Orbital Corporation Limited (OEC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Orbital UAV FY '20 Full Year Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Todd Alder, Managing Director and CEO. Please go ahead.

Thanks very much, Amanda, and good morning, everyone, and thank you for joining us on the call today. My name is Todd Alder. I'm the CEO and Managing Director of Orbital UAV. Joining me today is David Bonomini, our CFO and Company Secretary. The purpose of today's call is to present Orbital UAV's annual results for the financial year ending 30 June 2020. David and I will be running through the investor presentation that was released on the ASX on February (sic) [ Friday ] the 28th of August and which can be followed on the Open Briefing Webcast. Now relating to that presentation, I'll turn to Slide 3. And it just provides a quick presentation summary. We note that for financial year '20, we achieved revenue of $33.8 million, so the upper end of that $25 million to $35 million revenue guidance range. And in February of the last financial year, we announced the nomination as primary engine supplier to Insitu, so an exclusive arrangement where we'll supply engines into their complete tactical drone fleet. We note that we have 2 of the 5 engine models in production for Boeing Insitu, with the third engine model in development. We have new engine development contracts with Northrop Grumman and one of Singapore's largest defense companies that we announced in both March and April. I'm happy to say that our negotiations are maturing with other Tier 1 U.S. defense companies. And in July of this financial year, we announced revenue guidance, so that's for FY '21, revenue guidance of $40 million to $50 million. I'll now quickly turn to a comment on COVID-19, which is on Slide 4. Note that from a customer demand perspective, our order book has not been impacted by the COVID-19 pandemic. We're manufacturing at both our facilities in Perth, Western Australia and Hood River, Oregon, has not been interrupted. We continue to work closely with our global supply chain and logistics partners to ensure they are able to meet our production requirements. Our Australian-based employees are at our Perth facility in full, while in Oregon, our Hood River team continued to work from home where possible due to the elevated risk that remains in the United States. Both sites remain fully operational and continue to meet customer demand. I'll now turn to Slide 5 and note that financial year 2020 has been a significant one or was a significant one for Orbital UAV. I'd like to take a few minutes to talk about the market we're operating in, what we've achieved and why Orbital UAV is well positioned to take advantages of the opportunities that lie ahead for us. So on Slide 6, I note that Orbital UAV is a world leader in the design and manufacture of integrated engine systems for tactical unmanned aerial vehicles, UAVs or drones. Tactical UAVs are used by global defense forces for intelligence, surveillance and reconnaissance missions. Tactical UAVs are a category of unmanned air vehicle, sort of sits between the slide on Slide 7 between the combat and the mini UAVs. Specifically, they're worth now somewhere in the order of $3.5 million to $6 million. They carry payloads of up to 20 kilograms. Importantly, are required to fly or conduct missions of 12 to 24 hours. The tactical drone has evolved and become a critical part of the defense infrastructure, providing a powerful, yet agile tool for forward positions. So how is Orbital establishing a leadership position in this aerospace defense market? On Slide 8, by providing a solution to the market's current frustrations. The increase in commercial and strategic value of the tactical drone over the past 10 years has called for significant improvements in engine performance, specifically reliability. Orbital UAV owns patents, manufacturing know-how and the supply chain intelligence to deliver drone engine solutions, seamlessly integrate with customer platforms and provide real-time performance diagnostics. Most importantly, our technology provides 3 key customer differentiation. They are time between overhauls, so our engines last 500 hours compared to a typical customer engine -- sorry, a competitor engine of around 50 hours. Our engines start immediately, important when you need unscheduled eyes in the sky quickly. It doesn't take 20 minutes to warm up an engine prior to its start. And as importantly, if not, most importantly, our engines passed the U.S. FAR33.49, the manned aerospace standard of reliability back-to-back 3 times. No other engine in this class does so. In the financial year just gone, financial year '20, we leveraged this advantage to deliver a number of key strategic objectives shown on Slide 9. First of all, we achieved our second engine production under the long-term agreement. We were able to attract and appoint ex-U.S. Army Colonel Keith Hirschman as our VP of Global Growth. We were designated by Insitu as a primary supplier of their design and manufacturer of engines. We announced a new contract award with one of Singapore's largest defense companies, and also a contract award to develop the first hybrid engine in this category with Northrop Grumman. Our work in financial year '20 progressed the Boeing Insitu opportunity and furthered our customer diversification strategy. On Slide 10, I note that we're now working with Boeing Insitu, Textron Systems, Northrop Grumman and one of Singapore's largest defense companies, and I would hope to announce further developments on our customer diversification strategy during this financial year. With that, I'll now hand over to David Bonomini to provide further details on last year's financial performance. Thank you. David?

