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24 October 2006
CHAIRMAN'S & CEO'S SPEECH
ANNUAL GENERAL MEETING
Chairman Don Bourke: Good
morning ladies and gentlemen and welcome to the 18th Annual General
Meeting of Orbital Corporation Limited. My name is Don Bourke and
I will be chairing today's meeting.
We have a quorum
of shareholders present, so I am pleased to declare the meeting
open.
With me today are
my fellow non-executive Directors, Grahame Young and John Marshall,
and Managing Director and Chief Executive Officer, Dr Rod Houston.
Also present is Mr Keith Halliwell, our Chief Financial Officer
and Company Secretary.
In addition, we have
with us today Denise McComish, representing our auditors, KPMG.
I will start proceedings
this morning by giving you a brief overview of Orbital's year, including
a financial overview and strategic milestones. Rod Houston will
then follow up with a more detailed review of the 2006 financial
year after which we will conduct the formal business of the meeting.
We will then take questions from the floor.
Following a loss
of $1.4 million recorded in the first half of the 2006 year, I am
pleased to report that the Company has enjoyed a turnaround in the
2nd half and has been able to achieve a profit of $0.5 million in
the full year. This is a $2.2 million improvement compared to the
full year loss of $1.7 million in 2005.
The turnaround achieved
in the 2nd half year was a result of an increase in engineering
activity, reduced overheads and the typical improvement in royalties
and Synerject profit as our customers build product for the northern
hemisphere summer.
As explained at last
years AGM, Orbital's engineering business has switched from traditional
automotive customers to the emerging markets in China and India.
In addition Orbital has refocussed on product development opportunities
with customers wishing to introduce Orbital's DI technology. That
transition resulted in a shortfall in project revenue evident in
2005 and the 1st half of 2006; however it is pleasing to see that
the change in focus is now complete and there is a steady provision
of engineering work and an order book in excess of $8m, as we started
the new financial year. We anticipate further opportunities for
engineering revenue in the topical gaseous applications including
LPG and CNG DI applications.
Licensing and royalty
revenue increased 8% year on year. Royalties earned in the European
scooter market are still under pressure due to lenient emissions
regulations however the marine sector has more than compensated
with unit volumes up by 20% in 2006. Both Mercury Marine and Tohatsu
introduced new product during the year and 2 stroke engines in the
marine sector are enjoying renewed support. Bajaj have released
their DI autorickshaw pilot vehicles and subject to feedback from
these tests, plan full production launch early in 2007.
As noted last year
Orbital targeted cost savings of $1 million per annum and it is
pleasing to report that we have achieved approximately $1.5 million
(annualised) which have benefited the 2006 result and will have
benefits going forward.
Synerject have had
a good year! Revenue increased by 37% to A$77 million and Orbital's
equity accounted share of Synerject's result increased by 41% to
$4.1 million. The increase in revenue was partly underlying organic
growth in Synerject's traditional customer base but also includes
revenue from the Delavan acquisition effective from the beginning
of March. The Delavan plant, which manufactures engine management
modules for Johnson and Evinrude outboard engines, is meeting our
expectations, and while not contributing significantly to the bottom
line last financial year is expected to perform strongly in the
2007 financial year. Synerject's next growth opportunity will be
centred around the manufacture and sale of a newly developed electronic
control unit with applications primarily in the Chinese market but
also opportunities in Europe. Synerject are presently establishing
the manufacturing base in China with planned production in January
2007 for its first Chinese customer.
To support this growth
Synerject has negotiated new long term independent banking arrangements.
These finance arrangements which were put in place in June 2006
do not require support by parent company guarantees demonstrating
the maturity and financial stability of this joint venture.
Outlook
Synerject will benefit
from the ownership of the Delavan plant for the full year and will
continue to introduce operating and cost efficiencies throughout
the 2007 financial year. We are confident that this will prove to
be a valuable investment. Synerject's results in 2007 will however
be impacted by the investment in manufacturing facilities in China.
This is an opportunity which will have significant long term financial
returns and we believe that the short term investment cost will
be more than justified.
