PERTH, Australia, Feb. 22 /PRNewswire-FirstCall/ -- The following is an
interview with Orbital CEO Peter Cook with corporatefile.com.au:
Record of interview:
corporatefile.com.au
Orbital Corporation Limited today reported a net loss of $1.5 million for
the first half ended December 2004 compared with profit of $2.1 million in the
previous corresponding period. You'd previously flagged a loss of between
$1.5 million and $1.9 million in the first half. What were the factors that
contributed to the loss being at the smaller end of the forecast range?
CEO Peter Cook
As we'd indicated to the market, the first half carried some timing issues
for us. The solid underlying result in the previous first half was helped by
some very favourable one-off events, which were always going to make the
recent first half a difficult one in comparison.
However, the major factors that contributed to the loss being at the lower
end of the forecast range were first, our concerted effort to deliver early on
a couple of major powertrain assignments and second, the favourable movement
of the Australian dollar. Remember, a strengthening Australian dollar is
positive for our results. Nevertheless, I should point out that there were
similar currency movements last year, with an even greater impact on the
December 2003 half, when forex gains contributed more than $800,000 to the
result.
corporatefile.com.au
You've also reconfirmed that you expect to return to profit in the second
half ending June 2005. What level of earnings are you expecting in the second
half and do you expect to report a profit for the full year ending June 2005?
CEO Peter Cook
We expect a return to profit in the second half based on the stronger
Powertrain Engineering Services (PES) pipeline, expected new product releases,
and our view that the Synerject result should be an improvement over the first
half, even if only due to seasonal factors.
That said, we're dependent upon sales yet to be achieved in PES and the
receipt of royalties, particularly in the marine sector. In the latter area,
a recent anti-dumping case relating to outboard engines has been rejected in
the US, and whilst Mercury Marine assures us it will be business as usual, I'd
prefer to see the trends of the summer season emerge before I give advice to
the market about full-year earnings. I'd add that the pipeline and prospects
look encouraging.
corporatefile.com.au
What are the risks to achieving profitability in the second half?
CEO Peter Cook
Whilst our prospects are very encouraging, the two major risks are royalty
volumes in the marine sector not being as strong as expected and new
powertrain engineering contracts not being secured as expected.
corporatefile.com.au
Synerject, your 50:50 joint venture with Siemens VDO, contributed after-
tax earnings of $0.9 million to Orbital's first half result, up 4 percent from
the previous corresponding period. In US dollar terms Synerject's profit was
up 10 percent. Given Synerject's US dollar earnings tripled in the 2004
financial year, to what extent is the first-half result indicative of a
slowing in Synerject's underlying business?
CEO Peter Cook
A significant portion of Synerject's growth in 2004 was from the
restructuring we put in place in the previous year. So in constant currency
terms, Synerject's 10 percent growth in the recent first half was delivered
over and above a very significant increase in the previous year. Given the
high base of the 2004 year, we see the level of growth as very positive, and
incidentally, far more indicative of the underlying growth of the business.
Synerject's underlying growth prospects are also very good. Its market is
the conversion of current, typically carburetted non-automotive engines to
electronic engine management control, whether port injected or direct
injected. That conversion process is only just beginning and the market is
quite large. I'd also point out that Synerject is very active in ensuring
it's in a position to benefit from the forecast growth in the conversion
process in Asia.
corporatefile.com.au
The reduction in your balance sheet provision for borrowings of Synerject
to $2.6 million at the end of December from $3.9 million six months earlier
indicates the joint venture has continued to repay debt. Is Synerject
continuing to perform in line with your cash-flow and earnings expectations?
CEO Peter Cook
To date, Synerject has continued to meet or exceed our expectations in
terms of both EBIT and cash flow. There are some timing issues with revenue
at the calendar year end, but we're satisfied Synerject will meet our forecast
for the current fiscal year.
corporatefile.com.au
What's the outlook for Synerject's earnings for the full year?
CEO Peter Cook
Indications from Synerject's key customers are encouraging. Synerject's
revenue always favours the second half as it's dependent on certain seasonal
factors, including the summer build cycle for both outboards and scooters.
However, I'd like to see an additional couple of months of orders before
offering a firm view on revenue for the full year.
corporatefile.com.au
A fall in PES revenue, which was down 40 percent to $3.7 million, pushed
the business into a loss of $0.4 million in the first half, compared with
profit of $1.2 million previously. The forward order book stood at $4.9
million as of the end of December. What has driven the relatively strong
forward orders and when will they translate into revenue?
CEO Peter Cook
We're in the process of building and growing our Powertrain Engineering
business to create a strong third stream of turnover and profit to complement
our Royalty and Licence income and our share of the Synerject earnings. We
started on this strategy two and half years ago and until the recent first
half, the business had achieved revenue growth in every half. There were
timing issues with forward orders in the half and in part they can be
attributed to the recent caution amongst some of the world's auto makers in a
period that saw the Mitsubishi Motors shake-up, the global expense reductions
and restructuring at General Motors, and the uncertainty surrounding the Fiat
ownership arrangements in Italy.
