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23 October 2003
AGM SPEECHES
CHAIRMAN Mr Don Bourke: Significant
change has occurred in the Company in the last 12 months, such that
after reporting losses of close to $27m in each of the previous
2 years, the Company has been able to report a second half operating
profit of $1m this financial year.
This change has occurred largely as a result
of stringent, but necessary, measures that were introduced to contain
costs and reduce cash outflows. In addition, the restructuring and
refinancing of Synerject, our joint venture with Siemens VDO, was
undertaken during the year.
The success of these measures can be gauged
from the results, particularly the 23% reduction in overheads from
$25.4m in the 2002 year to $19.5m in the 2003 year and the second
half operating profit.
The Company raised capital of approximately
$6m after costs in June and July of this year by way of a share
placement to institutional investors and a share purchase plan for
eligible shareholders. Participants in the capital raising have
been rewarded with a healthy increase in the Company's share price
since that time.
The capital raising and the annual result provide
a sound foundation for the future development of your company and
were significant factors in my decision to accept the role of Chairman.
Strategic Review
While the focus on cost containment and cash
flow will continue, we have commenced a broad review of the Company's
strategic direction to ensure that we are well placed to capitalise
on both the opportunities available for commercialisation of our
OCP technology and the significant engineering expertise within
the Company.
The review will consider all sections of the
business for growth prospects and profitability. Specifically, we
will look at:
- Available facilities and resources and how
they can be best utilised.
- Expanding the
services and/or products offered, including engine development
work for third parties.
- Expanding our
geographic coverage, particularly in the Asian region where cost
and time factors provide us with a competitive advantage over
European and US service providers.
- Expanding the
application of our OCP technology, particularly in relation to
4-stroke engines.
- Determining the
cost effectiveness of our technology in relation to competing
direct injection technologies and the impact of factors such as
volume increases and supply location on the ultimate cost to our
licensees. We aim to be in a position where we can readily demonstrate
to potential users of our technology that the significant fuel
savings and emissions reductions obtained from the technology
can be gained at a modest cost increase.
- Whether our existing licensing strategy
needs to be modified in the current economic and commercial climate.
Corporate Governance
Your Board is absolutely committed to best
practice corporate governance procedures. We strongly support current
developments in corporate governance and in recent months the Board
has reviewed its corporate governance framework to ensure ongoing
compliance with appropriate standards in both Australia and the
US and will continue to do so.
While on corporate governance issues, retirement
payments to non-executive directors is a subject that has generated
much discussion in recent times. I am pleased to report that as
far back as late 1998, your Board determined that it was not appropriate
to make such payments and, accordingly, no retirement payments have
been made to non-executive directors (including Ross Kelly) since
that time. Neither I, nor any of the current non-executive directors
have any entitlement to retirement payments.
Ladies and Gentlemen, 2003 has been a defining
year for your company. While a lot has been done, there is still
much to do to build on the company's current position.
The directors are conscious of their obligation
to restore value to shareholders and will be working towards that
goal in the current year and beyond. I look forward to playing my
part in that process.
Thank you.
CHIEF
EXECUTIVE OFFICER Mr Peter Cook:
It's a pleasure to be addressing my second annual general meeting
of the company. On one hand, the time between AGM's has passed remarkably
quickly and it seems almost like yesterday that we were crammed
in with insufficient seats at the Old Swan Brewery. However, on
the other, reflecting on the scale of transformation that has been
achieved and the effort that has been involved by the board and
management team and considering each one of those critical steps
needed for that transformation, one at a time, it has been a long
road. Today's purpose is to bring the highlights of those changes
to the shareholders attention and outline the objectives for the
new fiscal year.
However, before we press on with that, I would
like to extend personal thanks to Ross Kelly, who retired from the
Board and as Chairman on August 21, this year. Ross made it abundantly
clear to me when I took up the appointment as CEO that a turn around
in Orbital was required. Ross's guidance, his availability for discussion
and the clarity of his and the Board's requirements made the task
a little easier. Similarly, Don's appointment as Chairman is welcome
and I have enjoyed the style, approach and competence he has already
brought to the Board.
Financial Details
The major financial highlights were
- Profit after
tax of $ 1.0 million in the second half.
- Significantly reduced loss for the full
year of $1.9 million, compared to a $26.8 million loss in each
of the previous two years.
- Engineering revenue increased 15% to $10.1
million.
- Royalty income increase 19% to $3.2 million.
- System sales down due to transfer of M&R
Systems business to Synerject in last quarter.
