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14th November 2005
OPEN BRIEFING
CEO & CFO on BRP
Plant Acquisition
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Orbital Corporation Limited recently
announced an agreement by Synerject, your US-based 50:50 joint venture
with Siemens VDO Automotive, to acquire the engine management modules
facility of Bombardier Recreational Products (BRP) in Delavan in
the US state of Wisconsin. What's the rationale behind this acquisition?
CEO Rod Houston
The facility is complementary to Synerject's
core business of manufacturing and supplying engine management modules
for the non-automotive market. It will bring a significant increase
in revenue and make a material contribution to Synerject's growth.
We also believe Synerject can overlay its production experience
adding value to this facility.
The acquisition will diversify Synerject's
customer base and the increased scale of the business should improve
the confidence of other customers and assist in winning new business.
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The plant supplies fuel injectors and engine
management modules for BRP's Johnson and Evinrude outboard engines.
To what extent do these products compete directly with Synerject's
existing products?
CEO Rod Houston
These products have application in Synerject's
existing marine market, however they have their own customer loyalties
so we see this as additional rather than competing business. Synerject
will actively support existing and new products and sees growth
prospects for all business segments.
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Following the acquisition, what will be Synerject's
position with regards to use of BRP's E-TEC direct injection technology?
CEO Rod Houston
The transaction involves only assets relating
to the manufacture of the fuel injectors and engine management modules.
There'll be no transfer of intellectual property rights for E-TEC
to Synerject. Synerject continues to have the exclusive rights to
the OCP system and this continues to be a key focus of Synerject.
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Synerject had revenue of US$42 million in the
year ended June 2005 and the Delavan facility is expected to immediately
increase turnover by more than US$15 million on an annualised basis.
You've also noted opportunities to grow revenue from the facility
going forward. What are the growth opportunities and to what extent
are they provided for under the long-term supply contracts Synerject
will enter into with BRP's Johnson Evinrude division?
CEO Rod Houston
BRP's E-TEC volume sales are increasing as
it switches more and more of its Johnson and Evinrude outboards
away from the traditional carburettor engines. Hence there are very
good growth opportunities for this facility and Synerject as it
keeps pace with this change-over.
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Over the medium term you expect the facility
to achieve profit margins consistent with those of Synerject's current
business, which on the 2005 result had a net profit margin of about
9 percent. In which specific areas do you expect to improve the
facility's earnings performance?
CFO Keith Halliwell
There's a number of areas where we see improvements
going forward. The first being increased sales and therefore improved
overhead recovery. The second area is purchasing price reductions
through utilising Synerject's supply arrangements. We also believe
we can introduce some of Synerject's production experience, which
will help improve the performance of the plant.
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Synerject booked an after-tax profit of US$3.9
million in the 2005 financial year and you expect the acquisition
to make a positive contribution to Synerject's earnings from day
one. What's the expected profit contribution in the current year
ending June 2006 and in the first full year post acquisition, i.e.,
the 2007 financial year?
CFO Keith Halliwell
We don't expect any significant profit contribution
in the current financial year, with the immediate focus on successful
integration. In 2007 we'd expect double digit sales growth and look
for the improvements we talked about coming through to the bottom
line. It's difficult to put a figure on it but we'd expect the profit
impact, compared with Synerject's present level of business, to
be significant.
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At your recent AGM you indicated that Synerject
would be adversely affected in the current year by a major customer's
decision to run down its inventories of Synerject products and by
cash costs relating to product upgrades. In light of the Delavan
plant acquisition, what are Synerject's expected earnings for the
current year?
CFO Keith Halliwell
Despite the customer inventory reductions and
product upgrade expense we still expect Synerject to make a healthy
contribution to our results this year.
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Synerject's investment in the Delavan facility
will equate to the business's working capital assets. How will Synerject
fund the acquisition and how will it impact Synerject's debt repayment
schedule?
CFO Keith Halliwell
Synerject has sufficient cash on hand to support
the working capital needs of this expanded business and also meet
the requirements of its present debt reduction program.
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At your AGM you said your strategic goal for
Synerject is to grow annual sales to over US$200 million by 2010.
Following the Delavan plant acquisition can Synerject achieve this
goal via organic growth? What further developments will be necessary
for it to reach the target?
CEO Rod Houston
We expect Synerject's growth to come from a
mixture of organic growth and growth by acquisition. We also see
that some of the major growth opportunities will be in India and
China and these are already being investigated by Synerject. As
I indicated at the AGM, Synerject is already investigating the potential
start-up of manufacturing capacity in China for its future products.
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Thank you Rod and Keith.
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