Welcome to Orbital's website, and to the "From the CEO" newsletter.
It has been a very active two months since my last newsletter, and I would like to update you on key activities and the directions your company is heading. Whilst we face challenges with the worldwide Financial Crisis, as discussed in my previous newsletters, we are starting to see positive results of the key strategies and initiatives introduced last year. Our market is responding to three key market drivers:
consumer market and legislative push for fuel economy improvement increased focus on climate change alternative fuels market As the opportunities for consulting engineering services contracted in our traditional markets of Europe, USA and Japan, we implemented new marketing initiatives. These included an increase on our focus on alternative and renewable fuels together with additional attention for China.
As announced in late February, we commenced major programs with Sygma Motors in Brazil for an Ethanol application of our FlexDI™ system on to large commercial engines - see http://www.orbitalcorp.com.au/orbital/investorinformation/news/090209.htm. Simon Brewster, who presented Orbital's Ethanol FlexDITM developments at the 2007 SAE Congress in Brazil, will be heading up the Sygma program and is spending half his time in Brazil.
I visited Brazil in early May, and met with the principles of Sygma Motors and VSE (Vale Solutions in Energy). The work that we are carrying out with Sygma Motors is the foundation work for the Ethanol sector of Orbital's overall alternative fuel strategy.
There is a growing demand from the Brazilian government and industry for ethanol to be applied to heavy duty industrial and transport applications where diesel is the predominant fuel. Brazil is ranked #1 for using renewable fuels and through the efforts of Sygma Motors and VSE, plans to be a leader in application of ethanol for power generation and heavy duty applications.
Marcos Langeani, Managing Director, Sygma Motors, James Pessoa, CEO & President, VSE with Terry Stinson
In late March, we finalised our commercial arrangements with Continental AG for the ownership of our joint venture company Synerject. Orbital had the option to take up 10% of Synerject shares to maintain a 50:50 joint ownership by payment of US$4 million. However, to enable expansion of Synerject, Continental requested to take controlling interest in Synerject and new commercial arrangements were negotiated. Continental has taken on an additional 8% ownership of Synerject in exchange for the US$4 million.
This brings immediate benefits to Synerject as Continental now has a controlling interest in the joint venture entitling Synerject to have better access to Continental's purchasing systems and processes. This will significantly improve Synerject's purchasing power; increased Synerject profits is projected to deliver greater returns to Orbital in the future.
As a part of the Synerject transaction Continental contributed a North American marine Engine Control Unit business with revenue of US$10m to Synerject. Orbital also received a special dividend of US$2.25m from Synerject, and will use this dividend for strategic investments going forward.
A further benefit is Orbital will become the Australian and New Zealand representative for the supply of specific Continental LPG and CNG fuel supply components. This includes software, injectors, regulators and fuel rails for passenger cars, heavy duty engine and mining applications and is important in supporting our growth strategy for our OGP business and in the alternative fuel markets. For more detailed information, please refer to the following link: http://www.orbitalcorp.com.au/orbital/investorinformation/news/300309.htm
In early May we secured a major development contract with Changan in China. Through this joint program, Changan and Orbital will apply FlexDI™ and other advanced technologies to a concept/demonstration Changan automotive product. The aim is to achieve significant improvements in fuel economy whilst maintaining the engine performance and meeting the stringent Euro IV emissions being introduced in China.
A successful proof of concept could result in a production program. We are cautiously optimistic as Orbital has been in this same position with several customers over the past ten years. Previous demonstration programs with major automotive customers achieved significant improvements, however these programs did not move into production. Our team will take the Changan program step-by-step, delivering on the concept is the primary focus and is imperative to have a chance at future production opportunities.
I expect many of you will have future follow-on questions related to the progress of the Changan project. From this point, please do not expect further updates from Orbital. Our customer, Changan, has requested that the progress and the results from this endeavour be kept strictly confidential. Changan may release the results in the future at their discretion. The Changan announcement may be found at http://www.orbitalcorp.com.au/orbital/investorinformation/news/010509.htm
We recently announced that OGP (Orbital Gas Products) has been appointed as the OEM supplier of the new-generation LPi system for Ford Falcon models, commencing in the second half of 2010. This is a major milestone for OGP and Orbital. It will allow Orbital to further develop our expertise in alternative fuel engine technology targeted for application and sale in our home country, Australia.