The engineering order
book underpins the engineering group running at near capacity and
the cost reductions put in place last financial year will provide
bottom line benefits. We anticipate royalty growth from Orbital's
existing DI customers and the launch of the Bajaj DI autorickshaw
will provide a step change in royalties in the 2nd half year.
Overall, your Board
is confident that the turnaround demonstrated in the 2006 2nd half
year will continue and Orbital will achieve an improved result in
the 2007 financial year.
In the last 12 months
Orbital has announced new customer licence arrangements covering
gasoline, spark ignited heavy fuels and gaseous applications. This
provides confidence in our technology and Orbital's long term prospects.
We believe that the
global focus on fuel efficiency, alternative fuels and environmental
concerns support our strategy. We look forward to the future working
with a range of customers and technologies in what is becoming a
truly global business.
Thank you.
Rod Houston will now address you…
CEO Rod Houston:
Good morning ladies and gentlemen, I would like to provide you
with a more detailed overview of the operations at Orbital. I have
been in the position of CEO for over a year now and I have had some
time to better appreciate the opportunities and challenges we have
for the future. This presentation will give you a short summary
of these and will finish with a look to the future markets and environment
in which Orbital currently operates.
I think it is useful to capture at the beginning
of this presentation some of the key strategic achievements over
the last year, which are summarized in the slide shown here. These
include:
- Acquisition of the Delavan facility in March
by Synerject
- Polaris entering into a license agreement
for Orbital DI products
- Negotiation of long term finance arrangements
for Synerject
- Improvement in Engineering services order
book by 100% at June 2006 compared to the same period last year
- Broadened product and technology portfolio
in key areas such as alternative fuels and gaseous fuels
Now I would like to review the three major
business segments of your company, followed by a discussion of the
outlook.
As your chairman has summarized previously
we have positive signs of a turn around in our business, and we
see catalysts for growth in our business given the growing economies
in our region as well as the influence of the tightening emissions
legislation.
Synerject
Synerject is a supplier and manufacturer of
electronic engine management systems (EMS) and electronic fuel injection
systems to the non-automotive vehicle market. The company was initially
formed in 1997 with Siemens-VDO as a 50:50 joint venture to manufacture
the Orbital DI fuel system for automotive and non-automotive applications.
In 2003 the company expanded to include access to all Siemens-VDO
engine management systems and components for non-automotive global
applications.
This joint venture company has been profitable
over the past four years now (cumulative profit after tax of $14.9m
) and cash positive for the past five years (cumulative $25.4m in
cash flow). The net debt for Synerject has been reduced from US$20m
to less than US$4m by the end of June, which enabled them to negotiate
its own finance (normal bank loan) and ultimately pay dividends
to it's parents in the future.
The components and systems sold by Synerject (including their new
acquisition) are divided into three main technologies:
- Orbital air assist DI engine management
systems including fuel systems and electronic control units which
also earn a royalty for Orbital
- Engine management systems incorporating
direct injection systems for the BRP E-TEC products which are
not linked to royalty payments for Orbital
- Engine management systems incorporating
electronic port fuel injection (PI) systems which are not linked
to royalty payments for Orbital
You will see a number of the customer end products
incorporating these components in the reception area today including
some of the new models released by Tohatsu this year. I would encourage
you all to take the opportunity to discuss with me or my colleagues,
any of these applications and understand which Synerject components
are included on the products. .
I would like to give you an update on this
market segment in which Synerject operate and the key drivers for
change in this market which will give you further insight into the
current and future potential value of this asset.
Synerject's current focus in the non-automotive
market covers a diverse range of products including motorcycles,
scooters, ATVs and Marine outboards. As shown the overall market
volume for this product sector is in the order of 39 million vehicles
and is expected to grow at a rate of 5% annually between 2006-2012,
taking it up to over 50 million vehicles (approaching automotive
global vehicle volumes). The majority of this volume are motorcycles
(>90%) and the vast majority of this motorcycle market are in
China and India.
Looking at the China and India markets alone
the total volume of motorcycles is in the order of 22 million manufactured
this calendar year and is expected to grow to over 30 million in
the next 5-6 years. Today however nearly all of this market in China
and India utilizes a simple carburetor fuel system without electronic
control systems.
One of the key drivers for the introduction
of Synerject's products is the staged introduction of emissions
legislation across the globe in all of these non-automotive markets.
