CEO & CFO on FY Results & OutlookASX ANNOUNCEMENT: 29 August...

CEO & CFO on FY Results & Outlook



ASX ANNOUNCEMENT: 29 August 2011

CEO & CFO on FY Results & Outlook

Open Briefing interview with CEO Terry Stinson and CFO

Keith Halliwell

Orbital Corporation Ltd

4 Whipple Street

Balcatta

Western Australia 6021

Orbital Corporation Limited (ASX OEC) provides engineering innovation, support, design, product

development and operational improvement services to producers, suppliers, regulators and users of engines

and engine management systems for application in motorcycles, marine and recreational vehicles,

automobiles and trucks.

Current Market Cap $17 million

In this Open Briefing? Terry and Keith discuss:

o Continued profitability with improved margins and Synerject growth

o Additional revenue in FY12 with the launch of Ford EcoLPi

o Outlook for growth markets and opportunities in China

Record of interview:

openbriefing.com

Orbital Corporation Limited (ASX: OEC) reported underlying NPAT of $0.16 million for the

year ended June 2011, compared with an underlying loss of $2.30 million in the previous

year. Profit in the second half was $0.13 million and Orbital has now booked underlying

profit for three consecutive halves. Do you see further recovery in the current year ending

June 2012? What will be the earnings drivers?

CEO Terry Stinson:

Orbital booked an underlying profit for the year and is on track for further improvement.

The investments we?ve made in the Ford Falcon EcoLPi system, as well as our other

businesses are expected to begin to bear fruit this year. The earnings drivers will be the

launch of EcoLPi which will generate additional revenue for the Orbital Autogas Systems

(OAGS) business, and we expect further growth in other areas of the business. The coming

year is not without its challenges. The continuing strength of the Australian dollar makes it

more difficult to trade with international customers, and this will also impact the translation

of our Synerject dividends and our US dollar-based royalty revenues.

Synerject has been a real earnings performer for Orbital over the past few years and has

done especially well over the past 12 months. This is projected to continue into the coming

year. Synerject is the highest performer in the Orbital stable and the results from this

segment are often overlooked by investors. The contribution from Synerject provided

underlying financial support over the past two years and facilitated Orbital?s ability to make

investments in new business streams such as alternative fuels and Unmanned Aerial System

(UAS) engines. As noted in the past, our strategic plan is to use the Synerject model to grow

Open Briefing? | Orbital Corporation Limited | 29 August 2011 2

organically and also through acquisition. We have a five year plan for growth and I am

excited by our prospects for the future. Synerject continues to be a primary driver of

earnings for Orbital in this plan.

openbriefing.com

In February, Orbital undertook the sale and lease-back of its head office property for $8.65

million, booking a $4.24 million gain. This contributed to an increase in cash and equivalents,

which stood at $6.87 million as at the end of June, up from $3.61 million a year earlier. Can

you comment on the adequacy of this cash buffer for the nearer term needs of the business?

CFO Keith Halliwell

We anticipate growth this financial year with a significant part of that driven by Sprint Gas

Australia (SGA), which will make a full year contribution. We?ll require working capital

funding for the ramp-up of the Ford EcoLPi but that can be supplied via our cash buffer.

We?ll target further acquisitions as opportunities arise, but at this stage we have adequate

cash for our known requirements.

openbriefing.com

You acquired 55 percent of Sprint Gas in May. Sprint Gas is an importer, assembler and

distributor of automotive LPG conversion kits in the aftermarket. You?ve flagged an interest

in further acquisitions. What are your acquisition criteria and to what extent will you be

looking for acquisitions like Sprint Gas that are a ?step out? from your core activities?

CFO Keith Halliwell

We see Sprint Gas as part of our core activities. Our core business is engineering innovation

but we?re also looking at businesses offering different channels to sell our innovation. For

example, our Liquid product is sold in the LPG aftermarket and the Sprint Gas acquisition

added a broader channel to sell this product. Our underlying acquisition criteria are return

on investment, growth potential and synergies with our existing businesses. Sprint Gas

ticked all those boxes.

We?re also interested however in adjacent businesses that still meet our investment criteria.

We have key criteria like growth potential, management, quality brands and relevant

industries, but are willing to take a ?step out? from core activities for an appropriate

acquisition.

openbriefing.com

Orbital booked net operating cash outflow of $1.79 million in 2011, versus outflow of $5.05

million in the previous year. What were the key drivers and can the cash flow improvement

trajectory be sustained?

CFO Keith Halliwell

Our reduced cash outflow was driven by improved day to day operations. We reduced

overhead costs across a range of expenses like travel, communication, insurance and patents.

We also spent less on Liquid kit development as we completed a range of kits for the LPG

aftermarket. Gross margins generated by OAGS improved with the strengthening Australian

dollar and our product mix. We also reduced working capital, in particular by reducing

inventory and increasing payables.

The expense reductions are sustainable and we?ll see a full year benefit this year. We

Open Briefing? | Orbital Corporation Limited | 29 August 2011 3

anticipate growth this year and are closely monitoring our working capital requirements.

openbriefing.com

What needs to happen for the Changan project to move in to commercial production? What

would be the estimated timeline and how would Orbital be involved with the various aspects

of the project?

