|
22 August 2003
OPEN BRIEFING
CEO on Improved Result, Outlook
ccorporatefile.com.au
Orbital Engine Corporation Limited yesterday
reported a net loss of $1.9 million for the year ended June 2003,
compared with a loss of $26.8 million in the previous year. Excluding
non-recurring items, Orbital generated cash from operations, with
positive EBITDA of $3.4 million in the second half, compared with
an EBITDA loss of $1.9 million in the first half. What's the outlook
for earnings in the current year to June 2004?
CEO Peter Cook
Expense reduction was our key thrust in 2003
and you'll see the full impact of that in 2004. Beyond that, it's
difficult to forecast in the current environment. We do expect some
growth in revenue but that's never guaranteed, and of course there's
an impact on our results from forex and that's very difficult to
forecast. But we're confident the cost reductions we implemented
in 2003, while substantially completed, will fully flow through
in 2004 and improve our overall results.
corporatefile.com.au
Orbital recently raised a total of $5.9 million
via a share placement and the offer of a share purchase plan to
existing shareholders. The funds were raised to place Orbital in
a better position to win major programs of work. How do you expect
access to larger projects to affect cash flow and earnings going
forward?
CEO Peter Cook
We're anxious to sell larger and particularly
longer-term projects to our customers in order to access more stable
and longer-term income streams. We felt that concern about our financial
stability may have created a potential obstacle to that and we believe
our stronger financial position will help to build client confidence.
Time will tell whether we've been successful, but I'm comfortable
we've made a step in the right direction.
corporatefile.com.au
Does Orbital directly fund this work?
CEO Peter Cook
In this area, we work on a fee-for-service
basis and receive progress payments all the way through a project.
We do attempt to balance our expenditure with our cash receipts
and it would only be in very rare circumstances that didn't occur.
corporatefile.com.au
Overhead expenses fell to $19.5 million from
$25.4 million. What scope is there to further reduce overheads in
the current year?
CEO Peter Cook
The major cost reductions, including redundancies,
were completed at various stages through 2003 so the full, annualised
benefit will show up in 2004. Whilst I wouldn't rule out some smaller
overhead reductions, they'll have appreciably less impact than the
$6 million worth of overheads we took out of the business in 2003.
corporatefile.com.au
Synerject, your 50:50 joint venture with Siemens
VDO Automotive contributed profit of $1.4 million for the year,
compared with a loss of $3.1 million previously. However, the second-half
contribution of $0.7 million was unchanged from the first half.
How did your restructuring of Synerject, effective April 2003, affect
its earnings over the year?
CEO Peter Cook
Historically, Synerject's earnings have been
skewed toward the first half but we expect the expanded business,
which now includes our marine and recreation systems business and
Siemens VDO's non-automotive systems business, to generate more
evenly balanced earnings across the first and second halves. That
trend started to emerge in 2003 even though the new structure was
only in place for the last quarter of the year. We'd expect the
trend to be more pronounced this year.
corporatefile.com.au
System sales fell 18 percent to $29.3 million
in 2003 and will be further significantly reduced in 2004, reflecting
the transfer of the marine and recreation systems business to Synerject.
What's the expected impact on net profit in the current year?
CEO Peter Cook
This is a slightly awkward transaction to understand
because previously both we and Synerject reported the same system
sales and our respective portions of the profit. In future, all
system sales will now be reported within Synerject, including the
profit, and our accounts will reflect our 50 percent share of Synerject's
increased net profit.
In 2004 under the new structure, Orbital's system sales will be
zero. We expect minimal impact at EBIT level because even though
there's a loss of turnover and margin, we've been able to achieve
cost reductions that will compensate, most notably through the closure
of our operations in Newport News in the US. At the same time, Synerject
will pick up the incremental profit and get some synergies as a
result.
corporatefile.com.au
What are the growth opportunities for Synerject?
CEO Peter Cook
Synerject has achieved solid growth and is
now a US$40 million turnover business. Synerject's achieving that
growth because it occupies a unique position as a specialist parts
and systems supplier to the non-automotive market, a sector which
has lagged the automotive market in adopting electronic engine management
systems. That process is underway and as the only specialist company
in this area globally, Synerject is seeing substantial growth.
