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23 February 2005
OPEN BRIEFING
CEO on H1 Results & Outlook
corporatefile.com.au
Orbital Corporation Limited today reported
a net loss of $1.5 million for the first half ended December 2004
compared with profit of $2.1 million in the previous corresponding
period. You'd previously flagged a loss of between $1.5 million
and $1.9 million in the first half. What were the factors that contributed
to the loss being at the smaller end of the forecast range?
CEO Peter Cook
As we'd indicated to the market, the first
half carried some timing issues for us. The solid underlying result
in the previous first half was helped by some very favourable one-off
events, which were always going to make the recent first half a
difficult one in comparison.
However, the major factors that contributed
to the loss being at the lower end of the forecast range were first,
our concerted effort to deliver early on a couple of major powertrain
assignments and second, the favourable movement of the Australian
dollar. Remember, a strengthening Australian dollar is positive
for our results. Nevertheless, I should point out that there were
similar currency movements last year, with an even greater impact
on the December 2003 half, when forex gains contributed more than
$800,000 to the result.
corporatefile.com.au
You've also reconfirmed that you expect to
return to profit in the second half ending June 2005. What level
of earnings are you expecting in the second half and do you expect
to report a profit for the full year ending June 2005?
CEO Peter Cook
We expect a return to profit in the second
half based on the stronger Powertrain Engineering Services (PES)
pipeline, expected new product releases, and our view that the Synerject
result should be an improvement over the first half, even if only
due to seasonal factors.
That said, we're dependent upon sales yet to
be achieved in PES and the receipt of royalties, particularly in
the marine sector. In the latter area, a recent anti-dumping case
relating to outboard engines has been rejected in the US, and whilst
Mercury Marine assures us it will be business as usual, I'd prefer
to see the trends of the summer season emerge before I give advice
to the market about full-year earnings. I'd add that the pipeline
and prospects look encouraging.
corporatefile.com.au
What are the risks to achieving profitability
in the second half?
CEO Peter Cook
Whilst our prospects are very encouraging,
the two major risks are royalty volumes in the marine sector not
being as strong as expected and new powertrain engineering contracts
not being secured as expected.
corporatefile.com.au
Synerject, your 50:50 joint venture with Siemens
VDO, contributed after-tax earnings of $0.9 million to Orbital's
first half result, up 4 percent from the previous corresponding
period. In US dollar terms Synerject's profit was up 10 percent.
Given Synerject's US dollar earnings tripled in the 2004 financial
year, to what extent is the first-half result indicative of a slowing
in Synerject's underlying business?
CEO Peter Cook
A significant portion of Synerject's growth
in 2004 was from the restructuring we put in place in the previous
year. So in constant currency terms, Synerject's 10 percent growth
in the recent first half was delivered over and above a very significant
increase in the previous year. Given the high base of the 2004 year,
we see the level of growth as very positive, and incidentally, far
more indicative of the underlying growth of the business.
Synerject's underlying growth prospects are
also very good. Its market is the conversion of current, typically
carburetted non-automotive engines to electronic engine management
control, whether port injected or direct injected. That conversion
process is only just beginning and the market is quite large. I'd
also point out that Synerject is very active in ensuring it's in
a position to benefit from the forecast growth in the conversion
process in Asia.
corporatefile.com.au
The reduction in your balance sheet provision
for borrowings of Synerject to $2.6 million at the end of December
from $3.9 million six months earlier indicates the joint venture
has continued to repay debt. Is Synerject continuing to perform
in line with your cash-flow and earnings expectations?
CEO Peter Cook
To date, Synerject has continued to meet or
exceed our expectations in terms of both EBIT and cash flow. There
are some timing issues with revenue at the calendar year end, but
we're satisfied Synerject will meet our forecast for the current
fiscal year.
corporatefile.com.au
What's the outlook for Synerject's earnings
for the full year?
CEO Peter Cook
Indications from Synerject's key customers
are encouraging. Synerject's revenue always favours the second half
as it's dependent on certain seasonal factors, including the summer
build cycle for both outboards and scooters. However, I'd like to
see an additional couple of months of orders before offering a firm
view on revenue for the full year.
corporatefile.com.au
A fall in PES revenue, which was down 40 percent
to $3.7 million, pushed the business into a loss of $0.4 million
in the first half, compared with profit of $1.2 million previously.
The forward order book stood at $4.9 million as of the end of December.
What has driven the relatively strong forward orders and when will
they translate into revenue?
