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25 August 2008
OPEN BRIEFING
CEO & CFO ON FY 08 RESULTS & OUTLOOK
corporatefile.com.au
Orbital Corporation
Limited recently reported net profit of $0.47 million for the year
ended June 2008, down from $1.33 million for the previous year.
Second half profit of $0.86 million represented a turnaround from
the $0.39 loss of the first half. To what extent was the second
half turnaround the result of internally generated initiatives and
to what extent external factors?
CEO Terry Stinson
Seasonal factors had an impact. The Synerject
manufacturing cycle, in particular for recreational vehicles for
the North American market, is geared to the Northern Hemisphere
summer. This pushes a significant portion of our earnings into the
second half. In addition, our license and royalty income tends to
be a little stronger in the second half, following the pattern of
sales.
The external factor that worked against us
particularly in the second half was the strong Australian dollar,
which moved from 88 to 96 US cents over the period.
corporatefile.com.au
You've indicated that you'll be targeting "continued
profitability" year on year. What are the main risks to earnings
in the current year ending June 2009?
CEO Terry Stinson
The exchange rate plays a large part in what
we earn because a big portion of our earnings is generated out of
the US. So what the Aussie dollar does compared with the greenback
is one risk and as we experienced in the past year, can influence
our reported earnings.
We're now laying the foundation for our future
business in China and our growth profile will be dependant on the
timing of China's implementation of emissions regulations. The market
there is buoyant and we doubt that it will go down but the timing
of future market penetration is difficult to predict. The outlook
is however positive, Synerject is targeting sales growth next year
in the order of US$10 million to US$15 million from product manufactured
in China.
An additional risk relates to our Engineering
Services business centred here in Perth. Our orders today are not
where we need them to be to get this segment to target contribution.
Our order book is just a little bit over $5 million which is similar
to this time last year. Our engineering business covers a large
part of our overhead costs and is also the foundation we're using
to build our aligned business strategy.
A final risk, which can also be viewed as an
opportunity, is our plan to expand in the alternative fuels business.
We're currently investigating investment and growth opportunities.
This will be through additional investment in our recently acquired
Orbital Gas Products (OGP) or in something new. We may decide to
invest some of our cash on hand in a purchase, and/or invest internal
Engineering Services resources which would normally be fee-earning.
An investment of internal resources would improve future profit
potential but may have a negative impact on this year's result.
My goal is profitable growth, requiring balanced decision making
throughout the year.
corporatefile.com.au
Net cash outflow from operations was $0.89
million for the year, with cash inflow of $1.77 million in the second
half only partly offsetting the $2.66 million outflow of the first
half. Trade working capital increased compared with a year earlier,
with a $2.65 million increase in receivables to $7.20 million reflecting
a $2.8 million receivable for a Commonwealth Government grant. Is
the increased level of working capital likely to be sustained going
forward?
CFO Keith Halliwell
Our operating cash inflow in the second half
was pleasing. Our working capital needs tend to go up and down with
our engineering project time-lines. Receivables at 30 June 2008
included the government grant, which was received in full in July.
That grant was a one-off receipt for the establishment of a heavy
duty engine testing facility, which we'll be constructing over the
next nine months.
Going forward, our recent acquisition of OGP,
which represented a $1.8 million investment in the 2008 financial
year, will require additional working capital over its first couple
of months as we increase receivables. The good news is that OGP
has started as EPS positive from day one.
CEO Terry Stinson
The construction of the heavy duty engine testing
facility is part of our larger strategy to grow an aligned alternative
fuel system business structure. One use for the test facility will
be for independent testing and evaluation of heavy duty engines
for the commonwealth and state governments and commercial customers.
We'll also use the test facility to forward our alternative fuels
strategy. This is an area where we can leverage our core gaseous
combustion competencies to develop products that provide future
positive cash flows and profits
corporatefile.com.au
Orbital's payables as at June included $4.14
million representing the present value of the estimated additional
investment required to maintain your 50 percent ownership of Synerject,
your engine management systems production joint venture with Continental.
Will this additional investment in Synerject be at the expense of
investment in your other businesses?
CEO Terry Stinson
No. We've planned for this investment for some
time and we have sufficient cash to take up the investment in Synerject
and continue to support normal business operations. We believe Synerject
is a valuable asset; the business is growing, and profitability
is projected to improve with time.
corporatefile.com.au
Is your cash in hand of $8.80 million at the
end of June, down from $9.39 million six months earlier, an adequate
buffer given your ambition to grow your alternative fuels business?
CEO Terry Stinson
Our strategy is to grow in alternative fuels
and we have enough cash to implement the plans we have today. We'll
review our cash requirements as we identify other opportunities
that show appropriate investment returns. My plan is for profitable
growth. I see real near-term opportunities to grow this business
and increase future profits. Our speed in identifying and qualifying
these opportunities will determine the timing and level of future
investments.
corporatefile.com.au
Orbital's share of the net profit of Synerject
was $2.36 million for 2008, down from $3.16 million in the previous
year, reflecting the impact of the stronger Australian dollar and
start-up costs associated with Synerject's China operation. You've
indicated that sales of product from China are targeted to increase
between US$10 and US$15 million in the current year. What assumptions
is this based on?