We're hopeful that conversion will continue
and that Synerject's unique position in the marketplace will remain
unchallenged, at least for a period of time. That should allow it
to continue achieving solid growth.
corporatefile.com.au
Orbital's engineering services income increased
15 percent to $10.1 million in 2003. What was the profit contribution
of this sector of the business during the year and how is it positioned
in terms of profitability and growth going forward?
CEO Peter Cook
At $10 million turnover, the engineering services
business is about breakeven, which is what we've managed to achieve
out of our restructuring and refocusing of the business over the
past year.
The indications are that the turnover can be
improved and that we can achieve higher turnover with no increase
in costs. We're hopeful that some additional small overhead reductions
can be achieved, which will have a positive impact on the overall
performance of the business this year.
corporatefile.com.au
What are the drivers of external demand for
Orbital's engineering services?
CEO Peter Cook
There are three underlying drivers that give
us confidence in the sector. First, we now have a wider engineering
services product offering than simply the traditional Orbital combustion
process, which two years ago was all we were setting out to sell.
Second, there's as much interest now among
OEMs in Orbital's combustion process as there ever has been. And
remember, it's OEMs looking to understand how OCP works on their
engines that write business for us. So that underpins a reasonable
amount of our turnover.
And thirdly, a point that shouldn't be overlooked,
there seems to be an increasing propensity for OEMs to outsource
the engineering services we provide. With the objective of keeping
their own fixed costs under control, they're looking to outsource
varying proportions of their work, particularly peak loads, and
we're a beneficiary of that trend.
corporatefile.com.au
Orbital's royalty income rose to $3.2 million
from $2.7 million, while licence income fell to $0.7 million from
$3.8 million. What were the drivers of these trends and what's the
outlook for royalty and licence income in the current year?
CEO Peter Cook
The reality is that licence income's lumpy
and there's no discernible "trend." We feel that around
$1 million a year would be a reasonable average.
On the issue of royalties, our income's a function
of the number of models incorporating our technology and the success
of those models in individual markets, for the OEMs.
We'd cautiously forecast some growth in our
royalty income because the number of models using our technology
has increased. History indicates that individual models can succeed
or fail, not necessarily because of our technology, but seasonal
effects, for example a good summer, increase sales of jet skis and
boats.
Also, we're just completing the second summer
season of sales of four of the scooter models that carry our technology
in Europe. So the outlook depends partly on whether in the third
season the OEMs are able to get even further growth and market penetration
from those models.
corporatefile.com.au
In February, you announced a technology cooperation
agreement with Indian parts and systems maker UCAL. What progress
has been made in getting Orbital's technology accepted by Indian
motorcycle and 3-wheeler manufacturers?
CEO Peter Cook
Our engineering programs appear to be delivering
the required results for the OEMs and UCAL continues to encourage
us that it's on track in its initiatives with the OEMs in the Indian
market.
corporatefile.com.au
Orbital had an equity deficiency of $12.0 million
at the end of June 2003. No value is ascribed to the OCP technology
on the balance sheet. What benchmarks should investors look to as
a guide to the value of the technology?
CEO Peter Cook
Bear in mind that the deficiency exists for
more than one reason. One is a $19 million interest-free loan and
that's the substantial part of our liabilities. It doesn't require
repayment, except in unusual circumstances, before 2014 although
it is carried as a loan.
And as you've pointed out, our intellectual
property is carried at zero value. It's particularly difficult to
put a value on it but we'd steer investors to look to our licence
fees and royalties, which are currently generating about $4 million
a year. That income is derived entirely from our intellectual property.
corporatefile.com.au
Yesterday you also announced the appointment
of a new Chairman, Don Bourke, to replace Ross Kelly, who is retiring.
What skills and attributes does Don bring to the business?
CEO Peter Cook
Don has extensive commercial experience at
both an executive level within Ford Australia, Consolidated Press
and Davids Holdings as well as at board level with Crown Casino,
Olex and Australian Technology Group.
Don's experience, particularly with the commercialisation of start-up
IT and technology ventures, will be particularly valuable as Orbital
continues to commercialise its technology.
corporatefile.com.au
Thank you Peter.
|
