(TRK) Torotrak

For release: 7.00, 22 November 2011

Torotrak PLC (LSE: TRK)

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

Half-Year results for the six months ended 30 September 2011

Financial and Operational Highlights

Financial highlights

Operational highlights

John Weston, Torotrak's newly appointed Chairman said:

"Torotrak's technology has matured at a critical time.  Vehicle manufacturers must deliver ever more fuel-efficient vehicles, and Torotrak has developed a range of practical, cost effective and patented solutions to help achieve this.  Legislative pressure means that maintaining the status quo in automotive technology is no longer an option.  This is all resulting in increasing opportunities for Torotrak.

With Torotrak's high quality customer base, strong cash balances and engaged industrial partners, I see exciting opportunities opening up for Torotrak and its shareholders".

1. Summary

1.1 Market opportunity

As legislative and environmental drivers continue to tighten, vehicle manufacturers need cost effective new technologies to reduce carbon emissions and improve fuel economy.  Torotrak's patented variable drive systems provide a tested and proven mechanical engineering solution to address this need. 

Through a single technology platform, different Torotrak applications can deliver substantial cumulative benefits in fuel economy across passenger and commercial vehicles.  This is achieved through:

1.2 Strategy

Torotrak licences its technology to manufacturers and suppliers that have committed technical and financial resources to industrialise the applications.  We secure income from a combination of licence and engineering fees as our technology is developed towards production, with a royalty or share of earnings based on annual production volumes.

Our strategy is to:

1.3 Summary of progress

Our assessment of progress takes into account cash generation and maintaining sufficient cash funding reserves; evidence of growing support for the industrialisation of our technology; and key milestones towards achievement of commercialisation.  In each of these respects, we report a positive position:

Cash generation and funding

Positive cash flow of £0.5 million was generated in the first half (2010: £3.1 million negative), with a closing cash balance of £8.8 million (31 March 2011: £8.3 million). We believe this provides us with a resilient level of funding to achieve the successful commercialisation of our technology.

Support for industrialisation

We have seen increasing commitment from vehicle manufacturer licensees, evidenced most notably by a step up in committed resources and investment.  Significantly, as we look to develop the production supply chain for customers, we have also seen increased engagement with the suppliers of fluids and components that are core to our technology.

Milestones

The key milestones achieved in the first half of the year, providing good momentum in our critical programmes, are as follows:

2. Results

2.1 Revenue

Revenue of £0.8 million (2010: £2.0 million) comprises income from engineering services, principally in relation to our commercial vehicle programmes, with no licence income being recognised in the first half (2010: £0.7 million). Whilst we received £3.5 million in licence payments in April 2011, from an accounting perspective half of this was recognised in the previous financial year (when it was committed) and £1.7 million will be deferred until 2013 (when Allison's licence rights in the over 14,000 kg gross vehicle weight market can be exercised and when ETBM's licence in this field reverts to a non-exclusive licence).

Engineering income decreased by £0.5 million due to lower prototype build activity and hence a lower value of material parts being billed.  This is in line with our strategy to focus Torotrak's engineering time on the core areas required to commercialise our technology, and encourage our licensees and development partners to drive the main programme build activities.

2.2 Costs

We commenced the new financial year with our staff and resources better organised to support our own and our licensees' commercialisation objectives.  Increased development activity by our licensees and partners means that we have been able to reduce operating costs for the half year by £0.8 million to £2.6 million (2010: £3.4 million), with committed board costs being reduced by approximately one third.

2.3 Loss after taxation

Losses after taxation of £2.0 million (2010: £1.8 million) principally reflect the absence of any income recognition from licence agreements in the first half of the year.  Timing of licence payments, and associated accounting requirements for income recognition, materially impacts our periodic reporting.

2.4 Cash and cash flow

After £0.3 million was invested in new patent activities, IT and other infrastructure, operating cash flow was positive by £0.7 million (2010: £2.5 million negative) with closing cash balances of £8.8 million (March 2011: £8.3 million; September 2010: £10.0 million). 

