open briefing interview

Date of lodgement: 05-May-2004
Title: Open Briefing. Orbital Engine Corp. CEO on Bajaj, Outlook
Record of interview:
corporatefile.com.au
Orbital Engine Corporation Limited recently announced a technical cooperation
agreement with Bajaj Auto Limited, one of India’s largest producers of two and
three wheeler vehicles. How will Orbital derive revenue under the agreement and
what are the implications for earnings going forward?
CEO Peter Cook
Our arrangement with Bajaj is a fairly standard licence and royalty agreement. A
small amount of the licence fee was payable on the signing of the agreement and
certain milestone payments are due over the next 12 months or so. Then, once
Bajaj goes into production, we’ll derive a royalty from every unit made.
The implications for earnings are twofold. Firstly, the volume and size of the
Bajaj autorickshaw market is significant relative to those of other licences we
hold. We’re hopeful it will prove to be of a similar value to the Mercury royalty
stream for us. Secondly, this is the first time our product will be used on a
commercial vehicle – autorickshaws are predominantly taxis in India – and the
fuel benefits will have a significant meaning for the operator. We’re hopeful we’ll
see significant market penetration and growth in the sector overall.
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The agreement gives Bajaj exclusive use of Orbital’s fuel injection technology on
its autorickshaws for three years following the commencement of production.
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Why was it necessary to provide exclusivity? Does this relate only to the Indian
market?
CEO Peter Cook
The exclusivity is only in the Indian market and is restricted to a particular
capacity range of two stroke engines. We agreed to this because Bajaj has
pioneered, grown and developed this market sector and it wanted to make certain
there were no competitive pressures from other manufacturers moving into the
sector with what it sees as the superior technology.
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What other opportunities are there for Orbital in the Indian market?
CEO Peter Cook
This is our first venture with a commercial vehicle and our first venture into the
Indian marketplace, so we have to tread a little warily. We’re optimistic however,
that with some success in this sector, and particularly with our emissions and fuel
economy demonstrated on a commercial vehicle, there’ll be other opportunities
over time.
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Orbital said at its first-half results announcement that it expected the results of the
second half ending June 2004 to be in line with the first half, excluding any
foreign exchange gains or losses. First-half net profit was $2.1 million. How do
results so far in the half compare with this expectation?
CEO Peter Cook
At the time, we also alerted the market that one of the sectors where we derive
royalties, the 50cc scooter market in Europe, was reasonably volatile with
manufacturers under profit pressure from changing market circumstances. We’re
still concerned about that, and the position could deteriorate, but on our current
reading of the environment in Europe, we believe our second half should be
consistent with our first half.
I should also add that despite these concerns in Europe, we have a greater level of
confidence about the market for outboards. Current indications are quite positive
for Mercury’s Optimax range in North America.
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Is the volatility of the 50cc market in Europe a cyclical event, or are there signs
that it could be a structural change that could have a long-term impact?
CEO Peter Cook
It could be either. Like a lot of European manufacturers, our licensees have found
it very difficult to sustain a position against imported Asian products. But they’re
moving to secure manufacturing points in Asia, so we’re hopeful that this is just a
cyclical shake-out.
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Orbital’s overhead expenses fell to $7.2 million in the first half from $10.6 million
in the previous corresponding period. What has been the trend in overheads in the
second half and to what extent will your head office relocation contribute to
lowering costs over the remainder of the year and going forward?
CEO Peter Cook
There’ll be some minor savings in terms of occupancy and related costs, but we’re
not seeing any significant change in overheads compared with the first half.
We’ve got our overheads fairly stable and where we want them to be.
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Can you give any guidance on the level of any one-off costs that might be
associated with the head office relocation? To what extent are these cash costs?
CEO Peter Cook
The one-off costs were all cash and amounted to some $950,000. They were either
fully provided for in earlier financial periods or will be capitalised and therefore
will have no impact on this year’s profit. The costs related to two elements, the
termination and make-good obligations under the lease and the refurbishment of
one of our existing buildings into which we’ve relocated.
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Orbital reduced its net operating cash outflow to $0.3 million in the first half,
compared with $6.1 million previously. The result included some final
redundancy payments relating to the Synerject restructure. As you generate
positive cash from operations, what will be your priorities for employing the cash?
CEO Peter Cook
We now want to rekindle some support work for our underlying Orbital
combustion process technology, and particularly second generation products for
OEMs that have our product out in the marketplace. Our first generation product’s
been in the market for upwards of five to six years, so we’ll be looking to do some
product improvement aimed at lowering cost for the OEM, achieving easier
application and reducing the number of components.
This will be a very focused development spend, not a research spend, and will be
driven off the needs of our customers. We’d therefore expect it to be reflected
fairly quickly in improved royalties and improved market penetration.
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Orbital’s shares are currently trading at around $0.15, more than 30 percent below
their 52-week high of $0.22 in September. Given you’re still within the period
during which the New York Stock Exchange is monitoring the company for
compliance with its listing rules, does the share price fall have any implications for
your NYSE listing?
CEO Peter Cook
The answer’s got to be yes. One of the issues the NYSE considers is market
capitalisation, so decline in share price is relevant. We’ve now been monitored by
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the NYSE for 18 months, and we’re not fully meeting all of their requirements
although we are requesting that the company be allowed to continue to trade on the
exchange on the basis that we expect to move back into a position of full
compliance in the medium term.
We’re committed to ensuring that our US-based shareholders have an accessible
market on which to trade their ADRs and our preference is to remain listed on the
NYSE. In the event that proves not to be possible, we’ll canvass alternate markets
in the US.
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Thank you Peter.
For previous Open Briefings with Orbital Engine, visit www.corporatefile.com.au
For more information about Orbital Engine, visit www.orbeng.com.au