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24 July 2007
OPEN BRIEFING
CEO and CFO on Update
corporatefile.com.au
Orbital Corporation
Limited said in February at its first-half result announcement that
it expected an improved profit result for the full year ended June
2007. The company booked net profit of $0.5 million in 2006. Do
you remain in line to achieve a profit improvement?
CFO Keith Halliwell
Yes, we expect to report an improved profit
after tax. As reported in the first half, the result for the June
2007 year includes the $0.5 million settlement of an R&D syndicate
dispute and the impact of Synerject's investment in the Chinese
engine management system (EMS) market, however we've seen an improvement
in our engineering business which has underpinned the result.
corporatefile.com.au
How are Orbital's earnings being affected by
the strengthening Australian dollar?
CFO Keith Halliwell
The strengthening Australian dollar has a negative
impact when we convert the Synerject profit to Australian dollars
and this will continue to dampen our US-based revenues, which also
include engineering and royalties. We can put in place some level
of hedging for anticipated engineering and royalty cash flow.
corporatefile.com.au
Orbital's Engineering Services business made
a pre-tax profit of $2.0 million in the first half of 2007 compared
with a loss in the previous corresponding period. Did the momentum
continue in Engineering Services in the second half?
CEO Rod Houston
Engineering Services was particularly buoyant
in the first half due to the strong order book at the beginning
of the year. There was some slowdown in the second half mainly due
to delays in engineering orders out of China and India. We're starting
to see some of these orders come through now, however our order
book isn't quite as strong as this time last year given the slower
second half.
corporatefile.com.au
As Keith mentioned earlier, the earnings of
Synerject, your 50:50 joint venture with Siemens-VDO Automotive,
were impacted in 2007 by costs associated with the start-up of production
in China. Can you comment on Synerject's performance versus this
expectation and the progress of its operations in China?
CEO Rod Houston
Synerject's results are generally in line with
expectations, given the investments required to set up in China.
We're also expecting ongoing support costs for establishing Synerject's
first few products in China, with upfront engineering costs that
will be recovered in component sales in future years.
Synerject has made good progress on setting
up both its manufacturing centre and engineering centre in China.
corporatefile.com.au
In China Synerject is manufacturing a recently
developed low-cost electronic control unit (ECU). What is the potential
market for these units and what will be the drivers of their take-up
by the market?
CEO Rod Houston
The low-cost ECU will initially be taken up
by Taiwanese and Chinese manufacturers who are looking to export
their products. The good news is that emissions legislation, which
is already in place in Taiwan, will be put in place in China from
January 2008. This will help to drive the change towards the use
of these ECUs for scooters and motorcycles in the domestic market
as well.
The Chinese domestic motorcycle market was
over 20 million motorcycles last year and it's growing at 10 to
15 percent a year. The market today is 100 percent carburettor-based.
The experience in Europe and the US shows that the introduction
of more stringent emissions legislation provides a good driver for
the penetration of EMS. The exact timing of this change-over is
difficult to predict, Synerject is setting up now to be in a good
position to supply this emerging market in the future.
corporatefile.com.au
When might Synerject return to earnings growth?
CEO Rod Houston
Synerject is in the process of building up
its manufacturing, engineering and infrastructure to support its
future growth in the Chinese and Indian markets. This investment
has created a slowdown in earnings growth but it should start to
deliver growth from the beginning of next financial year.
corporatefile.com.au
Orbital announced in May that one of its licensees
in India, Bajaj Auto, had started production of an autorickshaw
model that incorporates Orbital direct injection (DI) technology.
What market feedback have you received since the launch and what
are your unit sales expectations for the current financial year
ending June 2008?
CEO Rod Houston
The market feedback has been positive, with
customers enjoying over 30 percent reduction in fuel consumption
and hence running costs, as well as improved drivability. The sales
figures are difficult to predict as they'll depend on Bajaj's roll-out
plan which is being carried out in a very controlled fashion in
order to generate pull from the market and ensure that the dealer
network is appropriately trained.
Bajaj manufactures over 350,000 autorickshaws
in total and has a strong commitment to ensuring the DI model works
well in the long term.
corporatefile.com.au
What are expected to be the drivers of the
Bajaj autorickshaw's penetration of the Indian market and what impact
are you expecting on your License and Royalties income stream?
CEO Rod Houston
The key drivers of the Orbital DI-Bajaj autorickshaw's
market penetration will be improved fuel consumption and reduced
running costs. Particulate emissions are also reduced considerably
on the DI product, and the reduced oil consumption and smoke are
major benefits to the environment. In the development pipeline there
is a DI gaseous rickshaw which is expected to give even further
benefits in running costs.
Any further licensing payments for the autorickshaw
are linked to volume triggers and are expected to become payable
this financial year. Royalties will depend on the overall acceptance
in the marketplace, however with the launch of the petrol version
and the potential for a gaseous version in the next calendar year,
there are good prospects for royalties to grow over the short to
medium term.
corporatefile.com.au
One element of your growth strategy for Orbital
is to expand its engineering and technology capability. What has
been your recent progress in this area?
CEO Rod Houston
We've done a lot of work in the last two years
to expand our engineering and technology capability and broaden
our portfolio to increase the number of potential customers. A good
example of this has been the development of our spark-ignited kerosene
and diesel combustion system, which has led to a number of large
engineering programs and new products being developed for the coming
years. The first four-stroke DI product in this area is expected
to be launched this financial year.
More recently, we've also built up our expertise
in the area of compressed natural gas (CNG) applications for heavy-duty
trucks in the Australian market. This is a new market in Australia
and we've already won significant engineering programs in this area.
There are many other new activities we expect to develop from this
small beginning.
The development of a centre of excellence for
gaseous and alternative fuels in Australia is something we strongly
believe in. We're currently investing significant resources from
our R&D budget to ensure we build up our knowledge and intellectual
property in this area.
corporatefile.com.au
Can you comment on how the structure of Orbital's
earnings might change over the next three to five years given your
entry into emerging markets such as China and India and the increasing
pressure on governments to address the issue of greenhouse gas emissions?
CEO Rod Houston
The India and China markets are important to
our growth aspirations. They have significant volumes and we're
in the process of launching new products that will provide benefits
with respect to emissions and fuel consumption in these markets.
Market penetration will be dependent on customer acceptance, which
is difficult to predict at this early stage. We also have opportunities
to grow revenue in our more established markets in the US and Europe,
where we can develop into new areas.
I believe we're well positioned to leverage
our core capabilities as a company that understands the commercialisation
process and also has a track record of developing clean solutions
for future sustainability. In the area of energy usage, we have
a solid platform of skills, passion and management to work on improving
efficiency for both the transport and mining industries here in
Australia and in Asia.
Our strategy is to move more of our activities
into the wider field of technology and service solutions for a cleaner
world.
corporatefile.com.au
Thank you Rod and
Keith.
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