and product sales, which will create a profitable business, regardless of any licensing of our technology and future royalties

·; Fund the initial investment required for prototype and manufacturing investment from existing cash flows from licencing, with licence fees thereafter made available for substantial re-investment into the business, or returned to shareholders.

·; Ensure that a strong level of working capital support is available at all times with resilient cash balances, or alternative secured funds when debt capacity is created.

·; Create strong capital growth in the Company, whilst providing the capability for future dividend payments once recurring positive earnings are established.

4. Board Changes

On 31 August 2012 it was announced that Dick Elsy, was stepping down as Chief Executive of the Company and would be leaving the board of Torotrak in order to take up a role as the first Chief Executive of the UK's High Value Manufacturing Catapult, the Government's flagship programme designed to transform the UK's capability for innovation and to help drive future economic growth. Dick was succeeded by Jeremy Deering, the former Finance and Commercial Director of the Company, which has proved to be a seamless transition. We would once again like to thank Dick for his invaluable contribution to the Group.

We are delighted to announce the appointment of Garry Wilson to the Board with immediate effect. Garry joined Torotrak in June 2012 as Group Director - Engineering and Programme Delivery. He brings additional expertise in project delivery and growth management that supports the stated objectives of this phase of Torotrak's development.

Prior to joining Torotrak in June 2012, Garry was the Director responsible for implementing significant global growth in engineering capability for Delphi Diesel Systems Aftermarket, part of the top-twenty global vehicle technology supplier Delphi Automotive. He has also held senior positions at Land Rover and at major engineering consultancies, delivering high-value powertrain programmes. At Roush Technologies, Garry led European engineering activities across a range of automotive and non-automotive sectors including cars, commercial vehicles, agriculture, and defence, increasing profitable engineering services income fourfold.

There is no further information required to be disclosed pursuant to LR 9.6.13 R.

5. Conclusion

Torotrak is well placed to commercialise its fuel saving technology in commercial and passenger vehicles. Customers are demanding cleaner technology and legislation is requiring it. Our strategy to take a greater level of control over our route to market is pragmatic, determined, and will be supported in future reports by tangible measures of our progress against these aims. We are confident that a shorter term increase in investment, funded by existing cash resources, should accelerate earnings growth, expose more visible valuation in the different areas of our business, and allow a more predictable exploitation of our market opportunities.

Consolidated income statement

for the six months ended 30 September 2012

The results above derive from continuing operations.

The notes below form an integral part of this condensed consolidated half-yearly financial information.

Consolidated balance sheet

as at 30 September 2012

The notes below form an integral part of this condensed consolidated half-yearly financial information.

Consolidated statement of changes in equity

for the six months ended 30 September 2012

The notes below form an integral part of this condensed consolidated half-yearly financial information.

Consolidated statement of cash flows

for the six months ended 30 September 2012

The notes below form an integral part of this condensed consolidated half-yearly financial information.

Notes to the half year financial information

1. General information

The Company is a public limited company incorporated and domiciled in the UK. Theaddress of its registered office is 1 Aston Way, Leyland, Lancashire PR26 7UX. The Company is listed on the London Stock Exchange under the trading symbol TRK. These condensed consolidated half-year financial statements were approved for issue on 28 November 2012 and the information contained therein is unaudited.

These half-year financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2012 were approved by the Board of Directors on 29 May 2012 and have been delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

2. Basis of preparation

The condensed consolidated financial statements for the half-year ended 30 September 2012 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union and should be read in conjunction with the annual financial statements for the year ended 31 March 2012, which was prepared in accordance with the relevant IFRSs applicable at the time as adopted by the European Union.

3. Accounting policies

The accounting policies adopted in these condensed consolidated half-year financial statements are consistent with those of the annual financial statements for the year ended 31 March 2012, as described in those annual financial statements.

The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year beginning 1 April 2012 and have not been early adopted:

·; IFRS 9, 'Financial instruments', issued in December 2009. This addresses the classification and measurement of financial assets and is likely to affect the Group's accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. The Group is yet to assess IFRS 9's full impact and decide when to adopt IFRS 9.

The credit for taxation is based on the estimated effective rate for the year as a whole, adjusted for taxation losses brought forward and reflects research and development tax credits.

4. Critical accounting estimates and assumptions

In applying the accounting policies, appropriate estimates have been made in many areas. The key areas of estimation uncertainty, where assumptions and estimates are significant in terms of impact upon the Financial Statements, are the same as those that are described in the annual financial statements for the year ended 31 March 2012.

5. Analysis by business segment

Segmental operating analysis for the six months ended 30 September 2012

Segmental operating analysis for the six months ended 30 September 2011

Note 1 Development activities include research and the creation of intellectual property.

Significant customers

The following revenues are attributable to significant customers

Business segment balance sheets

6. Earnings per share

The basic and diluted earnings per share are based on a profit after tax of £1,586,000 (2011: loss after tax of £2,043,000). The weighted average number of shares was 164.4 million shares (2011: 163.0 million) and the diluted weighted average number of shares was 174.8 million.

For the six months ended September 2011 potential share options are antidilutive, as their inclusion in the diluted earnings per share calculation would reduce the loss after tax, and hence have been excluded.

In accordance with IAS33 'Earnings per Share' the number of shares used in the calculation excludes the weighted average number of shares held by the Employee Benefits Trust (formerly the Employee Share Trust) of 931,774 (2011: 689,891).

7. Fixed assets

8. Taxation

The credit for taxation is based on the estimated effective rate for the year as a whole, adjusted for taxation losses brought forward and reflects research and development tax credits.

9. Investments

10. Trade and other receivables

11. Cash and cash equivalents

12. Trade and other payables

13. Related party transactions

There was a loan outstanding of £26k to Rotrak at 30 September 2012 (2011: £96k), 50 per cent of which was eliminated on consolidation. There was a long term loan outstanding to Rotrex of £147k (2011: £147k).

14. Exceptional item

The exceptional item relates to redundancy, severance and associated expenses incurred as part of a restructuring process.

15. Commitments

Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:

Statement of Directors' responsibilities

The Directors confirm that, to the best of their knowledge, this condensed consolidated set of half-year financial statements has been prepared in accordance with IAS 34, as adopted by the European Union. The half-year management report includes a fair review of the information required by 4.2.7 and 4.2.8 of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, namely:

·; an indication of the important events that have occurred during the first six months of the financial year ending 31 March 2013 and their impact on the condensed consolidated set of half-year financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·; disclosure of material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report.

The Directors of Torotrak plc are listed in the Torotrak plc Annual Report for the year ended 31 March 2012. Dick Elsy retired as a Director on 28 September 2012. A list of current Directors is maintained on the Torotrak plc website: www.torotrak.com.

By order of the Board

Jeremy Deering - Chief Executive

-ends-