The new agreement will see OGP deliver more content to Ford, resulting in significantly greater revenues. In addition, Orbital Gas Products will expand through the planned introduction of new generation LPG technology to the After-OEM and retrofit markets commencing in the second half of 2009.
LPG is an attractive alternative fuel option in Australia, with good supply infrastructure in place. In 2008, more than 125,000 vehicles in Australia were fitted with LPG, resulting in an estimated 104,000 fewer tonnes of CO2 being released into the atmosphere. Due to the worldwide financial crisis and Australian recession, the LPG retrofit market has recently softened. We expect this to rebound with the economy and with increases in the price of petrol.
The new Orbital LPi system significantly improves vehicle performance compared to the current vapouriser systems. It delivers good cold start/operation, with power and torque levels similar to the gasoline engine. The LPI system demonstrates over 10% reduction in CO2 compared to the gasoline equivalent vehicle. This new system, targeted at Australian application, will build on our close relationship with Vialle and on the new commercial relationship with Continental.
LPG pricing is typically only 40 to 50% of unleaded petrol. As the cost of gasoline increases, the operating cost savings - without compromise on performance - makes switching to LPG a very compelling argument. OGP is currently developing the new LPi system and retrofit kits that will cover a range of popular Australian car models. For more information re the LPi announcement, please refer to:
On the topic of alternative fuels for large engine applications, our Heavy Duty Test cell is progressing well. It is expected to be commissioned in a July/August 2009 timeframe. This new test facility will assist in our alternative fuel development, especially with LNG, 100% ethanol and fuels that work particularly well in heavy transport and industrial engine applications. Using LNG can save up to $80,000 per year for a high mileage C15 powered road train. This saving is a very attractive proposition to the user and comes with an added benefit of 15% greenhouse gas savings.
Many of Orbital's shareholders have asked me how the existing Orbital DI products are faring. Key markets, specifically North America, Europe and to a lesser extent Japan, are in recession, as a consequence we have seen significant fall off in our traditional gasoline FlexDI™ product volumes. The marine products in particular have been heavily impacted as these are mostly discretionary income products. As Synerject is the key supplier of non auto FlexDITM systems to these customers, Synerject's business is also being negatively impacted. Most of our North American and European customers warn us not to expect any significant improvement in the immediate future. We will take this into account as we prepare our FY10 budgets.
On a more positive side, all of our outboard, motorcycle and three wheeler models continue in production, albeit with the reduced volumes in the recreational market.
In India, the three wheeler GDI autorickshaw is now listed on the Bajaj website. This is a positive sign and shows continued support by Bajaj for FlexDI technology. I expect questions related to sales volumes and market expansion for this product. Please accept that this information is customer confidential and cannot be disclosed by Orbital. The benefits of the GDI vehicle compared to the baseline and more detailed information are available at this link: http://www.bajajauto.com/3wheeler_regdi.html
You may recall in my last newsletter I commented that the impact of the worldwide financial crisis has not dimmed my spirits related to Orbital's prospects. This is still the case. You can see from this newsletter that our staff have been very busy and despite the financial conditions have done well and we continue to secure new contracts. Since the end of February, we have had engineers on site supporting funded programs in USA, Germany, Austria, UK/Scotland, Brazil and France. I am continually encouraged with the global recognition of the unique skills that we can offer engine and vehicle manufacturers.
In the last two months, the executive management team and the Board of Directors have further developed the base strategies introduced at the last AGM. Whilst this is ongoing work, our strategy reviews have confirmed that our growth opportunities lie in the alternative fuel area. We will be vigorously pursuing these opportunities from supply, service and development perspectives for engines ranging from small, to automotive, to large industrial engine applications. Orbital currently has sufficient financial and technical resources to pursue our objectives, however, to achieve the growth that the Orbital Board and Management team are targeting, addition funding to support this growth may be required. We are evaluating each investment very carefully and will endeavour to investment in opportunities that will yield the best returns for our shareholders.
With regards
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