Synerjects current revenues are derived from the European and US
markets where the emissions legislation for recreational vehicles
has already forced the change from carburetors to some form of electronic
engine management and fuel injection systems, including the introduction
of Orbital DI.
Having established the potential vehicle volumes
of the overall market and the key drivers for new technology (i.e.
emissions reduction and improved fuel efficiency), we can look at
the projected value of the engine management system market (including
components). This data is based on our best estimates of the overall
market and the predicted penetration of electronic EMS. The current
total market value is approximately $450m, with the majority of
the business in Europe and the USA. Current estimates suggest that
the total market could grow to in excess of $1.6 billion by 2012,
with the major growth occurring in China and India as they transition
to various forms of engine management systems. These figures would
be subject of course to the exact timing of the emissions legislation
and the ability to develop solutions specifically suited to these
high volume, low cost markets.
The average value of EMS components per vehicle
in these Asia markets will be much lower to match the lower cost
motorcycle products compared to the recreational products in the
US and European markets. In response Synerject have made significant
investment over the last two years and are well advanced in the
development of a new line of highly integrated and low cost electronic
control units (ECUs). One of these new designs (M3 ECU) is shown
here along with an example of the product fitted to one of the first
customer applications, which will be in launched in Europe in 2007.
In the medium to long term the majority of
Synerject sales growth is expected to come from India and China
as their emissions legislation start to be become more stringent
in 2008-2010...
Synerject have already established a good working
relationship with UCAL in India who have been licensed as a local
supplier for Orbital DI. In China, Synerject are establishing a
new engineering customer support group in Chongqing and are establishing
a manufacturing facility in Changchun for the manufacture of the
new M3 ECU products.
It is clear that in order to continue to grow
strongly Synerject will need to invest into new products, launch
production in Asia and potentially look at further strategic relationships
as well as acquisitions. As discussed today you can see that these
steps are well underway, and we see Synerject as a valuable manufacturing
investment for the future.
Engineering Services
Orbital's engineering services business provides
professional engineering consultancy services to engine manufacturers,
OEMs, suppliers and governments on a global basis. The provision
of these services creates a significant revenue stream while allowing
Orbital to work closely with its customers on advanced powertrain
applications and developments, some of which also involve the application
and development of Orbital proprietary technology.
As explained earlier by the Chairman, the Engineering
services business started out with a very low order book at the
beginning of FY06, however this improved significantly in the second
half as a result of the change in focus of our marketing to the
emerging markets (including Asia) and the strong interest and growth
from the alternative fuels and gaseous fuels markets. These strategies
along with market changes have started to deliver good results with
the improvement in the forward engineering order book which stands
at $8 million as of July 1st, 2006, almost double the order book
value at the same time last year.
This order book also shows a significant proportion of the services
relate to the application and development of Orbital technology.
In particular this relates to new programs in the area of spark
ignited heavy fuel (kerosene and diesel), applications for direct
injection gasoline as well as new gaseous applications covering
both LPG and CNG DI. The increased level of Orbital DI technology
programs is a result of the continued commitment to technical innovation
and internal R&D expenditure at Orbital which I will discuss
in more detail later.
Orbital has also continued to build on our
reputation for the effective delivery of professional engineering
services outside our traditional proprietary (OCP) technology. This
has enabled us to develop new customer relationships which in some
cases have become more long term strategic relationships, which
have then lead to the development of more long term engineering
contracts with key customers such as UCAL and Bajaj. Going forward
I see further opportunities to develop longer term strategic partnerships
with other key customers keen to grow their products and their competence
to meet the new emissions and fuel efficiency challenges for the
global automotive and non-automotive market.
The growth in the Chinese automotive and engineering
services industry continues at a high level, driven by their desire
to export into stringent emissions markets and the introduction
of new emissions and fuel efficiency constraints in China. Orbital
have achieved some success in winning new customers from this region
over the last year through increased sales and marketing efforts.
This is an important engineering services market for Orbital, however
in terms of overall revenue targets and the difficulty of extracting
good margins in this market, China will not be our only focus.
