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24 August 2007
OPEN BRIEFING
CEO AND CFO ON FY07 FINANCIAL RESULTS AND OUTLOOK
corporatefile.com.au
Orbital Corporation
Limited yesterday reported net profit of $1.3 million for the year
ended June 2007, up from $0.5 million in the previous year. Excluding
a $0.6 million one-off legal settlement, net profit was $1.9 million.
What are the main risks to earnings in the current year?
CEO Rod Houston
Royalty earnings
this year will be dependent on the overall robustness of the marine
market. Given signs of a weaker US economy, which traditionally
impacts the overall marine market, this royalty stream has some
risk. The introduction of new products into new markets e.g. the
Bajaj autorickshaw, is part of our plan to increase earnings and
reduce our exposure to the US marine market.
In Engineering Services,
we operate in a competitive marketplace and our results depend on
our ability to win new contracts through the year. The cyclical
nature of customer outsourcing activity is a risk we’re dealing
with by broadening our customer base and technical solutions.
The results of Synerject, our US-based 50:50 joint venture with
Siemens VDO, will be influenced by the timing of the launch of new
products in China and India, as well as the strength of the marine
and recreation markets as a whole.
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The main driver of
Orbital’s improved performance in 2007 was the Engineering
Services business which booked pre-tax profit of $3.2 million, up
from $0.4 million in the previous year, on revenue of $12.5 million,
up from $8.6 million.
You’ve indicated the Engineering Services order book stood
at $5 million at the end of June, down from $6 million six months
earlier, partly due to delays in orders from China and India. What
are your prospects in these markets and what will trigger new orders
from them?
CEO Rod Houston
Our prospects in
China and India continue to be strong, with good opportunities for
both our technology offerings and Engineering Services. Timing of
orders is always difficult to predict however, we’re increasing
our business development team for both China and India to increase
the overall pipeline of opportunities. In particular we’re
working on a number of new opportunities in the design and development
of new engines for automotive, two-wheeler and general purpose engine
applications.
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You’ve indicated
new areas of work contributed to the growth in Engineering Services
in 2007. These included LNG/CNG systems development as well as design
and development of small engines for the lawn, garden and utility
markets.
What scope is there to enter other new areas with your existing
capabilities?
CEO Rod Houston
We’ve already
shown our team’s knowledge and skill is very adaptable, and
there are many other areas of the clean technology business we can
participate in. Our facilities are also very adaptable and over
the last year we’ve been able to take an increased variety
of work, including both heavy duty truck and small engine work,
without major investment. Going forward we intend to increase investment
in our facilities and people, to ensure we’re proactively supporting
market demand for clean solutions.
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Synerject contributed
after-tax earnings of $3.2 million in 2007, down from $4.1 million
in the previous year. As previously flagged, Synerject’s result
was negatively impacted by costs, totalling $0.9 million, relating
to the start-up of manufacturing and engineering operations in China.
What further steps need to be taken before Synerject’s Chinese
operations start to contribute profitably?
CFO Keith Halliwell
Synerject has commenced
production of prototypes and validation testing in China. Following
the testing, we expect to start supplying a number of customers
out of China by the end of the financial year. Initial volumes however
will be low, and it will be the 2009 financial year, the second
year of production, before Synerject generates profits in China.
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Synerject’s
revenue was up 38 percent to US$80 million. You’ve indicated
that the former Bombardier Recreational Products engine management
modules facility in Delavan in the US, which you acquired in March
2006, contributed US$19.3 million of the revenue increase. This
implies revenue growth of 6 percent in Synerject’s traditional
business. Does this reflect the growth potential of the business?
CFO Keith Halliwell
This reflects Synerject’s
markets, which are relatively stable. Synerject will grow by developing
new products and by customer acquisition, and both of those have
relatively long lead times. In 2007, growth was primarily generated
by the acquisition of the Delavan facility, and going forward, the
launch of the Bajaj autorickshaw and the production launch in China,
will provide step changes in revenue.