By comparison, conditions are buoyant in China and opportunities are being
created there. We expect to participate in those opportunities and turn those
into revenue within the next 12 months.
Typically our forward orders have a time horizon of about three months,
depending of course on the type of projects. Our current order book includes
some projects that will straddle 12 months, so not all the $4.9 million will
translate into revenue in the March quarter. However, we were comforted at
the end of the first half to be carrying a firm set of orders that was in
excess of the revenue we booked in the period. We see reason to be positive
about the second half.
corporatefile.com.au
You've indicated a focus of the PES business is the Asia-Pacific market.
What level of revenue currently comes from this region and what makes it
particularly attractive to PES?
CEO Peter Cook
Our prospects in Asia-Pacific look very promising and our outstanding
quotations in the region are at their highest level ever. Clearly China is a
significant driver, but the region is generally very strong, including India.
Asia-Pacific's attractive to us because as a number of our other markets in
the world are contracting, this market is expanding. And it's relatively
simple to service, being in the same time zone as us.
corporatefile.com.au
What are your earnings expectations for PES for the full year?
CEO Peter Cook
The prospects are very promising. We have our highest level ever of
outstanding quotations and our order book is reasonably strong. However at
this stage, I'm not comfortable giving any firm indication of earnings.
corporatefile.com.au
How might you mitigate the volatility in PES's revenue streams and do you
foresee a need to further cut the cost base of the business?
CEO Peter Cook
One of the characteristics of an outsourced engineering services business
is that work flow is never totally smooth. Outsourced services are used to
handle overflow, which by its nature is stop-start. We try to smooth the flow
of work by taking from a diverse group of clients, not all of whom will be in
overload at the same time, and by flexing both the lead time and the resources
we deploy on project delivery. As a result, we keep our cost base under
constant review, not only in absolute terms - the amount of resources we have
and apply to jobs - but also in terms of the skills mix because every job is
different.
corporatefile.com.au
Royalty and Licence income was $0.9 million, down 52 percent from the
previous first half. To what extent did the result reflect the impact of
currency moves, and to what extent softness in underlying markets?
CEO Peter Cook
We secured two significant licence payments early in fiscal 2004, which
boosted our results in the previous first half. Licence payments are
infrequent as we usually only receive one licence payment from any single
licensee, although we'd expect to see royalties from that licence flow for
many years after. We expect one of the licences we won in the previous first
half, the UCAL-Bajaj licence for the auto rickshaw market in India, to
generate significant royalties in the future, but they won't start until
December 2005.
The recent first half was also impacted by smaller than expected European
scooter market royalties. In comparison, we're seeing improvements in our
outboard engine volumes and we have two licensees due to come into production
during calendar 2005, Kymco in Taiwan with a 100cc scooter and Bajaj in India.
Against that, the currency's impact has been comparatively minor.
corporatefile.com.au
Cash flow from operations was negative $2.5 million in the first half,
compared with negative $0.3 million previously and cash on hand fell to $9.3
million at the end of December from $12.4 million at the end of June. What do
you regard as the minimum cash-on-hand requirement of the business and what's
the outlook for cash at the end of June 2005?
CEO Peter Cook
As we've been stabilising the business, our target has been to achieve
cash neutrality. Clearly we've needed a buffer of cash reserves from time to
time to handle working capital movements and to allow us to cope with the
timing of certain large powertrain assignments. Cash neutrality remains our
target and I'm hopeful we can soon get into a reliable cash-generating
position. Remember we achieved exactly that during fiscal 2004, so it's not
too far fetched a demand.
corporatefile.com.au
In light of the disappointing first-half result, do you believe there's a
need to further restructure the business or to review your strategy for the
longer term?
CEO Peter Cook
Certainly we see the first-half results as disappointing, but I'd add not
surprising. The business has undergone profound change in the last couple of
years and until this half, every result has indicated that our strategy's the
correct one. Of course with an organisation undergoing such profound change,
it's not always plain sailing. That doesn't mean we can't improve on the
implementation of our strategy, nor does it imply the strategy can't be
extended or higher priority given to certain aspects of it. For example, the
board has already made it clear that within very specific guidelines,
including being a solid fit with our current business, being earnings
accretive to our shareholders and being cash positive, we'd consider an
appropriate acquisition. But I'd stress that this would be to strengthen and
accelerate the progress we've achieved, not to be an alternative to it.
corporatefile.com.au
Thank you Peter.
For more information about Orbital, please visit
http://www.orbitalcorp.com.au or call Peter Cook on (+61 8) 9441 2311
For previous Open Briefings by Orbital, or to receive future Open
Briefings by e-mail, please visit http://www.corporatefile.com.au
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Website http://www.orbitalcorp.com.au
SOURCE Orbital Corporation Limited
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Related links:
http://www.orbeng.com.au
http://www.orbitalcorp.com.au
CONTACT:
Mr Peter Cook, Chief Executive Officer of
Orbital, +61-8-9441- 2311, or USA, +1-810-245-0621
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