CEO Peter Cook
We're in the process of building and growing
our Powertrain Engineering business to create a strong third stream
of turnover and profit to complement our Royalty and Licence income
and our share of the Synerject earnings. We started on this strategy
two and half years ago and until the recent first half, the business
had achieved revenue growth in every half. There were timing issues
with forward orders in the half and in part they can be attributed
to the recent caution amongst some of the world's auto makers in
a period that saw the Mitsubishi Motors shake-up, the global expense
reductions and restructuring at General Motors, and the uncertainty
surrounding the Fiat ownership arrangements in Italy.
By comparison, conditions are buoyant in China
and opportunities are being created there. We expect to participate
in those opportunities and turn those into revenue within the next
12 months.
Typically our forward orders have a time horizon
of about three months, depending of course on the type of projects.
Our current order book includes some projects that will straddle
12 months, so not all the $4.9 million will translate into revenue
in the March quarter. However, we were comforted at the end of the
first half to be carrying a firm set of orders that was in excess
of the revenue we booked in the period. We see reason to be positive
about the second half.
corporatefile.com.au
You've indicated a focus of the PES business
is the Asia-Pacific market. What level of revenue currently comes
from this region and what makes it particularly attractive to PES?
CEO Peter Cook
Our prospects in Asia-Pacific look very promising
and our outstanding quotations in the region are at their highest
level ever. Clearly China is a significant driver, but the region
is generally very strong, including India. Asia-Pacific's attractive
to us because as a number of our other markets in the world are
contracting, this market is expanding. And it's relatively simple
to service, being in the same time zone as us.
corporatefile.com.au
What are your earnings expectations for PES
for the full year?
CEO Peter Cook
The prospects are very promising. We have our
highest level ever of outstanding quotations and our order book
is reasonably strong. However at this stage, I'm not comfortable
giving any firm indication of earnings.
corporatefile.com.au
How might you mitigate the volatility in PES's
revenue streams and do you foresee a need to further cut the cost
base of the business?
CEO Peter Cook
One of the characteristics of an outsourced
engineering services business is that work flow is never totally
smooth. Outsourced services are used to handle overflow, which by
its nature is stop-start. We try to smooth the flow of work by taking
from a diverse group of clients, not all of whom will be in overload
at the same time, and by flexing both the lead time and the resources
we deploy on project delivery. As a result, we keep our cost base
under constant review, not only in absolute terms - the amount of
resources we have and apply to jobs - but also in terms of the skills
mix because every job is different.
corporatefile.com.au
Royalty and Licence income was $0.9 million,
down 52 percent from the previous first half. To what extent did
the result reflect the impact of currency moves, and to what extent
softness in underlying markets?
CEO Peter Cook
We secured two significant licence payments
early in fiscal 2004, which boosted our results in the previous
first half. Licence payments are infrequent as we usually only receive
one licence payment from any single licensee, although we'd expect
to see royalties from that licence flow for many years after. We
expect one of the licences we won in the previous first half, the
UCAL-Bajaj licence for the auto rickshaw market in India, to generate
significant royalties in the future, but they won't start until
December 2005.
The recent first half was also impacted by
smaller than expected European scooter market royalties. In comparison,
we're seeing improvements in our outboard engine volumes and we
have two licensees due to come into production during calendar 2005,
Kymco in Taiwan with a 100cc scooter and Bajaj in India. Against
that, the currency's impact has been comparatively minor.
corporatefile.com.au
Cash flow from operations was negative $2.5
million in the first half, compared with negative $0.3 million previously
and cash on hand fell to $9.3 million at the end of December from
$12.4 million at the end of June. What do you regard as the minimum
cash-on-hand requirement of the business and what's the outlook
for cash at the end of June 2005?
CEO Peter Cook
As we've been stabilising the business, our
target has been to achieve cash neutrality. Clearly we've needed
a buffer of cash reserves from time to time to handle working capital
movements and to allow us to cope with the timing of certain large
powertrain assignments. Cash neutrality remains our target and I'm
hopeful we can soon get into a reliable cash-generating position.
Remember we achieved exactly that during fiscal 2004, so it's not
too far fetched a demand.
corporatefile.com.au
In light of the disappointing first-half result,
do you believe there's a need to further restructure the business
or to review your strategy for the longer term?
CEO Peter Cook
Certainly we see the first-half results as
disappointing, but I'd add not surprising. The business has undergone
profound change in the last couple of years and until this half,
every result has indicated that our strategy's the correct one.
Of course with an organisation undergoing such profound change,
it's not always plain sailing. That doesn't mean we can't improve
on the implementation of our strategy, nor does it imply the strategy
can't be extended or higher priority given to certain aspects of
it. For example, the board has already made it clear that within
very specific guidelines, including being a solid fit with our current
business, being earnings accretive to our shareholders and being
cash positive, we'd consider an appropriate acquisition. But I'd
stress that this would be to strengthen and accelerate the progress
we've achieved, not to be an alternative to it.
corporatefile.com.au
Thank you Peter.
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