|
21 February 2007
OPEN BRIEFING
CEO and CFO on H1 Results and Outlook
corporatefile.com.au
Orbital Corporation
Limited today reported a net loss of $0.4 million for the first
half ended December 2006 compared with a net loss of $1.4 million
in the previous corresponding period. Excluding a $0.5 million payment
to settle a legal dispute with Coles Myer, the result was a net
profit of $0.1 million. You expect the company to achieve an improved
profit result for the full year. What assumptions underlie this
forecast?
CEO Rod Houston
We expect Engineering
Services revenues to be higher than the second half of 2006, as
well as continued steady royalty income. Both Orbital and Synerject
typically have a stronger second half due to the engine build required
for the northern hemisphere summer. Synerject's contribution however
is expected to be impacted by higher engineering costs associated
with the expansion of its operations in China.
corporatefile.com.au
The highlight of
the first half was the Engineering Services business, where revenue
increased to $7.0 million compared with $3.4 million in the previous
corresponding period and $5.3 million in the second half of the
June 2006 year. To what extent was the increase attributable to
new customers and to new applications of Orbital direct injection
(DI) technology, and is the momentum sustainable?
CEO Rod Houston
Most of the increase
was attributable to new customers and new applications. We have
a number of new applications relating to our DI technology and there's
been good growth in engineering services related to these over the
last year, including new applications for gaseous and spark-ignited
heavy fuel engines. There are good signs the momentum can be sustained,
and we continue to work hard to deliver.
corporatefile.com.au
The Engineering Services
business booked pre-tax profit of $2.0 million in the first half
compared with a loss of $0.3 million in the previous corresponding
period. With a profit of $0.7 million on revenue of $5.3 million
in the second half of 2006, the business appears to have a relatively
high fixed cost base. What confidence do you have that you can keep
these fixed costs under control?
CFO Keith Halliwell
Most of Orbital's
fixed costs relate to the running of the facilities, including depreciation
of property, plant and equipment. Our facility capacity isn't under
pressure with the level of Engineering Services revenue we're currently
servicing; in fact we estimate we can accommodate a 10 to 20 percent
increase in revenue without a significant investment in those facilities.
corporatefile.com.au
Orbital's share of
the net profit of Synerject, your 50:50 joint venture with Siemens
VDO, was $0.8 million in the first half, flat year on year. You've
indicated that costs increased, reflecting expenses associated with
the expansion of Synerject's operations in China. When will production
start up in China and to what extent is output contracted?
CFO Keith Halliwell
We expect production
for our first Chinese customer to start in April 2007 and production
launches are planned for a number of other customers over the next
12 months. We've been working with customers on product application
engineering programs for some time and ultimately output will be
dependent on market acceptance.
corporatefile.com.au
Synerject booked
revenue of US$35.7 million in the first half, up 100 percent or
US$17.9 million. You've indicated that the Bombardier Recreational
Products engine management modules facility in Delavan in the US,
which Synerject acquired in March 2006, contributed US$15.2 million
of the increase. This implies 15 percent growth in Synerject's underlying
revenue. What were the key drivers?
CFO Keith Halliwell
We're pleased with
Delavan's sales contribution, which is in line with plan. The increase
in Synerject's underlying revenue was attributable to a range of
factors. In particular, revenue from new products increased and
engineering revenue was up reflecting work on a number of electronic
management system (EMS) applications for various customers.
corporatefile.com.au
Synerject's earnings
are typically stronger in the second half of the financial year.
How do you expect your net profit share of Synerject's earnings
in the current second half to compare with your $3.3 million share
in the previous corresponding period?
CFO Keith Halliwell
We expect earnings
be under pressure in the second half. Synerject will commence manufacturing
in China during the period and will bear the related start-up costs.
Initial production volumes will be low but will carry the full fixed
overhead cost. Engineering costs relating to the launch of new products
will also be incurred in this period.
corporatefile.com.au
Synerject was due
to start paying dividends of 45 percent of profits after tax to
its joint-venture partners semi-annually from the December 2006
half-year. Can you comment?