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What’s the outlook
for Synerject’s earnings in the current year given ongoing
investment in China and a slow ramp-up in production of the Bajaj
autorickshaw in India?
CFO Keith Halliwell
Notwithstanding the
slow ramp-up, the production of the Bajaj autorickshaw will make
a positive contribution to Synerject’s earnings this year.
Looking at the bigger picture, we anticipate Synerject will achieve
efficiencies in its more mature businesses, and that will drive
improved EBIT margins. This will offset the additional investment
required in China, and provide overall earnings growth.
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Orbital’s Royalty
and Licence revenue fell to $2.3 million from $2.4 million.
You’ve attributed the fall primarily to the impact of the stronger
Australian dollar in 2007. Can you give an indication of the trend
in royalty-earning units sold during 2007 and the outlook for Royalty
and Licence income in the current year?
CEO Rod Houston
Unit sales into the
marine market were slightly up on the previous year but scooter
volumes in Europe were down, so overall volume was similar to the
previous year.
The outlook in this area is positive, with growth expected in the
DI autorickshaw in India. Of course, the marine market is also an
important part of our continuing royalties, and our customers in
this market have shown strong commitment to our two-stroke products,
as evidenced by the launch of more DI products by Mercury in June
this year.
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Excluding the legal
settlement, Orbital’s total expenses increased to $16.1 million
in 2007, up $1.5 million or 10 percent. What scope do you have to
reduce the cost base if Engineering Services revenues slow significantly?
CEO Rod Houston
A portion of the
higher costs related to non-fixed costs such as consumables and
contractors, which we can control according to demand.
We don’t anticipate Engineering Services slowing significantly;
there are always cyclical fluctuations we need to manage. Overall,
we do not intend to reduce our core capabilities or facilities as
they are a key part of our long-term strategy.
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Orbital had net cash
outflow from operations of $0.2 million in 2007, compared with outflow
of $1.9 million in the previous year. Excluding the legal settlement,
you had positive cash flow of $0.6 million in the first half, offset
by outflow of $0.2 million in the second half. What’s the outlook
for operating cash flow over the coming year?
CEO Rod Houston
The improved cash
flow has been driven by the increase in Engineering Services revenue.
Going forward, we’d expect operating cash flow to be aligned
with our revenue generation. We’ll also have additional cash
income from the Synerject dividend, equivalent to 45 percent of
Synerject’s US GAAP profit, which will add to our cash flow
for the first time this financial year.
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During the 2007 financial
year Orbital raised a total of $8.8 million through a share placement
and a share purchase plan offered to existing shareholders. Cash
in hand stood at $11.3 million at the end of June 2007, up from
$3.3 million a year earlier. Given initiatives such as your increased
level of R&D activity and your campaign to increase the level
of customer contact, is this an adequate cash buffer for the coming
year?
CEO Rod Houston
We were very pleased
with the level of support for our capital raising during the year.
Our cash level at 30 June 2007 is sufficient for our current business
needs including additional marketing initiatives and planned R&D
activity. Last financial year we spent just over $1.0 million on
R&D and we anticipate that the overall level of expenditure
this year will be of the same order. Importantly, we’re also
in a better cash position to take up opportunities beyond our current
business as they present themselves.
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You’ve indicated
Orbital will be looking to extend the scope of its business either
through bolt-on acquisitions or organic expansion. In which specific
areas do you see potential opportunities?
CEO Rod Houston
We’re well positioned
to leverage our core capabilities in the area of technology commercialisation,
and as a company with a track record of developing clean solutions.
These include the development of alternative fuel engine management
systems, gaseous fuel systems and the design and development of
small engines for the motorcycle and general purpose markets. I
also believe strongly in the development of a centre of excellence
for gaseous and alternative fuels in Australia, which we continue
to develop through our strategic planning and our R&D investments.
These initiatives
are part of our overall vision to expand our activities into the
wider field of innovative technology solutions for a cleaner world,
with a specific focus on clean, efficient and safe transportation.
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Thank you Rod and
Keith.
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