Thanks, Todd, and hello, everyone. I'd like to start by thanking all the shareholders for their ongoing support of Orbital UAV. When I joined the company back in February of this year, I was extremely excited with many opportunities and the growth potential that lies ahead for Orbital UAV in the tactical UAV market. Working alongside Todd and the team, I'm looking forward to capitalizing on those opportunities as we continue to grow your company and deliver shareholder value. So to begin, let's look at the corporate structure. As at the 30th of June 2020, Orbital UAV had 77.5 million fully paid ordinary shares on issue. We closed the financial year with a share price of $0.75 and a market cap of $57.7 million. Basic earnings per share was at $0.024. With the council of our experience and support of board, we have clear focus on what we must deliver to drive shareholder value. That focus is year-on-year revenue growth, transition to sustainable underlying earnings, commitment to ongoing profitability, strong balance sheet to fund the growth. Now diving a little more detail on to the FY '20 financials. Let's look at the profit and loss statement. On Slide 13, you'll see that our revenue is at $33.8 million, is at the upper end of our FY '20 revenue guidance; gross profit of $13.3 million, circa 40% gross margin; overheads of $13 million; other income of $3.9 million includes a one-off Mercedes settlement of $3.2 million; and it closed out with a net profit of $1.9 million. Moving on to the balance sheet. As you can see, our balance sheet is extremely strong. We have cash of $9 million, and receivables of $5 million, inventory of $9.5 million. We are carrying a high inventory value due to the COVID-19. Our liabilities of $19.7 million and a net asset position of $18.1 million. And finally, we will have a look at our cash flow, which is on Slide 15. Net cash used in operating activities of $3.7 million. Now this includes $3.2 million from Mercedes settlement. Our net cash used in the investing activity is $600,000, predominantly relates to plant and equipment. Net cash used in financing activity of $1.3 million relates predominantly to the Balcatta property lease extension. So with that, I will hand back to Todd to provide some further context around the activities of F '21 and beyond.

Thanks, David. When we released our preliminary results in July, we also set out our revenue guidance for financial year '21. On Slide 17, we note that we're targeting a revenue of $40 million to $50 million. Revenue will be underpinned by the sale of propulsion systems under the long-term agreement with our key customer Boeing Insitu. The increase from FY '20 guidance of $25 million to $35 million comes from the development of the third engine model under the Boeing Insitu contract and new customer engineering development programs. The Boeing Insitu long-term agreement covers the supply of 5 engine models and associated services across Insitu's entire fleet of drones. We began in financial year '20 with 1 engine model in production. In January 2020, we brought the second engine model into production. We began financial year '21, this financial year, with 2 engine models in production for Insitu and the third in development. Production of the third engine is currently scheduled for the second half of financial year '21. The Insitu supply agreement continues to be the foundation of our business, however, our customer diversification strategy made significant progress in financial year '20 and is positioning us for further growth. In addition to our work with Boeing Insitu, our 2 recently announced contracts with Northrop Grumman and one of Singapore's largest defense companies are setting the path for this future growth and as a supplier to global defense prime contractors. Additional focus areas, however, for financial year '21, will be securing the company's supply chain, particularly in this environment of COVID-19. Also we'll be developing the capabilities and promoting those capabilities within Australia's supporting sovereign defense initiatives. We also note that globally, there are a number of bids, including the U.S. Army's FTUAS program and the Australian LAND129 program that provide additional growth opportunities for our business. Well, I think that concludes the presentation. So with that, I'll hand back to Amanda, who will open up the call for any questions.

