open briefing - corporatefile

Date of lodgement: 22-Aug-2003
Title: Open Briefing. Orbital Engine Corp. CEO on Improved Result,
Outlook
Record of interview:
corporatefile.com.au
Orbital Engine Corporation Limited yesterday reported a net loss of
$1.9 million
for the year ended June 2003, compared with a loss of $26.8 million
in the
previous year. Excluding non-recurring items, Orbital generated cash
from
operations, with positive EBITDA of $3.4 million in the second half,
compared
with an EBITDA loss of $1.9 million in the first half. What's the
outlook for
earnings in the current year to June 2004?
CEO Peter Cook
Expense reduction was our key thrust in 2003 and you'll see the full
impact of that
in 2004. Beyond that, it's difficult to forecast in the current
environment. We do
expect some growth in revenue but that's never guaranteed, and of
course there's
an impact on our results from forex and that's very difficult to
forecast. But we're
confident the cost reductions we implemented in 2003, while
substantially
completed, will fully flow through in 2004 and improve our overall
results.
corporatefile.com.au
Orbital recently raised a total of $5.9 million via a share
placement and the offer of
a share purchase plan to existing shareholders. The funds were
raised to place
Orbital in a better position to win major programs of work. How do
you expect
access to larger projects to affect cash flow and earnings going
forward?
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CEO Peter Cook
We're anxious to sell larger and particularly longer-term projects
to our customers
in order to access more stable and longer-term income streams. We
felt that
concern about our financial stability may have created a potential
obstacle to that
and we believe our stronger financial position will help to build
client confidence.
Time will tell whether we've been successful, but I'm comfortable
we've made a
step in the right direction.
corporatefile.com.au
Does Orbital directly fund this work?
CEO Peter Cook
In this area, we work on a fee-for-service basis and receive
progress payments all
the way through a project. We do attempt to balance our expenditure
with our cash
receipts and it would only be in very rare circumstances that didn't
occur.
corporatefile.com.au
Overhead expenses fell to $19.5 million from $25.4 million. What
scope is there to
further reduce overheads in the current year?
CEO Peter Cook
The major cost reductions, including redundancies, were completed at
various
stages through 2003 so the full, annualised benefit will show up in
2004. Whilst I
wouldn't rule out some smaller overhead reductions, they'll have
appreciably less
impact than the $6 million worth of overheads we took out of the
business in 2003.
corporatefile.com.au
Synerject, your 50:50 joint venture with Siemens VDO Automotive
contributed
profit of $1.4 million for the year, compared with a loss of $3.1
million previously.
However, the second-half contribution of $0.7 million was unchanged
from the
first half. How did your restructuring of Synerject, effective April
2003, affect its
earnings over the year?
CEO Peter Cook
Historically, Synerject's earnings have been skewed toward the first
half but we
expect the expanded business, which now includes our marine and
recreation
systems business and Siemens VDO's non-automotive systems business,
to
generate more evenly balanced earnings across the first and second
halves. That
trend started to emerge in 2003 even though the new structure was
only in place
for the last quarter of the year. We'd expect the trend to be more
pronounced this
year.
corporatefile.com.au
System sales fell 18 percent to $29.3 million in 2003 and will be
further
significantly reduced in 2004, reflecting the transfer of the marine
and recreation
systems business to Synerject. What's the expected impact on net
profit in the
current year?
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CEO Peter Cook
This is a slightly awkward transaction to understand because
previously both we
and Synerject reported the same system sales and our respective
portions of the
profit. In future, all system sales will now be reported within
Synerject, including
the profit, and our accounts will reflect our 50 percent share of
Synerject's
increased net profit.
In 2004 under the new structure, Orbital's system sales will be
zero. We expect
minimal impact at EBIT level because even though there's a loss of
turnover and
margin, we've been able to achieve cost reductions that will
compensate, most
notably through the closure of our operations in Newport News in the
US. At the
same time, Synerject will pick up the incremental profit and get
some synergies as
a result.
corporatefile.com.au
What are the growth opportunities for Synerject?
CEO Peter Cook
Synerject has achieved solid growth and is now a US$40 million
turnover
business. Synerject's achieving that growth because it occupies a
unique position
as a specialist parts and systems supplier to the non-automotive
market, a sector
which has lagged the automotive market in adopting electronic engine
management systems. That process is underway and as the only
specialist
company in this area globally, Synerject is seeing substantial
growth.
