Orbital Engine Corporation Open Briefing
PERTH, Australia, Feb. 23 -- The following is a
dialogue between corporatefile.com.au and Orbital Engine Corporation Limited
CEO Peter Cook:
corporatefile.com.au
Orbital Engine Corporation Limited recently reported a net
loss of $2.9 million for the first half ended December 2002 compared
with a loss of $20.7 million in the previous comparable period. What
were the key drivers of the improved performance?
CEO Peter Cook
The basic drivers were an improvement in sales and a substantial expense
reduction. Sales were up 30 percent on the engineering front, our
royalty revenue was up 26 percent and systems sales were up 37 percent.
On the expenses side, we cut overheads by 28 percent.
Additionally, Synerject has enjoyed a $3.0 million turnaround.
corporatefile.com.au
Discounting non-recurring cash costs related to the restructuring of the
business, operating cash out-flow for the first half was $1.8 million,
compared with an out-flow of $6.0 million previously. Do you remain on
track to achieve cash neutrality from your underlying trading for the
full year ending June 2003?
CEO Peter Cook
We're hopeful of achieving cash neutrality from underlying trading in the
second half. I have to be quite specific and say this excludes any
costs associated with staff attrition as a result of the restructuring
of Synerject, our 50:50 joint venture with Siemens VDO, which isn't yet
fully completed in terms of staff transfers and terminations.
corporatefile.com.au
Orbital had cash in hand of $6.7 million as of the end of December, down
from $13.8 million at the end of June. What's the outlook for cash at
the end of June 2003?
CEO Peter Cook
We'd expect to see some erosion of our cash position, but that would stem
from the Synerject staff-related matters and little else.
corporatefile.com.au
First-half revenue from operations was up 29.1 percent to $29.7 million
in spite of big reductions in the cost base. What were the drivers of
the growth and what's the outlook for the remainder of the year?
CEO Peter Cook
System sales increased on the back of a recovery in the Marine and
Recreation sector in particular. The number of products using our
direct injection technology grew, with more in the pipeline for 2003
release, including a new personal watercraft from Bombardier, a
jet-powered sport boat from Polaris and new models in Mercury Marine's
OptiMax outboard motor range.
Revenue from engineering services rose because of our aggressive efforts
to seek sales and find customers. And it's important we do that because
engineering services is our single biggest cost base, representing
around $10 million of costs. A very strong focus of management has been
to increase our utilization of that engineering resource and we feel we
can continue the growth and efficiency gains.
Marine royalties were favored in the first half due to client inventory
build and won't be as strong in the second half. Motorcycle royalties
will continue to improve in the second half as the manufacturers build
for their summer sales season.
corporatefile.com.au
What level of revenue growth do you believe is sustainable under the
current cost structure of the business?
CEO Peter Cook
We could have another year of current growth rates, i.e. 30 percent,
before we'd need some addition to our resources to service the level of
demand. I think 30 percent growth's achievable over the next year and I
wouldn't expect any material increase in the cost base until around
2005.
Of course some of our growth comes from royalties, which are a function
of the growth of our customers' products in the marketplace. And
clearly we don't need resources for that. On this front, it's
encouraging that our customers are planning additional product launches
for the Northern Hemisphere summer. But because that's late in our
financial year and straddles the new financial year, it won't impact our
bottom line until next year.
corporatefile.com.au
Orbital recently announced a deal with the Indian parts and systems
manufacturer UCAL. What's the potential revenue from this deal, how
will the revenue be structured and when will Orbital begin to book the
income?
CEO Peter Cook
The UCAL deal is a medium-term revenue opportunity for us. We'll receive
some license fees from the arrangement over the next two years, which
won't be significant, recognizing the Indian market is cost-sensitive.
At this stage, we have no firm commitments from any of the four major
scooter and motorcycle manufacturers in India to adopt our technology
and take it out onto a product. However, critical for that to occur is
a reliable supplier of componentry within the Indian sub-continent, and
that's what the UCAL deal signifies.
corporatefile.com.au
Synerject contributed after-tax earnings of $0.7 million to the first
half result, compared with a loss of $2.7 million previously. Following
the January restructure of Synerject, Orbital will add its Marine and
Recreation systems business and Siemens VDO a non-automotive systems
business, to the Synerject operation. Given the Marine and Recreation
business has been Orbital's most consistent profit generator, how will
the changes impact Orbital's earnings in the second half and going
forward?
