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22 February 2006
OPEN BRIEFING
CEO and CFO on FY06 Outlook
corporatefile.com.au
Orbital Corporation
Limited today reported a net loss of $1.4 million for the first
half ended December 2005 compared with a net loss of $1.8 million
in the previous corresponding period. You're confident about prospects
for the second half and anticipate a full-year profit. Where is
the strength coming from in the second half?
CEO Rod Houston
We've had an increase in our engineering services
orders in the first half and as these programs ramp up they'll add
significantly to our second-half performance. Also Synerject's revenue
streams are traditionally seasonal, with stronger performance in
the second half as customers build product for the northern hemisphere
summer.
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What factors might prevent you from achieving
in the second half a level of profit that would result in a full-year
profit?
CEO Rod Houston
There are always some variables in respect
to our business which create some risk, in particular our ability
to manage the start-up timing of some major engineering programs
due to changes dictated by customers' timelines. Also, Synerject's
new acquisition will take a little time to bed down. We've taken
these into account and on current projections expect to be profitable
for the full year.
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Total expenses declined by almost $0.9 million
to $7.2 million in the first half. Do you anticipate further reductions
in the cost base, or are the full benefits of last year's restructuring
already contributing?
CFO Keith Halliwell
We didn't see the full impact of the cost savings
in the first half. However, the further savings we'd expect over
the full year will be offset to a certain extent in the second half
by some increases in certain engineering resources that we require
to service our increased order book. We're pleased we've already
exceeded our target of annualised cost reductions of $1 million.
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Synerject, your 50:50 joint venture with Siemens
VDO, contributed after-tax earnings of $0.8 million to the first-half
result, down 14 percent from the previous corresponding period.
To what extent does the result reflect the operational performance
of Synerject?
CFO Keith Halliwell
It's a fair reflection of the first-half operating
performance. There have been some increased costs in Synerject as
a result of an anticipated increase in annual turnover and on a
full-year basis we'd expect to see increased sales as well as an
improved result year on year.
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What's the outlook for Synerject's earnings
for the full year and what's the expected contribution to earnings
of the BRP engine management modules facility Synerject will acquire
in March?
CEO Rod Houston
The outlook for Synerject is very positive,
with growth expected on a full-year basis. The new acquisition is
anticipated to be profitable from the outset. On an annualised basis
it will increase Synerject's revenue by more than 50 percent compared
with revenue in the June 2005 year of US$42 million.
corporatefile.com.au
Do you expect the BRP facility, which is based
in Delavan Wisconsin in the US and manufactures electronic components
for BRP to contribute to growth going forward?
CEO Rod Houston
Yes, we expect good things from this acquisition.
The E-TEC® system components are one of the key products from
this facility; BRP has switched over to this system as its main
product for 2-stroke outboards and certainly the business plan Synerject
has drawn up as a result of its due diligence shows there are good
growth prospects for a range of products. This would increase throughput
and therefore improve margins.
corporatefile.com.au
A 9 percent fall in Powertrain Engineering
Services (PES) revenue to $3.4 million produced a loss of $0.3 million
in the first half, reduced versus a loss of $0.4 million in the
previous corresponding period. To what extent is this revenue performance
a result of cutbacks by Orbital's traditional automotive customers?
CEO Rod Houston
We've certainly been impacted by the downturn
in some of our traditional automotive customers, which started over
18 months ago. Our focus on emerging markets such as China and India
has led to the recovery of our order book. On top of this, we saw
an increase in programs for the application of our Orbital direct
injection (DI) technology in new products in this period.
corporatefile.com.au
You've indicated that PES has secured $9 million
of engineering contracts since the beginning of the current year,
including contracts in China and India. When do you expect to book
revenue from these contracts and what are your earnings expectations
for PES for the full year?
CEO Rod Houston
The new programs are long term and will provide
significant revenue streams over the next 18 months. The start-up
phases of these programs will provide earnings in the second half
and should enable us to improve our PES revenues compared with the
same period last financial year.
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What's the outlook for the PES business in
the Chinese and Indian markets? What type of projects are the most
prospective in these new markets and can the Chinese and Indian
markets fully offset the apparent downturn in PES's traditional
markets?
CEO Rod Houston
The outlook for engineering services in these
markets is positive. We have a good selling proposition as a technology
provider with Orbital DI and as an independent powertrain developer
that can deliver complete turnkey programs as well as provide extensive
on-the-job training. We see good prospects for further growth and
will be increasing our marketing and business development activities
in these markets. Our intent long term is to make the Chinese and
Indian markets additional to our traditional markets.
corporatefile.com.au
Royalty and Licence income increased 35 percent
from the previous first half to $1.2 million. What contribution
do you anticipate from the recently signed Polaris deal and what's
the outlook for Royalty and Licence income over the remainder of
the year?
CEO Rod Houston
In the second half we expect a similar pattern
to the first half. In the outboard engine industry Mercury is performing
well and has recently announced a new flagship 300 horsepower (XS300)
Optimax engine along with a new range of upgrades across the existing
range of Optimax engines. These upgrades along with recent industry
awards for Optimax are anticipated to be good for overall sales
in this market.
In regard to royalty income from Polaris, we
don't expect a contribution to revenue this year. This is part of
our future royalty growth opportunities.
corporatefile.com.au
Cash flow from operations was negative $2.0
million in the first half, compared with negative $2.5 million previously
and cash on hand fell to $6.0 million at the end of December from
$9.3 million at the end of June. What cash requirements do you foresee
to fund the business for the rest of this year?
CFO Keith Halliwell
We anticipate our operations in the second
half will be cash flow positive on the improved engineering services
pipeline. As we mentioned earlier, we'll continue to enjoy the benefits
of our overhead cost savings and we don't anticipate any cash requirements
relating to restructuring. We had restructuring costs of $299,000
in the first half which won't be repeated in the second half.
corporatefile.com.au
Your $19 million interest-free loan from the
Western Australian State Government was written down at the end
of December 2005 to $12.5 million under AIFRS and an expense of
$311,000 applied in the first half relating to the unwinding of
the discount. What will be the impact of the AIFRS treatment on
earnings and cash flow?
CFO Keith Halliwell
I'd emphasise that the accounting change will
have no impact on our cash flow. Going forward we'll account for
a non-cash charge relating to the unwinding of the discount, which
in the current year will be approximately $625,000.
corporatefile.com.au
You've highlighted the commencement in the
recent first half of a number of programs for the application of
OCP technology to new products. What's the ongoing cost associated
with these programs and what are the expected future returns?
CEO Rod Houston
The good news is that the majority of these
OCP programs are fully funded and hence don't add ongoing costs.
The programs will deliver future returns via engineering services
revenue, royalty streams and Synerject revenue streams from the
sale of engine management systems and other components.
corporatefile.com.au
Thank you Rod and Keith.
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