- Licence revenue, typically volatile, was
$0.7 million compared to $3.8 million in FY02.
- Overheads reduced a further 23% to $19.5
million due to past restructuring initiatives.
- Orbital's share of Synerject's profit was
$1.4 million compared to a $3.1 million loss last year.
- Cash burn was reduced to almost zero ($0.3)
million in the second half, excluding any capital raisings, compared
to ($7.1) million in the first half, ($8.2) million in the 6 months
to Jun 02 and ($10.7) million in the 6 months to Dec 01.
- Four successive halves have demonstrated
an improving EBITDA (earnings before interest, tax, depreciation
and amortisation) with a positive $1.8 million being achieved
in the last half and positive for the year.
These results are encouraging on most fronts.
They demonstrate that we have been able to stabilise the business
in its current form, even deriving royalty income from only relatively
low volume, niche applications of our technology in marine, recreation
and motor scooters, and importantly, achieving growing revenue from
our Engineering Services activities.
Major highlights of the year are as follows.
Major activities during FY 03
Engineering Services
Engineering services are a significant area
of revenue, achieving $10.1 million in turnover in F03. In the past,
it has also been the major area of cost; partly facilities, but
mainly headcount. That imbalance was addressed during FY 03 through
the following initiatives.
- Strengthening of the sales activities with
a better focused and trained team, supported with better systems
and controls, and improved relationships with key accounts. Prospects
are more rigorously qualified and as a consequence, a higher success
rate is being achieved.
- Continuation of cost control, i.e. right
size and right skills for our clients' needs.
- Improving the performance of on time, on
cost delivery of all engineering service work, through a better
project management discipline.
The result of these initiatives has been to
improve turnover and bring the engineering services to break even
in F03. A number of major programs were secured during the year
including some over a million dollars. The most visible of these
has been the Ethanol E20 program for the Federal Department of Environment
and Heritage. Most of the programs however, relate to the adaption
of Orbital's proprietary technology onto specific engine models
for the OEMs. Turnover in this area should be able to be improved
further in F04, without an increase in resources, bringing the engineering
group into profit.
Synerject Restructure
This time last year Synerject's financial recovery
and the refinancing of its lines of credit were both major unresolved
issues. The last AGM was advised that negotiations were underway
on these matters with Siemens-VDO, our Synerject JV partner. The
restructuring was successfully completed on April 1st 2003 and appropriate
financing was put in place until 30 September 2006.
This major accomplishment along with the continued
profitable performance of Synerject, has removed considerable uncertainty
from Orbital's business and more importantly, these Synerject arrangements
have created a platform for the development of a valuable asset
for shareholders through our 50% ownership.
The restructuring included:
- The addition of Orbital's M&R
Systems business, with future turnover and profit to be reported
through Synerject.
- The addition of Siemens-VDO's non-automotive
systems business.
- Orbital and Siemens-VDO to remain
50/50 owners.
The impact of this restructure
- Reduces operating costs to Orbital
estimated at $600k pa through the closure of our US facilities.
- Reduces Orbital's system sales turnover
to zero from this fiscal year.
- Provides operating synergies to Synerject
- Provides Orbital with a 50% share
of the profit from the Siemens-VDO non-automotive business, and
- Diversifies Orbital's technology and
business risk.
Orbital equity accounts for its ownership
of Synerject, that is, it shows half of Synerject's profit (or loss)
as a single line entry on Orbital's profit and loss statement. In
FY03 Orbital's share of the profit was $1.4 million compared to
an FY02 loss of $3.1 million.
While all of this restructuring was being completed,
and thereafter, Synerject has continued with its improved performance.
Synerject has achieved:
- Revenue increase of 50% to just under US
$ 40 million annually
- Positive cash flow for approximately 18
months.
- Working capital requirements well within
the available line of credit.
- Minimal capital expenditure requirements.
UCAL
During the year we announced a manufacturing
and distribution license with UCAL, an Indian components manufacturer
and a major supplier to the key domestic two and three wheeler OEMs
in India.
The UCAL licence is an important milestone
in Orbital achieving a successful entry into the Indian market.
India has a large domestic market for two and
three wheel vehicles, with a volume about twice that of Europe's.
This market has successfully been developed by four local producers
and a very limited number of smaller joint ventures. Additionally,
the Indian government has a global pricing policy for petrol and
have indicated they intend to progressively adopt stringent emissions
standards. Both factors are positive for our fuel economy and improved
emissions technology.