CFO Keith Halliwell
Synerject commissioned its manufacturing
facility in China during the year and first sales of the plant's
low cost M3 engine control unit (ECU) were to Taiwanese customers.
The sales growth we're targeting for the current
financial year is expected to come from existing Taiwanese customers
taking into consideration a full year of production. We're also
expecting our first Chinese customers to come on board during the
year. This however may depend on the timing of the introduction
of strengthened emissions legislation.
corporatefile.com.au
You've indicated that Synerject faced generally
difficult conditions in the North American marine recreation market.
What's the outlook for Synerject's earnings if the US economy remains
subdued?
CFO Keith Halliwell
Synerject's sales last year were impacted by
the tough economic conditions in the US. However, the bottom line
benefited from productivity improvements, particularly at the Delavan
facility. That was the plan when we acquired the Delavan business
and Synerject management have done a good job.
This financial year Synerject will have the
benefit of having those efficiencies in place for the full year.
In addition, we also look forward to an improved contribution from
Synerject's operation in China which in the 2008 financial year,
its start-up year, suffered a loss of $2 million.
corporatefile.com.au
Orbital's Engineering Services business booked
EBIT of $2.41 million in 2008, down 26 percent, on revenue of $11.68
million, down 7 percent. The EBIT and revenue drop accelerated in
the second half. Is this an indication of the expected trend in
Engineering Services' performance in the current year?
CEO Terry Stinson
There were several factors that influenced
Engineering Services revenue in 2008 including the fact that revenue
from North American customers was down by $2.4 million due to the
tough conditions in the US market. Our order book of $5 million
is in line with this time last year and prospects are reasonable.
We see opportunities in the alternative fuels market and the commissioning
of the heavy duty engine testing facility in the second half of
the year will give us a range of additional services we can offer.
corporatefile.com.au
Orbital's 2008 Royalty and Licence income was
$2.68 million, up 17 percent. Do you expect the momentum to be maintained
in the current year?
CFO Keith Halliwell
The 2008 income included steady royalty
volumes, with increased license fees. License fees are one-off payments
and growth momentum is difficult to maintain however royalties are
an annuity business and we expect those to continue.
corporatefile.com.au
In the OGP business, formally Boral Alternative
Fuel Systems, you've indicated that Orbital's technical skill base
will complement the development of next generation OGP systems.
What will be involved in the development process and what's the
time line to market?
CEO Terry Stinson
We have to make sure the current OGP product
offering retains its robustness and fulfils customers' needs. Our
team has the technical skill and experience to support the existing
business. In parallel, we need to develop a next generation product
offering. The process covers the normal stages of design, development,
prototype application and production. We're in the early stages
of working through that process now. The associated expenses to
support this new product development are similar to what is required
to launch any new product.
The alignment of OGP and Orbital comes from
our experience with developing and commercialising engine management
and fuel injection systems for gaseous products. What we've learned
through the commercialisation of the Flex DI product is an excellent
fit with what's required to grow our OGP business.
The time line to market will depend on our
customers' needs. But, we're probably looking at a one to three
year horizon for the launch of new products. In the mean time sales
of our existing OGP products will continue.
corporatefile.com.au
What's driving customers' changing needs in
this market?
CEO Terry Stinson
The primary driver is the price of petrol and
the saving that can be achieved by using LPG. Using our skills and
infrastructure, we can further improve the fuel savings, retain
vehicle performance and reduce the level of greenhouse gas emissions
over what is currently offered in the market. As the price of petrol
(gasoline as it's called where I'm from), rises, customer demand
will increase. The Australian automotive original equipment market
is projected to grow for LPG products due to customer demand. The
after-market will also continue to grow, especially in light of
the recent announcements by the commonwealth to continue to support
use of LPG.
corporatefile.com.au
What are the immediate opportunities in alternative
fuels?
CEO Terry Stinson
One clear opportunity for growth is the
after-market business, which we're already in through our acquisition
of OGP. We believe this will be a very good, profitable market where
we can grow. We're looking at several additional opportunities in
this area, not just related to OGP. It's a big market with lots
of potential.
It's also worth noting that there are government
subsidises in the after-market, for the retrofit of LPG systems
onto standard petrol cars. That's attractive to drivers - the government
partially pays for putting the LPG system on the car, and the payback
is pretty quick due to the lower cost of the fuel.
corporatefile.com.au
Thank you Terry and Keith.
Forward Looking Statements
This release includes forward-looking statements that involve risks
and uncertainties. These forward-looking statements are based upon
management's expectations and beliefs concerning future events.
Forward-looking statements are necessarily subject to risks, uncertainties
and other factors, many of which are outside the control of the
Company, that could cause actual results to differ materially from
such statements. Actual results and events may differ significantly
from those projected in the forward-looking statements as a result
of a number of factors including, but not limited to, those detailed
from time to time in the Company's Form 20-F filings with the US
Securities and Exchange Commission. Orbital makes no undertaking
to subsequently update or revise the forward-looking statements
made in this release to reflect events or circumstances after the
date of this release.
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