In summary I believe our competitive advantages
in this engineering services business of a highly competent and
flexible skill base, strong IP portfolio (including OCP) and willingness
to provide education and training has helped develop a growing list
of new opportunities with the potential to deliver a sustainable
and growing business.
Licensing and Royalties
Orbital licenses its patented direct injection
technology to OEMs and suppliers. Royalties and license fees are
derived from a wide range of customers in the marine, motorscooter
and motorcycle sectors (see slide for products).
Licensing and royalty revenue increased by 8% compared to the prior
year, most of which relates to increased royalties from the marine
sector which has shown a 20% increase in engine volumes year on
year. The 2-stroke DI market has held up well in this sector due
to the inherent 2-stroke benefits in performance, light weight,
fuel efficiency and lower maintenance. I believe we will continue
to see the DI 2-stroke market share hold its own as this product
has good acceptance and as shown here the Mercury Optimax engine
(with Orbital DI) can show a clean pair of heals to the best of
the 4-stroke competitors (with better acceleration, top speed and
fuel efficiency) .
The European DI scooter market has continued
to struggle in an environment of lenient emissions regulations which
have enabled the continued sale of low cost carburetor solutions.
New initiatives (with Synerject) to re-invigorate this market have
been undertaken over the last 12 months leading to the development
of a second generation prototype DI fuel system with improved functionality
and lower cost. This new system will take advantage of some of the
new components being developed by UCAL (e.g. fuel pump and air compressor)
as well as integration of some of the components to reduce parts
count.
I have recently returned from Europe where
we presented this new generation DI system to some of our customers,
and there was a good reception for the proactive approach we have
taken to support this market. I am optimistic about the long term
prospects for both the DI scooter and motorcycle markets based on
positive customer feedback I received.
Bajaj are progressing well with the DI autorickshaw
program and production launch will follow an extensive pre-pilot
vehicle release which is currently underway.
I am encouraged by the positive feedback from
Bajaj and the recent expansion of their license to cover gaseous
rickshaw applications adds to the potential long term growth of
this DI application. Bajaj are an exciting and fast growing company
with volume growth of 20-30% year on year over the last 2-3 years
and they have major plans for becoming number one in India and the
Asia-pacific motorcycle market. The DI autorickshaw product has
the potential to contribute significantly to the future royalty
stream for Orbital, and is important to our plans given the softness
we are experiencing in the near term European scooter market.
There continues to be strong interest shown
in assessing the capability of Orbital DI 4-stroke systems for future
motorcycle and recreational applications. The investigations by
a number of OEMs are at the production feasibility level, and cover
both gasoline and spark ignited heavy fuel (kerosene and diesel)
and could lead to significant revenues streams from royalties, engineering
services and Synerject sales in the future.
In the automotive sector regulations for improved
fuel economy or reduced carbon dioxide emissions are still quite
limited, and up to now the OEMs have been able to meet market demands
without the adoption of sophisticated (lean operation) direct injection
systems. Clearly, however with the reality of diminishing global
reserves of oil and with fuel prices increasing there is increasing
pressure from the market for improved fuel economy.
In some markets (e.g. Europe) the response
to high fuel prices has been an increased market share of diesel
engine equipped vehicles. This market shift has however seen a reduction
in the vehicle profit margins for the OEM due to the very high cost
of the diesel engine (50-70% higher including fuel system and exhaust
aftertreatment). I believe along with an increasing number of the
industry OEMs that there is significant scope to improve the gasoline
engine efficiency by spending some of this difference in cost on
a combination of direct injection, turbocharging and variable valve
control which can match the fuel economy and driving characteristics
of the diesel engine. This would favour the introduction of sophisticated
DI technology such as Orbital DI.
However, there remain some key challenges for
OCP DI adoption in this market not the least of which is a number
of established competitive technologies including high pressure
single fluid DI.which has become the incumbent.
There are some emerging opportunities for OCP
DI in the new automotive markets such as China where there is significant
fuel economy legislation combined with a hunger for leapfrog technology.
Therefore it is important that we continue to update the technology
in this area to keep this market opportunity active, which leads
me into a brief discussion of some of the research and development
activities at Orbital.
R&D
Orbital has continued to invest in further
research and development to extend the capability and value of the
Orbital technology.