However, India is a cost sensitive market and
provides significant tariff protection to its domestic producers.
To be successful in India, Orbital requires a competent local manufacturer
who is able to meet local costs and provide local support to the
domestic OEMs.
UCAL is such a company and should be progressively
establishing licenses with targeted local OEMs over the next year
or so. UCAL have moved to the second stage of their license contract
with Orbital and they continue to make technical progress with the
programs they have underway with the OEMs.
Capital Raising
The capital raising, completed early this year,
was undertaken to strengthen the balance sheet and limit any concerns,
real or imaginary, that potential customers or licensees may have
had with respect to our overall financial stability.
Before asking shareholders for further support, it was considered
important that our cash burn rate had been reduced and something
approaching cash neutrality had been achieved.
The strengthened balance sheet was important
to a number of major customers, particularly those overseas considering
reasonably large programs with us. These issues were not only restricted
to overseas clients, but the Federal Department of Environment and
Heritage, had a similar approach and required financial guarantees
be put in place, before confirming our E 20 program.
The Board were gratified by the response received
from both the Share Placement Program and the Share Purchase Plan
and the subsequent favourable movement in share price. The capital
raising also provided Orbital with the opportunity to reintroduce
the stock to a number of institutions and reacquaint them with progress.
Unfortunately, US domiciled shareholders were
not able to take part in the placement. US laws would have required
a full prospectus be prepared before they could participate and
that would have eroded much of the capital raised. It is unfortunate,
as our US shareholders continue to support our stock and now represent
approximately 40% of our total shares on issue.
NYSE Listing
The 30% drop in the market capitalisation of
the New York Stock Exchange listed companies over the last eighteen
months up to the end of calendar 2002 had an inevitable impact on
a number of listed companies. Share prices of at least US$1.00,
market capitalisation of above US$50 million and shareholders equity
above US$50 million are just some of the ongoing listing requirements
set by the NYSE. The general downturn of the market saw Orbital
and a number of other larger companies affected.
The NYSE's requirements under such circumstances
require the affected company to submit a business plan designed
to address the specific areas of non-compliance with the listing
requirements. Clearly the NYSE cannot evaluate forward share prices
and hence market capitalisation, but issues such as shareholder
equity and share price through, in our case, alteration of the ADR
ratio are closely evaluated. The business plan process was completed
and by early January this year Orbital received positive comment
from the NYSE in relation to that plan. As part of the plan, Orbital
changed its ADR ratio; ADRs are the means by which Orbital's shares
are traded on the NYSE and each ADR represents a specified number
of shares. In May of this year, we changed the ratio from 8 shares
underlying each ADR, to 40. As a result, Orbital's trading price
in the US increased approximately five-fold, satisfying the continued
listing requirement that our securities trade above the US$1.00
level. Similarly, our recent capital rasing has improved, but not
yet fully corrected, the shareholders' equity position. Shareholders'
equity should be favourably affected by new international accounting
standards which come into force in 2006 and govern the balance sheet
treatment of our $19 million dollar WA government loan.
The situation with the NYSE has therefore improved
considerably. Orbital will of course continue to be monitored for
on going conformity with the NYSE listing requirements and progress
against our business plan.
First Quarter F 04 Results
The first quarter has produced a solid start
to the new fiscal year.
- Sales (excluding system sales) are up 82%
over the same quarter last year. Gross margin is up 190% over
the same quarter's comparison.
- Profit after tax is A$3.2 million ahead
of the same period last year.
- Cash is positive and excluding capital raisings,
underlying trading has added a further A$600k to our cash on hand
to the period ended 30th September 2003.
- Synerject has also continued with its progress,
contributing A$400k, as our share of its profits or 16% higher
than the same period last year.
The results to date suggest that the first
half will be a substantial improvement over the same period last
year. However, the first quarter was favourably impacted by a number
of one off events including the timing of certain licence payments
and ACIS credits that will not occur in the second quarter. Further,
Engineering Services revenue will be affected by the reduced number
of available hours in the second quarter, compared to the first.
Orbital is a small organisation that often
in the past has found itself buffeted by political, market and consumer
changes beyond our direct control. Similar circumstances may occur
again.
However to allow you to form a view on Orbital's
prospects, it is appropriate to briefly discuss the key markets
on which we are currently dependent, notably the marine sector,
the recreation sector (particularly PWCs) the motorcycle and scooter
sectors and the automotive sector, which of course we hope to penetrate.