2.5 Risks and uncertainties

There has been no material change to the key risks facing the Group as described in the Review and Directors' Report sections in the 2011 Annual Report.

3. Market background and environmental legislation

3.1 Market positioning

Increasing fuel prices, and mounting legislative demands, continue to strengthen the case for manufacturers to adopt new fuel saving technology.  The level of saving demanded and the timescale for achieving this is putting pressure on even the most conservative of organisations to consider new approaches.

Torotrak's response is to offer technology that manufacturers can engage with at greater or lesser levels of investment.  Our latest technology developments offer a lower cost of entry into Torotrak technology through ancillary devices, that deliver fuel savings but which work alongside more conventional engine and transmission arrangements. Alternatively, as a main drive transmission, Torotrak's variable drive can transform the fuel economy and performance of a vehicle, requiring a more fundamental re-engineering programme of the nature that our commercial vehicle licensees are currently undertaking.

This approach is paying off and we are seeing a high level of interest from a range of major international component and vehicle manufacturers, with a growing list of engaged licensees and partners across both commercial and passenger vehicle markets. 

The cost and benefit challenges are very clear:

Since all credible solutions require new investment and an element of change for manufacturers, this in effect reduces the "investment barrier" to adopting new technology and thus levels the playing field for competition between new and incumbent technologies. This presents substantial opportunities for Torotrak.

Manufacturers are looking at whole system performance and increasingly whole life costs. This is particularly evident in the commercial vehicle market where fuel is the predominant operating cost. 

A number of solutions are available to vehicle manufacturers for improving fuel efficiency, ranging from aerodynamics; weight reduction; re-capture of energy losses such as braking energy; different fuels; engine downsizing through pressure charging; and fundamental engine/powertrain re-engineering. 

Some solutions are possible only with government subsidies because they are inherently costly, for example diesel electric hybrid vehicles.  Others require considerable development before they are likely to be economic, for example complete vehicle electrification.  Solutions incorporating Torotrak's technology are favourably positioned in terms of cost and, whilst still seen as "new technology", the technology has already benefited from considerable investment and testing.

3.2 Introduction of environmental legislation in USA

Fuel economy legislation continues to be a key factor in the automotive industry's search for new technology. Formal legislation in USA and Europe is a key driver in forcing down C0₂ emissions for passenger cars, whereas in Europe in the commercial vehicle market there are currently only voluntary arrangements.

Since last reporting, the USA has introduced new environmental legislation for the commercial vehicle market.  As predicted, this emphasises fundamental fuel economy as a priority, where previously noxious gas emission reduction has been the key driver.

In August, the new legislation was launched by the US Department of Transport ("DOT") and the Environmental Protection Agency ("EPA") requiring the commercial vehicle industry to reduce fuel consumption in vehicles by around 20%, starting in 2018 model year (vehicles built and sold in 2017).  According to the DOT and the EPA, heavy-duty vehicles account for 12% of all US oil consumption and 20% of greenhouse gas emissions (in 2007). It is clear that this new legislation will have a material impact on energy security and reduction in air pollution and so we expect it to be implemented vigorously.  The legislation has a broad reach, covering long haul trucks as well as distribution and vocational vehicles and buses. 

We believe that this legislation adds a further incentive to the successful introduction of Torotrak technology within this key geographic market.

4. Commercial priorities and programmes

4.1 Commercial vehicle transmissions

Torotrak has three licensees in this area:

We have undertaken substantial proof of concept prototype programmes with Allison and ETBM, as previously reported.  Allison confirmed at the beginning of this financial year that its multi-stage programme had commenced, subject to a number of internal gateways, towards the production of transmissions for commercial vehicles. Having conducted extensive transfer of knowledge to Allison's engineers over the last financial year, Torotrak's role is now to provide specialist engineering support. 

In the first half of the year, Allison's programme has concentrated on proving out key performance criteria based on concept prototype hardware.  Acceptance has been achieved leading to the next stage of the multi stage programme which proceeds to representative hardware.