CEO Peter Cook
The Marine and Recreation business has been a consistent profit earner,
but essentially from royalties. Orbital will continue to receive these.
Similarly, we'll continue to receive the Marine and Recreation
engineering services profit. Synerject has taken over the Marine and
Recreation systems business, and it will look exactly the same as our
motorcycle systems business, which is already handled within Synerject.
In simple terms, the sales revenue of our Marine and Recreation systems
business will be booked by Synerject, not by Orbital. So, essentially
all of the Marine and Recreation systems sales will drop to almost zero
in the second half. We'll report system sales of about $1.2 million for
January, the last month before the restructure.
But Synerject now also contains Siemens VDO's non-automotive systems
business, so even though we only own half of Synerject, and therefore
only half our Marine and Recreation systems business's earnings, the
costs associated with Marine and Recreation systems are now within
Synerject and we also own half of a business we never had before. So
our bottom-line earnings should be essentially unchanged compared with
the old structure, notwithstanding the revenue reduction from systems
sales.
corporatefile.com.au
Given the financial impact is negligible, what's the rationale behind
combining the Marine and Recreation business with Synerject?
CEO Peter Cook
The reason it's a sound move is that our customers find it easier to deal
with one company, Synerject, than with both Synerject and Orbital.
Synerject was a parts supplier to our customers, and then we put the
parts together and supplied the system. Synerject can undertake
everything we did with almost no increase in staff. It can simplify the
process for the customer and achieve some real efficiencies. So we
stand to benefit from those cost savings before we even consider the
benefits of half ownership of the additional Siemens VDO business, which
is of similar size to our Marine and Recreation business.
corporatefile.com.au
What revenue growth rates do you expect within Synerject and how does
the restructure change the earnings outlook for the joint venture?
CEO Peter Cook
Year to date, Synerject's revenue is up some 50 percent year on year.
Whilst there's a timing element to that, we'd expect growth in the
underlying business to remain well above 20 percent. With the
additional businesses and an improvement in processes, I'd expect
growth in total revenue of about 50 percent.
corporatefile.com.au
In the first half, Orbital capitalised $0.8 million worth of engineering
and other services provided to Synerject. Will this be ongoing? What
operating and financial commitments do you have to the restructured
Synerject?
CEO Peter Cook
We've had an ongoing arrangement to supply engineering services to
Synerject, with the work done booked as a trade debt. As part of the
restructuring, we've taken that trade debt up as equity but in future
we'll treat Synerject like any of our clients and be paid for those
services. Beyond our loan guarantee, we have no financial commitments
to the restructured Synerject.
corporatefile.com.au
What are the terms of the re-payment schedule for Synerject's
restructured funding from Siemens and how does it compare with
Synerject's current cash-flow generating capability?
CEO Peter Cook
There are two points I'd want to make on this. First, we're satisfied
with Synerject's revised business plan, taking advantage of the
synergies from the contributed businesses, and its underlying growth.
We're satisfied that Synerject can meet its repayment obligations with
respect to the restructured loan.
The second point is in regard to our guarantee of Synerject's loan from
Siemens, which is in position until September 30, 2006. I want to
stress the guarantee's only callable in the event of Synerject
defaulting under its repayment arrangements. We don't see any problem
with the repayments so we don't believe our guarantee is likely to be
called.
corporatefile.com.au
The New York Stock Exchange recently agreed to allow Orbital to maintain
its listing subject to the implementation of the business plan submitted
to the exchange. What obligations does this place on Orbital in the
short to medium term?
CEO Peter Cook
We've got an obligation to report on our progress to the NYSE each six
months over an 18 month period. I can't discuss the detail of the
business plan, that's confidential, but an example of the sort of things
that have concerned the exchange is the restructuring of the loan
facility within Synerject, under which we had an obligation. That's
obviously been addressed.
corporatefile.com.au
Thank you Peter.
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