[Operator Instructions] Your first question comes from Brendon Agius from Curran & Co.

Todd, I just wanted to ask with regards to CapEx spend as your production growth, how much of a significant investment do you have to make as revenue increases?

Well, I'd like to hand to David, who has been doing the budgets and the cash forecast for us out for 2 to 3 years with anticipated growth. David?

Yes. Thanks, Todd. Yes, basically, our proposed budget spend or what we're targeting next year is about $1.5 million to $2 million for FY '21. That's really focused on basically developing our Insitu third engine and the investment really is in relation to the upgrade of aspects of our Perth facility to accommodate that engine.

Okay. Great. And secondly, for one -- now one for David. With regards to your debt facility, can you give us a bit of color on the terms as far as repayment and interest?

Yes. Our debt facility is with the WA government. It's for value of about $10 million and the repayments commenced in May FY '21. And basically, we then repay the loan over the next 5 years. So it concludes at the end of May 2025.

And the interest rate?

The interest -- it's an interest-free loan. So over that period, there's no interest. It's just all principal repayment.

[Operator Instructions] Your next question comes from [ Justin Goodfellow from Orbital ].

I was wondering if you guys could give me an estimate of how much of the company's work is actually outsourced. Are you able to tell me that? And what kind of -- what would make that list? And what kind of expenditure that entails?

So we're a manufacturer of UAV propulsion systems. So with that, we have a global supply chain, so they are for components. Those components are either bespoke sort of components made to a specific design for us or they are off-the-shelf components. So there is, if you can imagine, supporting the $40 million to $50 million for this year, a significant portion of the cost of goods sold is delivered to us by that supply chain. In addition to that, but much smaller, we only have in a traditional sense of outsourcing, we outsource our IT support services. But I trust that has answered your question.

Your next question comes from Daniel Broeren from Watermark.

Just had a couple of questions. Firstly, Slide 7, you've got some detail there on the UAV landscape. I just see that in the margin mix to tactical UAV, you're right, it's your current focus. Does that imply that at some stage you will look to potentially extend your focus outside of tactical into the mini and combat markets?

Thanks for that question. So longer afield, when we see -- I think it was one of the later slides that our concentration is on supply chain security. We may look at where we can leverage our expertise in the various components that we require to build the existing propulsion systems for tactical drones, to see whether there is any correlation or overlap with some of the broader drone market. I must say that the focus right now, though, is on the third engine to get into develop for Boeing Insitu, then to work on the fourth and the fifth, while in parallel, working on our opportunities with Northrop Grumman and the Singapore defense company, and then comes the additional customers that we're after to build the propulsion systems for tactical drones with the like of other U.S. Tier 1 companies.

Okay. Got you. And then just secondly, this might be a bit of a longer answer, but can you just run through some of the major programs that are running that you think will be attracting larger pools of funding that you can be part of sort of in the next 5 years?

Yes. So with that, I'm going to assume that you're talking about sort of some R&D funding, in particular, defense R&D funding and there is the FTUAS, the U.S. Army. And then we have closer to home, Australia, that LAND129, and also, they've got a SEA, I think it's called 129 coming up. And our work with the Australian government to look at how we can support their 2020 defense paper and initiatives with regards to the sovereign defense capability.

Okay. And in the U.S., is there anything that as I guess that's the biggest market, is there anything that you would point to that's going to be an opportunity next little while?

Yes. So the FTUAS contract that I mentioned and then there are another -- there are some other angles that we have that Keith Hirschman is progressing, but probably not at liberty to speak too much more about those at this stage.

Your next question comes from James from Petra Capital.