A key issue that we are addressing is development of the production supply chain for important variable drive components such as discs, rollers and fluids, which are critical to the industrialisation of our technology.  We are currently engaged with a number of international component and fluid suppliers with a view to establishing defined, strategic relationships in support of our licensees.  We will report on progress in this regard at the full year stage.

With ETBM, we have substantially completed our three year turnkey engineering programme and are now providing support to its vehicle and test rig evaluation programme. Test rigs are, in general, the most rigorous and objective way of evaluating a new prototype transmission and this has dominated the work over the last 6 months. The main focus has been fuel economy against the initial target application. Work is now underway to evaluate applicability against a wider range of vehicle types and duty cycles in order to determine the best fit for our technology to their product range.

We know from the work to date that Torotrak's technology is most effective at saving fuel in vehicles which are subject to a number of stop/start cycles, representing a substantial part of the commercial vehicle addressable market.

4.2 Variable drive flywheel hybrids

Torotrak is working with two flywheel technologies, developed independently by Ricardo and Flybrid Systems, to produce a cost effective alternative to a battery electric hybrid.  Battery electric hybrids are relatively expensive, heavy and take up a large package space. They also require complex battery management systems to protect the vulnerable cells from premature deterioration. As a result, and despite considerable development, the current and near term predicted take up of electric hybrids in the passenger and commercial vehicle markets is comparatively low.

The alternative that we are working on with our consortium partners is a mechanical engineering device that recovers braking energy and releases it back into the driveline via Torotrak's variable drive. The advantages of this system are clear:  it costs considerably less, takes up less space, weighs less and as a result is an affordable and pragmatic solution for vehicle manufacturers.

The system is also very power dense, which means that whilst it cannot store energy overnight (as the battery based systems do) it can deliver its full power repeatedly within the driving cycle where the performance is most needed to conserve fuel. This is in contrast to the battery based systems which cannot be discharged much below 70% of their full charge capacity. The flywheel system is capable of discharge from 100% to zero, delivering all of this power to the vehicle to help save fuel.

Passenger cars

Prodrive, the system integrator in our technology collaboration with the Flybrid flywheel system, confirmed in September that the Flybrid apparatus, fitted to a Jaguar vehicle, combined with a conventional stop start system, achieved fuel savings of 22.4% on the "real life" ARTEMIS test cycle.  For many vehicle manufacturers, this result provides a compelling reason to consider the advantages listed above of the Torotrak/flywheel solution. 

Also in September, the Volvo Car Corporation announced that it would be the first car company to test Torotrak's equipped flywheel energy recovery system on the roads ("KERS").  Volvo is adopting a new vehicle "platform" which will be used as the basis for their entire product range. The so-called Scalable Platform Architecture (SPA) has been configured to accommodate the fitment of a flywheel hybrid system featuring a Flybrid Systems LLP flywheel and Torotrak's variable drive technology.

Commercial vehicles

The flywheel energy recovery system is also very relevant to the commercial vehicle market, both on road and off road. Here, we are working with Ricardo, who announced in August a breakthrough in its second generation flywheel, which uses a patented form of magnetic coupling. We have successfully installed a Torotrak equipped mechanical flywheel into an Optare bus, as part of the Flybus consortium project. Formal test results are due to be released later this financial year.  This technology has generated a significant amount of interest and vehicle manufacturer engagement. All of the consortium partners see considerable potential value in this technology application and it is generating great interest from fleet operators. 

4.3 Variable drive pressure charging

Manufacturers are predicting a significant increase in engine pressure charging as the push for greater fuel economy continues.  Torotrak's variable drive offers an alternative to conventional turbo charging or supercharging by providing the ability to rapidly adjust boost, independent of engine speed.  It has the potential to displace the more expensive two stage systems as it comprises a single unit, allowing cost effective engine downsizing without compromising vehicle performance. Our challenge is to introduce this new technology with appropriate industrialisation partners at a compelling price.

We have teamed up with supercharger specialists Rotrex to provide a combined variable drive supercharger through our joint venture "Rotrak".  We also took a 15% equity stake in Rotrex last year.  Since last reporting, we have successfully installed a Rotrak variable drive supercharger into a vehicle, which is now on test on our rolling road facility in Leyland.  We have separately supplied a unit to a leading Tier 1 component manufacturer for installation into their target vehicle.