CEO Terry Stinson

Changan has many advanced projects moving forward in parallel. Some of these are targeted

at improving fuel economy and emissions. This project proved technical capability; the

FlexDI technology integrated into Changan?s ICCS engine delivered 20 percent reduction in

fuel consumption. Changan will now determine the commercial feasibility of FlexDI and

compare this to other alternatives that it has developed. If FlexDI is determined to be

commercially feasible, Changan will then pick a platform and begin to select potential

suppliers. From my experience, the evaluation process can take 12 to 18 months, perhaps

longer.

A new engine project like the ICCS with FlexDI would take three to five years and require

further significant investment by Changan to get to commercial production. The engine to

vehicle part of the project can happen almost in parallel if Changan decides to use an existing

platform. The integration of FlexDI requires base engine changes as well as the

incorporation of advanced fuel and engine management systems. The new base engine

components, like the cylinder head, require new tooling and equipment which have long lead

times. The new tooling and capital required drive the front end timing for the project; the

vehicle integration reliability and durability testing and certification drive the back end.

In my view, this commercial feasibility gateway is the point where Orbital?s automotive

projects have stalled in the past. Orbital is limited by not being a mainstream automotive

systems supplier like Bosch or Delphi, as we don?t have the financial strength to fund a major

automotive program and this raises the risk level for the customer. Suppliers like Bosch and

Delphi have their own competing Direct Injection systems and are very reluctant to consider

adopting and supporting a new technology. The barrier to entry has been much lower for

the non-automotive market, allowing the same Orbital FlexDI technology to sell into over

650,000 engines in this market. Based on history, I?m cautiously optimistic that Changan will

take Orbital?s FlexDI into production.

Our primary thrust moving forward with Changan will be on the engineering side. If the ICCS

program moves forward, the program support from Orbital could exceed the proof of

concept phase. From this success we expect that there will be other programs with Changan.

openbriefing.com

Alternative Fuels generated an underlying loss of $0.76 million (excluding the write-off of

capitalised development costs and provision for slow moving inventory) in 2011, compared

with a loss of $1.73 million in 2010. Revenue declined by 6 percent to $5.85 million. To what

degree was this earnings improvement due to structural cost savings versus the impact of

exchange rate movements, including upon the cost of materials?

Open Briefing? | Orbital Corporation Limited | 29 August 2011 4

CEO Terry Stinson

The improvement was mainly due to overhead management. Ford stopped production of

their previous generation LPG Falcon in September 2010 and OAGS had to adjust costs at all

levels to compensate for the loss of sales. The OAGS team delivered the required savings and

I?m pleased with its performance. In parallel, the team focused on growing our after-market

sales which helped soften the drop in Ford business. The lower level of trading due to Ford

ceasing production minimised the effect of the exchange rate.

CFO Keith Halliwell

Gross margins also improved due to the sales mix. A significant part of our aftermarket

revenue is made up of spare part sales, which provide better margins than supply to OEMs.

Lastly, margins also improved because we bought Sprint Gas towards the end of the year ?

Sprint Gas has better margins than OAGS.

openbriefing.com

In 2012, what is the expected contribution to Alternative Fuels from the Liquid LPG system

(Liquid LPi), which is fitted to the recently launched ?EcoLPi? Ford Falcon, and what is the

outlook for the LPG aftermarket? How are your expectations of demand in these markets

reflected in your level of investment?

CEO Terry Stinson

We expect a major contribution from the sale of Ford EcoLPi components this year. Last

year, OAGS had no Ford production from September through the end of the year. Over the

next few months we?ll be ramping up to full production with Ford. The value of the content

we sell to Ford on EcoLPi will be higher than that on the previous model.

We have a sales plan, however the market will ultimately decide on the level of sales for the

full year. Feedback from the motoring press on the Ford EcoLPi vehicle has been very good.

I?ve driven a number of the test vehicles and they really deliver on performance.

The aftermarket picked up late last year however it?s still significantly down year on year.

The downturn created an unexpected advantage for Orbital. OAGS picked up sales when one

of our key competitors failed. This was one of the biggest players in the market. The best

time to make a strategic acquisition is often in a declining market. We feel that the Sprint

Gas acquisition fits in this category. Orbital has the best system on the market and now has a

mature distribution channel. Sprint Gas also carries a full line of LPG products.

I expect the aftermarket to continue to be depressed until fuel prices rise and the world

economic situation improves. There is, however, an underlying trade-user market that has

been less affected than the consumer market and that will support the continuing

profitability of our LPG aftermarket business, even in a depressed market. The Australian

LPG aftermarket has experienced many highs and lows over the years, primarily driven by the

price of petrol. Ford and Holden have invested heavily in new advanced LPG vehicle

platforms with the expectation that the market will be sustained and hopefully grow. We?ll

have the right product alternative for Australian car buyers when the price of petrol rises and

squeezes the pocket books of fleets and average drivers.

openbriefing.com

Orbital Consulting Services (OCS) booked pre-tax profit of $0.16 million in 2011, down from

$1.03 million in 2010, on revenue which was down marginally to $9.49 million. Pre-tax profit

Open Briefing? | Orbital Corporation Limited | 29 August 2011 5

in the second half was $0.13 million, up from $0.04 million in the first half, on revenue of

$5.29 million, up $1.09 million. Is the momentum of the second half sustainable in a high

Australian dollar environment?

