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25 August 2005
OPEN BRIEFING
CEO and CEO-Elect on Update
corporatefile.com.au
Orbital Corporation
Limited yesterday reported a net loss of $1.1 million for the year
ended June 2005 compared with profit of $3.4 million in the previous
year. In the second half, Orbital booked net profit of $0.4 million,
partly reversing the $1.5 million loss of the first half. What were
the main drivers of the improved second-half performance and is
it sustainable?
CEO Peter Cook
A number of things contributed to the improved
second half. They included an improvement in the contribution of
Synerject of about $1.2 million half on half. There was also an
improved contribution from Powertrain Engineering Services (PES)
of about $600,000 half on half, which was all revenue driven. And
there was an improvement in royalties and licence fees of about
$400,000 half on half.
In addition, there was a discrepancy between
the two halves in that we had a forex gain in the first half versus
a neutral forex impact in the second half, plus we had some additional
overhead expense savings in the second half.
It's worth pointing out that Synerject is a
cyclical business; it's heavily driven by the northern hemisphere
summer season and always has a better second half than first half.
We'd expect 2006 to be the same.
corporatefile.com.au
The 2005 result included a $257,000 restructuring
expense. What does this relate to and what will be the impact on
costs going forward?
CEO Peter Cook
It was a redundancy expense and the savings
going forward will be about $250,000 per year.
corporatefile.com.au
What's the outlook for earnings in the current
year ending June 2006?
CEO-Elect Rod Houston
It's too early to provide a firm forecast for
the whole year. We only have a limited look-ahead on our PES work,
as by its nature, it tends to have three to four month horizons.
At this stage, we expect to see a tough first half and a profitable
second half knowing the cyclical nature of Synerject's business,
with an overall improvement year on year.
corporatefile.com.au
Orbital's geographical revenue breakdown for
2005 shows year-on-year falls in all major regions except North
America, with revenue in Asia down 50 percent. What's the outlook
on a regional basis?
CEO-Elect Rod Houston
We expect our opportunities to grow significantly
in Asia based on the business proposals and leads we're now seeing
from the region. The macro-economic trends and the general move
to Asia of the automotive industry also back that up. In particular,
we see China and India as being quite hungry for technical services,
which fits well with our PES business and our location.
corporatefile.com.au
PES booked a loss of $0.1 million for the year
on revenue of $8.3 million compared with a profit of $2.1 million
on revenue of $11.5 million in the previous year. The business turned
a profit of $0.3 million in the second half compared with a loss
of $0.4 million in the first half. What indications do you have
regarding PES's revenue levels in the current year and what confidence
do you have that they'll be adequate to sustain a profit?
CEO-Elect Rod Houston
At this stage we don't have firm orders for
the whole year, so it's difficult to forecast 12 months out. The
current look-ahead on revenue has limited horizons, but there are
already a number of very good lead indicators that suggest an improvement
in the business. The prospects look promising and they are certainly
stronger than what we had at this time last year.
corporatefile.com.au
Can you comment on the current order book in
the PES business? What are the major themes of the development work
in the current book and how has it changed in the recent period?
CEO-Elect Rod Houston
Obviously we can't give too much detail with
respect to client activity. But in terms of the recent development
work we're carrying out on our own behalf, the focus is on spark-ignited
heavy fuel engines for both two and four stroke application. We're
also working on advanced combustion systems for next-generation
gasoline engines and on alternate fuels, particularly compressed
natural gas (CNG), for which we're developing a specific direct
injector and which we see as a good investment for the future.
Our program remains very much focused on improving
the fuel economy and fuel efficiency of the gasoline engine. We
see the rise in oil prices starting to bite at the consumer level
and, to a lesser extent, also at the original equipment manufacturer
(OEM) level, where we're starting to see more interest in technology
for improved fuel economy, although it does take a long time to
flow through into work programs and revenue.
corporatefile.com.au
Synerject, your 50:50 US-based joint venture
with Siemens VDO, contributed after-tax earnings of $2.9 million
in 2005, up 9 percent from the previous year. Can you comment on
the US dollar performance of the joint venture and how it compares
with expectations?
CEO Peter Cook
In US dollar terms, profit after tax was up
14 percent to US$3.9 million, with the weaker US dollar obviously
accounting for the lower growth in the Australian dollar contribution.
And that 14 percent increase was despite an ongoing, and reasonably
heavy, investment in the development of a new generation of electronic
control units (ECUs).
Synerject's 2005 profit was in line with expectations
and was accompanied by organic growth of 4 percent in the top line.
The other positive aspect of Synerject's performance was its very
strong cash flows. There was a 41 percent increase in cash compared
with the previous year.
corporatefile.com.au
What's the outlook for Synerject's earnings
for the current year?
CEO Peter Cook
We're expecting good revenue growth in 2006
with continued profits, even recognising the continued funding of
its development program, and solid, positive cash flows.
corporatefile.com.au
Orbital's balance sheet provision for the net
asset deficiency of Synerject fell to $0.7 million at the end of
June from $3.9 million a year earlier. How will the structure of
Orbital's cash flows from Synerject change once the joint venture
has paid off its remaining debt and when might this happen?
CEO Peter Cook
That's a hypothetical question, so I'll answer
hypothetically. When the balance sheet is reasonably capitalised,
i.e. when there is a net debt level of, say, less than US$5 million,
we'd expect a dividend policy to be put in place. If there were
no other changes such as requirements for significant capital expenditure,
we'd expect that to occur by the 2007 financial year. Meanwhile,
Synerject's loans are due to be renegotiated at the end of September
2006. Our expectation at that point is that the borrowings would
be reduced sufficiently to allow them to become third-party provided,
and that might enable us to enter into a dividend policy arrangement
with our JV partner.
corporatefile.com.au
Royalty and Licence income was $2.2 million,
down from $3.2 million in the previous year. What's the outlook
for Royalty and Licence income in the current year?
CEO-Elect Rod Houston
We expect income to improve this fiscal year,
in particular through growth in the marine market and other existing
customers and through new licensees coming on stream such as Bajaj
in India. Bajaj is due to launch its auto-rickshaw incorporating
our technology during the current fiscal year and we see good prospects
for royalty growth as those volumes kick in later in the year and
into next financial year.
corporatefile.com.au
Orbital had net cash out-flow from operations
of $3.8 million in 2005, compared with in-flow of $0.7 million in
the previous year. Cash on hand fell to $8.0 million at the end
of June from $12.4 million a year earlier. Does the current cash
level provide the required financial backing for the PES business?
What's the outlook for cash at the end of June 2006?
CEO Peter Cook
The business has a semi-fixed cost base and
our intention has been to make it cash break-even at around $10
million of PES annual revenue. The reduction in costs referred to
in our ASX release will reduce that break-even point to about $9
million, which is fairly close to our PES turnover in 2005. Improvements
in royalties and licences would, together with the cost reductions,
create a minimal cash drain in 2006. Therefore we believe the cash
levels are appropriate, assuming normal trading requirements.
corporatefile.com.au
Rod, you'll take over as Orbital's CEO on October
1. What will be your immediate priorities for the business?
CEO-Elect Rod Houston
The immediate priority is to focus on the growing
markets for engineering services in India and China, where we see
very good opportunities. In Synerject, we see the business growing
well and generating cash, and believe it's now in a position to
focus on growth opportunities, including acquisitions. On royalties
and licences, my priority is to ensure that the launch of new end-products,
such as the Bajaj auto-rickshaw, are supported and go as smoothly
as possible.
corporatefile.com.au
Thank you Peter and Rod.
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