Through both our own demonstration vehicle, and that of our Tier 1 partner, we will be engaging with interested vehicle manufacturers in the second half of this financial year.  Formal test results will be released once further work on engine calibration and cross validation with our Tier 1 partner has been completed.

4.4 Other

We have continued to work with our other licensees on their programmes, including Carraro, which has promoted its new agricultural transmission platform intended to be the most efficient variable drive in its class and which utilises Torotrak technology.  TATA has continued to develop the "Pixel" small car concept further, which includes concept transmission Torotrak hardware that enables the vehicle to achieve a "zero turn"; there is no definition at this stage of a production version of the Pixel or of Torotrak's possible role within a production programme.

New developments continue to be made, and new intellectual property patented, in the programmes listed above.  In particular, we have made important progress and are developing valuable intellectual property in the area of low cost drives.

Torotrak's intellectual property portfolio and knowledge base continue to be strengthened by invention and continuous technical advances.  In particular, progress on auxiliary drives in the new energy saving sectors has led to specific new inventions, whilst know-how stemming from concept design activities and hardware development is being captured in Torotrak's extensive software design tools.

Torotrak's internal test and development activities have focused on two key areas: developing low cost technologies for our new markets (flywheel hybrids and variable supercharging), and testing and verifying components and fluids for the manufacturers that want to be considered as suppliers.  The progress we have made with this verification process has boosted our licensees' confidence in the route to production.

5. Outlook

Torotrak is well funded and has multiple opportunities to achieve successful commercialisation.  Our programmes have advanced well in the first half, generating increased confidence of successful outcomes, especially in the valuable commercial vehicle transmission market.  We expect to report increased revenues in the second half with the recognition of licence and other fees, and to maintain a strong level of demand for further licensing and engineering services.

Consolidated income statement

for six months ended 30 September 2011

In the six months to 30 September 2010, £224k is included within loss after taxation in relation to Torotrak's 50% share in the Infinitrak joint venture, which was discontinued in the second half of the year ended 31 March 2011 and replaced with a licensing arrangement (as reported in the 2011 Torotrak Annual Report). 

Consolidated statement of comprehensive income

for six months ended 30 September 2011

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

Consolidated balance sheet

as at 30 September 2011

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

Consolidated statement of changes in equity

for six months ended 30 September 2011

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 2011

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. The address 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 22 November 2011 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 2011 were approved by the Board of Directors on 25 May 2011 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 2011 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 2011, 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 2011, 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 2011 and have not been early adopted:

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 2011.

5. Analysis by business segment

Segmental operating analysis for the six months ended 30 September 2011

Segmental operating analysis for the six months ended 30 September 2010

Note 1 £196k costs relating to the Infinitrak joint venture that was discontinued in the second half of the year ended 31 March 2011 are included within operating loss.  Restated operating loss on a continuing basis excluding Infinitrak results is £1,689k and restated Development activities costs are £2,362k.

Note 2  Other revenue and costs not allocated to business segments.

5. Analysis by business segment (continued)

Significant customers

The following revenues are attributable to significant customers

Business segment balance sheets

6. Earnings per share

Basic loss per share is based on the loss after tax of £2,043,000 (2010: £1,803,000) and 163.0 million shares (2010: 161.6 million) being the weighted average number of shares in issue during the period.

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 689,891(2010: 99,490).

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 £96k to Rotrak Ltd at 30 September 2011 (2010: £90k), 50% of which was eliminated on consolidation.   There was a long term loan outstanding to Rotrex AS of £147k (2010: £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:

The Directors of Torotrak plc are listed in the Torotrak plc Annual Report for the year ended 31 March 2011. John Grant retired as a Director on 31 May 2011.  John Weston was appointed as a non-executive Chairman on 1 June 2011.   A list of current Directors is maintained on the Torotrak plc website: www.torotrak.com.

By order of the Board

Dick Elsy - Chief Executive

Jeremy Deering - Finance Director