CEO Terry Stinson

The momentum is sustainable for both our domestic and overall business. Our domestic

alternative fuel initiatives will be less affected by the exchange rate. International projects

like our UAS engine systems initiatives rely on FlexDI, Orbital?s proprietary technology. FlexDI

is only available from Orbital so we have a unique selling proposition that partially insulates

us from the strong Australian dollar.

However, the high Australian dollar is of course still impacting our OCS business.

International customers seeking general power train and vehicle engineering and testing

have options. OCS costs have effectively increased for international customers over the past

18 months due to the big swing in exchange rate.

Our goal is to offset the potential downside due to the exchange rate through higher

domestic revenues and profits from our new business activities. We need to continue to win

consulting services contracts to protect our core engineering infrastructure. This core

supports the birth and growth of new businesses like Synerject, OAGS and Sprint Gas.

openbriefing.com

Orbital?s Royalty and Licence pre-tax profit was $0.61 million in 2011, down 17 percent on

2010, with revenue of $1.08 million, down 10 percent. What was the impact of the high

Australian dollar on earnings and are there any indications of improvement in the US marine

and recreational markets?

CFO Keith Halliwell

The business is profitable, cash flow positive and currently requires minimum investment but

we?re taking a conservative view on future investment until we see the market improve.

The high Australia dollar eroded earnings by $125,000 compared with the previous year. If

the exchange rate had remained constant, profit would have been about $735,000. Our

markets were essentially flat, although royalty earning units in the marine market increased

slightly. While the market has improved since the onset of the global financial crisis, recent

economic uncertainty in Europe and North America does not give us confidence that

discretionary spending will pick up in the near future.

openbriefing.com

Having completed your program with Changan in China during 2011, what are Orbital?s key

opportunities in China and in other growth markets in the short to medium term?

CEO Terry Stinson

We expect our China initiatives will continue to grow in the short to medium term but we?ll

have to offset the significant impact of the exchange rate. The successful completion of

Changan leaves us with a hole in our China order book that we?re working hard to fill. Our

key opportunities are in our traditional markets of engine development and engine

management systems. For example, we have just won a smaller engineering project in China

based on our success with Changan that could build into another Changan type opportunity.

Open Briefing? | Orbital Corporation Limited | 29 August 2011 6

We?re working on offsetting the high Australian dollar by offering unique selling propositions

and expect FlexDI will contribute to this. Other potential growth markets this year are India,

Taiwan, and the US. As for China, the Changan project was a significant technical success.

The fuel consumption reduction achieved on the engine was benchmark. Changan invested a

significant amount of R&D and we achieved the targets. Hopefully the project will advance

to the next phase of commercial development. If it goes forward, Orbital will be involved in

that work. Orbital is also exploring the potential for other advanced R&D projects with

Changan.

openbriefing.com

Synerject, Orbital?s 42 percent owned associate, made a contribution to earnings of $3.23

million in 2011, up from $1.87 million in 2010. The associate?s US dollar NPAT was up 37

percent to US$6.50 million, with cash flow increasing to US$8.52 million, up 43 percent. To

what extent was the growth driven by demand in emerging markets? What is the outlook for

Synerject?s earnings and cash flow, given the planned launch of new products over 2012?

CFO Keith Halliwell

Synerject sales grew in a number of areas, including emerging markets. There?s demand for

Synerject products across a wide range of markets. In 2011 Synerject saw growth in the

marine sector, snow mobiles, high end motorcycles in North America and low end

motorcycles in Asia.

Synerject?s outlook for earnings and cash flow is positive. While growth may not be as

dramatic as last year, Synerject will grow again this year. Despite an unfavourable exchange

rate, the dividend we received from Synerject increased nearly 80 percent to A$1.2 million in

2011 and we anticipate a further increase in 2012. Synerject has a great management team

and we?re very pleased with the way the company is developing.

openbriefing.com

Thank you Terry and Keith.

For more information about Orbital, please visit www.orbitalcorp.com.au or call Terry Stinson on

(+61 8) 9441 2311.

For previous Open Briefings by Orbital, or to receive future Open Briefings by email, please visit

openbriefing.com

DISCLAIMER: Orient Capital Pty Ltd has taken all reasonable care in publishing the information contained in this Open Briefing?;

furthermore, the entirety of this Open Briefing? has been approved for release to the market by the participating company. It is

information given in a summary form and does not purport to be complete. The information contained is not intended to be used as

the basis for making any investment decision and you are solely responsible for any use you choose to make of the information. We

strongly advise that you seek independent professional advice before making any investment decisions. Orient Capital Pty Ltd is not

responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might

suffer as a result of that use.

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 forwardlooking

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.


http://www.stocknessmonster.com/news-item?S=OEC&E=ASX&N=554723