The increased level of engineering services
programs which utilize the Orbital technology is a result of the
continued commitment to technical innovation and internal R&D
expenditure at Orbital. Consequently Orbital has been able to continue
to build on it's intellectual property portfolio in key areas for
the future. An example of the outcomes from this committed expenditure
is the development of a new gaseous DI injector suitable for both
LPG and CNG applications in automotive and non-automotive markets.
In the case of automotive this development enables the conversion
of gasoline engines to operate on CNG or LPG without the loss of
performance normally associated with port injected gaseous systems.
In non-automotive the new gaseous systems can take advantage of
simpler DI system integration, without the need for fuel pumps and
separate air circuits.
The first production application for this DI
gaseous technology is likely to be in India, where CNG/LPG is already
mandated in certain cities. In many markets the high dependence
on oil imports combined with legislated CNG adoption will see an
increased interest in the global market for this type of technology
and associated engineering services.
As discussed previously, Orbital have developed
a second generation 2-stroke DI system which demonstrates improved
functionality (lower emissions, better driveability) and lower cost
(sourcing new components from UCAL in India and integration). This
program is specifically targeted at re-invigorating the 2-stroke
DI market, which is a hallmark of our technology and a key differentiator
of our engineering services.
As referred to last year, as part of our advanced
combustion research, Orbital have established a program to develop
a new combustion system which utilizes a combination of mechanical
features (variable valve-train, engine downsizing and turbo charging)
plus advanced combustion control techniques (using OCP DI or other
DI systems to supply fuel).
The intent is to develop a range of evolutionary
combustion solutions which can handle various fuels (including Ethanol
blends, CNG and gasoline) and deliver fuel economy similar to or
better than today's diesel engines. This program further enhances
Orbital's reputation as a leading edge development group for combustion
and is responsible for a number of new patents which will enhance
the value of Orbital's intellectual property into the future for
the auto and non-auto markets.
Future Objectives/Outlook
The potential for manufacturing revenue growth
via Synerject is positive with good long term prospects for growth
in the non-automotive EMS supply business. This will require investment
in the short term to expand into the markets in Asia, including
establishing new engineering and manufacturing facilities in China.
This investment will dampen the short term profit growth for Synerject,
but this is an important step if we are to realize the overall growth
targets and maintain the 15% market share of the non-auto EMS market
going forward.
There have been some positive signs that the
engineering services business can deliver an on-going positive contribution
while also enabling the development of new customers and advancing
the application of the Orbital technology. Due to our strong order
book at the beginning of the year, we have seen a significant improvement
in first quarter revenue compared to the same period last year.
This will give us a much better platform to provide an improved
full year result for this business segment.
We have also started taking on a broader range
of consulting roles - Assisting some of our customers with their
IP strategies and general commercialization strategies, and others
with fuel and EMS system evaluation outside our traditional market
segments.
I expect to see an improvement in licensing
and royalties for this financial year, due mainly to launch of the
Bajaj autorickshaw. Supporting this program launch is a key focus
of our efforts as this first program is key element of growing our
long term relationship with Bajaj and ensuring the continued success
of the product in this new very large market place.
In the medium to long term there are good opportunities
to grow royalty revenue from the introduction of new DI 4-stroke
and 2-stroke products in the motorcycle and recreational markets
including the first gaseous DI applications.
I believe there is a good future for Orbital
as the global emissions legislation tightens and greenhouse gas
concerns continue to influence change. This has the potential to
open up other markets and business opportunities including the Utility,
Lawn and Garden market which has global annual volumes in excess
of 60 million units and just like the motorcycle and recreational
market will be forced into technology change by new emissions legislation
over the next 5-6 years. This low cost market will require some
novel approaches to develop even lower cost solutions and possibly
new business relationships - but this could be the next new field
for Orbital.
Before closing I would like to thank the following:
- Orbital employees for their total commitment
and support
- Orbital board for their advice and council
- The shareholders for their continued support.
In summary
- We have some good prospects in all
three parts of our business.
- We have achieved some important milestones
particularly through our joint venture Synerject
- but our future is not without risk
and our challenge is to manage these risks.
Thank you.
Click here
to view the slide presentation (PDF 987kb).
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