CFO Keith Halliwell
Synerject has a softer
first half than second half, and its profit after tax in the first
half, after increased costs relating China, didn't support the payment
of a half-year dividend. Nevertheless, we expect the first dividend
to be paid at the end of the financial year, based on Synerject's
full-year profit.
corporatefile.com.au
Orbital's Royalty
and Licence income was $1.1 million in the first half, down from
$1.2 million in the previous corresponding period. Can you comment
on the results of the release of a pilot production run of autorickshaws
by Bajaj, an Orbital licensee in the Indian market? What's the outlook
for Royalty and Licence income for the remainder of the year?
CEO Rod Houston
We anticipate an
increase in Royalty and Licence income for the full year, however
the final figure will be dependent on the timing of the Bajaj autorickshaw
launch.
We haven't had any feedback on the pilot vehicles from Bajaj at
this stage.
corporatefile.com.au
Orbital had total
expenses, excluding the Coles Myer settlement, of $8.7 million in
the first half, up 20 percent from the previous corresponding period.
The increase was primarily attributable to a rise in personnel expenses
to $5.0 million from $4.0
million. What's the rationale behind the increase in personnel expenses
and what's the expected trend in expenses going forward?
CEO Rod Houston
The increase in personnel
expenses was a reflection of the increased level of Engineering
Services revenue, which rose by over 100 percent. We'll continue
to manage these expenses in line with our overall revenue growth.
corporatefile.com.au
Excluding the Coles
Myer settlement, cash flow from operations was $0.5 million compared
with outflow of $2.0 million in the previous corresponding period.
What's the outlook for cash flow over the remainder of the year?
When will the business be in a position to generate positive cash
flow on a sustainable basis?
CFO Keith Halliwell
The improved cash
flow in the first half reflected the increase in our Engineering
Services income. The outlook for Engineering Services in the second
half is positive and we'd expect the business to continue to underpin
our day-to-day cash flow.
As I mentioned earlier, we expect Synerject to pay its first dividend
shortly after year-end, and ongoing Synerject dividends, together
with a stable Engineering Services business and continuing royalties,
will provide sustainable cash flow for the company.
corporatefile.com.au
Can you comment on
the progress of Orbital's R&D in the areas of alternative fuel,
and gaseous fuel engines? What has been the progress in your development
of the "next generation" Orbital DI system?
CEO Rod Houston
We continue to invest
for the future with good progress in developing Orbital technology
for alternative fuels, including compressed natural gas (CNG) and
liquefied petroleum gas (LPG). These developments have generated
new levels of interest in Asia in both our engineering services
and our technology. We're also now running engines with hydrogen
on the Orbital DI system and this is expected to generate significant
interest.
We're making very good progress in developing the "next generation"
Orbital DI system. Our target is to develop a fuel system portfolio
that can deliver various fuels including CNG, LPG, kerosene, diesel
and ethanol.
corporatefile.com.au
Orbital had cash
on hand of $12.0 million at the end of December, up from $3.3 million
six months earlier, reflecting a share placement in November and
share purchase plan in December that together raised $8.8 million.
You've indicated the capital will be used partly to pursue growth
opportunities. Can you comment on the opportunities available to
the company?
CEO Rod Houston
The cash will help
to cover our working capital needs as we expand our Engineering
Services business. We see very good growth opportunities in India
and China and we're exploring a number of new markets and alliance
opportunities which would fit with our overall growth strategy of
expanding our engineering and technology capability. An example
of this is the move into the engineering applications of CNG for
the heavy duty truck market.
corporatefile.com.au
Thank you Rod and
Keith.
DISCLAIMER:
Corporate File Pty Ltd has taken reasonable care in publishing the
information contained in this Open Briefing®. It is information
given in a summary form and does not purport to be complete. The
information contained is not intended to be used as the basis for
making any investment decision and you are solely responsible for
any use you choose to make of the information. We strongly advise
that you seek independent professional advice before making any
investment decisions. Corporate File Pty Ltd is not responsible
for any consequences of the use you make of the information, including
any loss or damage you or a third party might suffer as a result
of that use.
|