We're hopeful that conversion will continue and that Synerject's
unique position
in the marketplace will remain unchallenged, at least for a period
of time. That
should allow it to continue achieving solid growth.
corporatefile.com.au
Orbital's engineering services income increased 15 percent to $10.1
million in
2003. What was the profit contribution of this sector of the
business during the
year and how is it positioned in terms of profitability and growth
going forward?
CEO Peter Cook
At $10 million turnover, the engineering services business is about
breakeven,
which is what we've managed to achieve out of our restructuring and
refocusing of
the business over the past year.
The indications are that the turnover can be improved and that we
can achieve
higher turnover with no increase in costs. We're hopeful that some
additional
small overhead reductions can be achieved, which will have a
positive impact on
the overall performance of the business this year.
corporatefile.com.au
What are the drivers of external demand for Orbital's engineering
services?
CEO Peter Cook
There are three underlying drivers that give us confidence in the
sector. First, we
now have a wider engineering services product offering than simply
the traditional
4
Orbital combustion process, which two years ago was all we were
setting out to
sell.
Second, there's as much interest now among OEMs in Orbital's
combustion
process as there ever has been. And remember, it's OEMs looking to
understand
how OCP works on their engines that write business for us. So that
underpins a
reasonable amount of our turnover.
And thirdly, a point that shouldn't be overlooked, there seems to be
an increasing
propensity for OEMs to outsource the engineering services we
provide. With the
objective of keeping their own fixed costs under control, they're
looking to
outsource varying proportions of their work, particularly peak
loads, and we're a
beneficiary of that trend.
corporatefile.com.au
Orbital's royalty income rose to $3.2 million from $2.7 million,
while licence
income fell to $0.7 million from $3.8 million. What were the drivers
of these
trends and what's the outlook for royalty and licence income in the
current year?
CEO Peter Cook
The reality is that licence income's lumpy and there's no
discernible "trend." We
feel that around $1 million a year would be a reasonable average.
On the issue of royalties, our income's a function of the number of
models
incorporating our technology and the success of those models in
individual
markets, for the OEMs.
We'd cautiously forecast some growth in our royalty income because
the number
of models using our technology has increased. History indicates that
individual
models can succeed or fail, not necessarily because of our
technology, but seasonal
effects, for example a good summer, increase sales of jet skis and
boats.
Also, we're just completing the second summer season of sales of
four of the
scooter models that carry our technology in Europe. So the outlook
depends partly
on whether in the third season the OEMs are able to get even further
growth and
market penetration from those models.
corporatefile.com.au
In February, you announced a technology cooperation agreement with
Indian parts
and systems maker UCAL. What progress has been made in getting
Orbital's
technology accepted by Indian motorcycle and 3-wheeler manufacturers?
CEO Peter Cook
Our engineering programs appear to be delivering the required
results for the
OEMs and UCAL continues to encourage us that it's on track in its
initiatives with
the OEMs in the Indian market.
corporatefile.com.au
Orbital had an equity deficiency of $12.0 million at the end of June
2003. No
value is ascribed to the OCP technology on the balance sheet. What
benchmarks
should investors look to as a guide to the value of the technology?
CEO Peter Cook
Bear in mind that the deficiency exists for more than one reason.
One is a $19
million interest-free loan and that's the substantial part of our
liabilities. It doesn't
require repayment, except in unusual circumstances, before 2014
although it is
carried as a loan.
And as you've pointed out, our intellectual property is carried at
zero value. It's
particularly difficult to put a value on it but we'd steer investors
to look to our
licence fees and royalties, which are currently generating about $4
million a year.
That income is derived entirely from our intellectual property.
corporatefile.com.au
Yesterday you also announced the appointment of a new Chairman, Don
Bourke,
to replace Ross Kelly, who is retiring. What skills and attributes
does Don bring to
the business?
CEO Peter Cook
Don has extensive commercial experience at both an executive level
within Ford
Australia, Consolidated Press and Davids Holdings as well as at
board level with
Crown Casino, Olex and Australian Technology Group.
Don's experience, particularly with the commercialisation of start-
up IT and
technology ventures, will be particularly valuable as Orbital
continues to
commercialise its technology.
corporatefile.com.au
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