Outlook by Sector for FY03/04
Marine Sector
The outboard market seems to reflect the well
being of the general economy. It has been in retreat over the last
2 to 3 years, however there are some positive signs emerging this
year with recovery in US volumes, although they have not returned
to their 2000 peak.
Orbital's major customer, Mercury, appears
to have held its market position, particularly in its US domestic
market and has extended its product offering of Optimax engines
this year. Bombardier have re-launched their Johnson and Evinrude
direct injected engines, based on Ficht technology, as E-Tec and
this will add an additional dimension of market interest next season.
Competitive product introduction should be
seen as beneficial to total market growth and therefore likely to
indirectly benefit Orbital Engine.
Recreation Sector (PWCs)
This sector has not fared as well as the general
marine sector over the past few years. Personal watercraft appear
to have been an expensive item in a fad market, that most probably
will settle into a global sales base of less than 100,000 units
per annum; appreciably smaller than the 750,000 reportedly sold
in 2000. In the near term, most of the new units sold will probably
be larger craft with four stroke powerplants, as second hand craft
fill the "value for money" positioning - the typical 2
stroke segment.
Bombardier, Orbital's only customer in this
sector, recently sold their Recreation Division to a consortium
of venture funders and the Beaudoin family, the original founders
of Bombardier. At this stage we are not privy to any decisions that
may have been made in relation to their strategy with the acquired
business. Any change should only produce a limited disruption to
our business with them, with the more significant drivers being
the changes affecting the PWC market place in general.
Bombardier's Recreation Division has a number of other product sectors
of interest, including ATV's and snowmobiles and we plan to maintain
our solid relationships with the group.
Motorscooter and Motorcycle Sectors
The European motorcycle/motorscooter market
has declined by 30% since a peak in 1999 of 2.7 million units with
most of that decline occurring in the 50cc and moped sectors. There
is some levelling out of the decline in this sector, although OEMs
continue to be reluctant to invest too heavily in a sector where
there is such uncertainty. Larger capacity bikes appear to be growing
at the expense of scooters. Models incorporating our technology
have improved their overall market share, and this reducing total
market with improving market share, explains the consistent, but
limited growth we are seeing in royalties from this sector.
There may be other changes likely to affect
the European market, including a move to sourcing from Asia by the
European manufacturers. However, with licences with Kymco in Taiwan
and UCAL in India, any such changes in possible sources of supply
should have, at worst, only a temporary impact on Orbital and in
the long term may provide growth opportunities.
The Indian market provides considerable contrast
with Europe. The market, reported as four million units in 2001,
is forecast to grow to 6 million units by 2010, mostly met by the
four large domestic manufacturers. Our license with UCAL, announced
in January of this year, should over the medium term give us access
to this valuable growth market. Further, we believe the Indian OEMs
are well placed to be major exporters to the other forecasted growth
markets in ASEAN, China and Latin America as well as a potential
source of European models.
Automotive Sector
There is an encouraging level of interest in
OCP by certain automotive OEMs. At this stage, whilst there are
no OEMs who have committed to take a model fitted with OCP to market,
there are at least three companies with active programs that could
lead to such an outcome. For Orbital to be successful, we will need
to see key industry participants convert to our technology. The
process of gaining overall industry acceptance is appreciably more
complex than simply securing any one customer.
However, earlier predictions about the sequence
of adoption of various powertrain technologies have proven to be
correct, despite the difficulty with specific timetables. The industry
is slowly moving toward first generation DI systems, including engines
from Mercedes, Alfa Romeo, Mitsubishi and a significant intention
by VW.
The uptake of these first generation systems
and similar commitments from other OEMs are essential precursors
to any adoption of our "second generation" system.
The cost competitiveness of OCP with its improved
fuel economy and reduced emissions should provide a viable platform
for adoption by some of the industry's major participants.
Restatement of FY 04 Objectives
The primary aim is to consolidate the gains
that we have achieved during FY 03, particularly the cost reductions
put in place and the operating efficiencies already achieved. Some
of those improvements were only realised midway through FY 03 with
full year benefits to be delivered in F04.
Additionally, growth in our engineering revenue
by around 20% and improvements in our royalties and license income
have also been targeted. These are not insignificant objectives
and if delivered, should result in a full year's profit for Orbital.
There are risks associated with these targets,
particularly ones that forecast sales. Additionally, the translation
impact of any changes in the Australian dollar exchange rate could
be quite significant on our overall results.
However, the significant progress we have achieved
over the last twelve months has created a solid base from which
on going improvements during F04 should be expected to be delivered.
Thank you.
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