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5 July 2006
OPEN BRIEFING
CEO and CFO on Synerject
corporatefile.com.au
Orbital Corporation
Limited recently indicated that Synerject, its 50:50 joint venture
with Siemens-VDO Automotive, has established new funding arrangements
comprising a US$8 million term loan and a US$3 million line of credit.
Each joint venture partner has also contributed US$2 million in
additional share capital to Synerject. Synerject is targeting revenue
of more than US$180 million by 2010, up from about US$42 million
in 2005. Will this level of financing be adequate to fund Synerject's
targeted growth?
CFO Keith Halliwell
Our expectation, based on Synerject's current
business plan, is that Synerject can finance its projected growth.
Some of this growth is underway and has already been financed. For
instance, including the Delavan acquisition, Synerject's annualised
sales would now be close to US$80 million.
Over the last four years Synerject has been
able to generate positive operating cash flows of more than US$15
million and we believe that over the medium to long term its cash
flow will continue to grow. Synerject's loan repayment commitments
are now significantly lower than they were and the free cash flow
will be used for reinvestment and also for payment of dividends.
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Orbital has indicated it will provide its capital
contribution to Synerject out of cash reserves. Given Orbital had
cash on hand of A$6 million at the end of December 2005, what is
the rationale behind investing some of these reserves in Synerject?
CEO Rod Houston
We believe this is a good investment. Orbital
has been cash positive during the second half. Looking forward,
our Engineering Services order book is strong and as such we're
comfortable with this investment into a business that has strong
growth prospects and is a good fit with our overall strategy.
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You've agreed that Synerject will adopt a policy
of paying dividends of 45 percent of profit after tax to the joint
venture partners semi-annually, beginning in the half year to December
2006. What are the expected cash flows to Orbital in the current
year ending June 2007 and going forward?
CFO Keith Halliwell
At this early stage in the financial year we're
not providing any detailed profit or cash flow guidance, but if
we have a look at the last few years, Synerject's results have been
positive. In recent years dividends in the order of A$1 million
to A$1.5 million per annum would have been payable to each of the
partners if the new dividend policy had been in place.
The refinancing arrangements have opened up
for the first time the potential for positive cash flows back to
Orbital from Synerject. In the past most of Synerject's cash flows
have been dedicated to repaying debt and strengthening the balance
sheet.
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You've indicated that under the terms of the
Synerject joint venture agreement, Orbital's percentage ownership
of Synerject may be adjusted down to 40 percent to reflect the recent
performance of the business Orbital contributed to the joint venture.
Orbital would have the option to maintain its 50 percent ownership
for an additional investment of up to US$4 million. Is it your intention
to pursue this option? How would you fund this investment?
CEO Rod Houston
We intend to exercise the option in 2008 and
continue as a 50 percent owner of what we believe is a valuable
business. Given Synerject's projected growth and potential value,
we'd consider this a very good investment to grow our involvement
in the non-automotive engine management system business, and it
fits well with our overall strategic plans.
Given Synerject's earnings potential we believe
that by 2008 the investment of US$4 million should be an easy decision.
At this stage we haven't decided how we'll fund the investment.
Over the next two years we believe the earnings prospects of our
core engineering and intellectual property business are positive,
and this, as well as the dividends from Synerject, should provide
good cash flow.
corporatefile.com.au
Can you comment on the quality of Synerject's
earnings and how they compare with Orbital's own earnings base,
which relies on licensing and royalty income and the provision of
engineering services?
CEO Rod Houston
Synerject is becoming a well regarded supplier
in the non-automotive engine management systems business worldwide.
This business has tremendous growth potential and Synerject is well
placed to be a part of that growth.
There are always risks in regard to the exact
timing of the transition from carburettors to some form of engine
management system. However, Synerject has a broad base of customers
and products which can mitigate some of this risk.
Orbital's other income streams provide diversification
in markets not addressed by Synerject's manufacturing operations.
The mix is complementary.
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Which products and markets are expected to
be the key drivers of Synerject's revenue growth over the four years
to 2010?
CEO Rod Houston
Synerject is well positioned to cover a wide
range of markets and products going forward. Over the last three
years it's established a solid customer base in Europe and the US
with engine management systems for both two-stroke and four-stroke
engines. In these established markets the plan is to increase the
content of the systems, including fuel pumps and modules, as well
as expanding the customer base.
The Delavan facility Synerject acquired in
March has been a good add-on business and is performing well so
far, with good prospects for growth and improved margins through
greater purchasing power. Further investment by Synerject in new
engine management system products over the last two years have been
targeted at opening up the Asian markets for single cylinder motorcycles,
which have an annual volume of over 23 million units. Emissions
legislation in both China and India will require a transition away
from carburettors and Synerject can now offer a range of solutions
to meet this legislation.
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You indicated early last month that Synerject's
new manufacturing facility in China is on schedule for first production
by the end of this calendar year. What is the size of the facility
relative to Synerject's existing operations and what are Synerject's
specific market opportunities in China?
CEO Rod Houston
The new facility in China is custom designed
for maximum efficiency and low cost to ensure we can meet the requirements
of the motorcycle market. It's initially quite small and fits into
an existing larger Siemens facility.
The market opportunities are extensive given
the large volume of motorcycles manufactured in China, with in excess
of 18 million units produced in 2005 and projected market growth
of 4 percent year on year over the next three to four years. Today
all of these engines utilise simple carburettors, but with the coming
emissions legislation and the drive by the Chinese OEMs to export
to Europe and the US, there'll be a transition towards electronic
engine management system solutions over the next two to four years.
Synerject will be well positioned to offer
a wide range of emission solutions to this market. It's important
to note that a new China facility will ultimately also serve other
customers in both Europe and the US.
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Over the medium term how do you expect Orbital's
earnings composition to change?
CEO Rod Houston
Synerject certainly has good growth prospects
and earnings potential and we're working hard to ensure this revenue
stream is developed. However, the outlook for the other parts of
our business is also good. We believe the multiple income stream
strategy is important from the perspective of both diversifying
earnings and being involved in the entire value chain of advanced
powertrain systems development and supply.
The engineering order book is in good shape
and we're seeing an increased level of interest in the capabilities
of our core technology and systems in the alternative fuels and
gaseous fuels market, which is expected to be a new growth area
for us.
Going forward I also see opportunities to enhance
our engineering and intellectual property earnings through further
strategic alliances with key customers in the Asian region.
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Thank you Rod and Keith.
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