Orbital Corporation Limited (OEC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Orbital UAV FY '21 Half Year Results Teleconference. [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, Bernadette. Good morning, everyone, and thank you for joining us on the call today. My name is Todd Alder, and I am 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 half year results for the 6 months ending 31 December 2020. David and I will be running through the investor presentation that was released to the ASX yesterday and which can be followed by the Open Briefing webcast. Now skipping over the cautionary statement, I'll turn to Slide 3 of the presentation. Orbital UAV is a world leader in design and manufacture of engines for military unmanned aerial vehicles, UAVs, or drones. These UAV platforms are used by global defense forces to support intelligence, surveillance and reconnaissance mission. This is a growing market dominated by global defense prime contractors. Some of the major players that Orbital UAV are currently talking with can be seen here on Slide 4. Independent market analysts, the Teal Group, reported annual UAV production spending of USD 5.6 billion in 2020. Forecast is rising to an annual spend of USD 14 billion in 2029, totaling some USD 95.5 billion for the global UAV market over the next 10 years. Orbital UAV's current market opportunity has UAV production spend at USD 15.7 billion over the next 10 years. With the council of our experienced and supportive Board, we have a clear focus on what we must deliver. That focus is growth through increasing market share, a commitment to profitability and positive operational cash flows that fund our strategic objectives. So how are we going against those strategic objectives? And I move on to Slide 6. In the 6 months ending December 2020, our half year revenue is $19 million, up from the 2019 half of $11.4 million with Boeing Insitu to design, develop and supply 5 distinct engine models for application across their entire fleet of military drones. Two of these 5 engine production lines are operational, with the production on the third engine line scheduled for Q4. Our critical customer diversification strategy has progressed, with Northrop Grumman and one of Singapore's largest defense companies signing engine development contracts with our company. Financial year 2021 revenue guidance is $30 million to $40 million. I'll now hand over to our CFO, David Bonomini, to take us through the last 6 months financial performance. Thanks. David?

Thanks, Todd, and hello, everyone. You would have seen our half year report and accounts released yesterday. I'm going to -- now going to run through some of the key highlights and provide some additional commentary on what we've done and what we are doing to ensure we continue to build our business. Turning to the profit and loss slide. You'll note that our operating -- reported revenue for the first half has increased by 67% to $19 million. As Todd mentioned earlier, it's underpinned by 2 engines in production. We maintain our targeted gross margin of 40% and pleasing, our operational profit for the first half of $600,000 is up from a loss of $1.9 million last year. The reported net loss for the period of $3.9 million includes an unrealized intercompany foreign exchange loss of $2.4 million and a write-down in our company's deferred tax asset in the United States of about $1.3 million. Moving on to the balance sheet. Our balance sheet remains strong. We have cash and trade receivables, as at the 31st of December 2020, totaling $12.4 million. With our current assets at $25 million, less our current liabilities of $14.8 million, we have sufficient working capital to deliver on our strategic objectives. And finally, our cash flow. For the first half, our net cash used in operating activities for the period was an outflow of $5 million. The increase was primarily due to Insitu's delayed payment of outstanding overdue invoices of $6 million. The reason they did that was to maximize their December '20 full year cash position. The overdue invoices of $6 million has been paid and received in full in January '21. Inventory also increased to $12 million. It's a $3 million increase, and it was to support higher volumes. Based on our current inventory value, we have sufficient inventory to meet our second half production volume. And as a result, we expect our inventory forecast to reduce in the second half. So just to wrap it up in terms of -- in summary, we have sufficient cash. Our operating profit has improved materially against last year. The FX -- intercompany unrealized FX relates to the setup of the U.S. Hood River facility and has no operational impact on profit. And the deferred tax asset adjustment or write-down is predominantly due to the time-bound nature of U.S. tax losses. So overall, we're really forecasting our improvement in our net cash used in our operating -- operations in the second half, and we're expecting a strong second half operational performance. With that, I'd like to pass back to Todd.

Thanks, David. I'll just wrap up the presentation with an outlook and our growth strategy and move to Slide 12. We've noted before that our revenue guidance for financial year 2021 is $30 million to $40 million. And that revenue is derived from our engine production and shipments and now customer development programs. The design, development and long-term supply agreement with Boeing Insitu continues to drive the majority of our financial year 2021 revenue. This agreement covers the supply of 5 engine models and associated services across Insitu's entire fleet of UAVs. As I noted before, we have 2 of these engine models in production, with a third engine scheduled for production in Q4. In February, Boeing Insitu recast production requirements on one of our engine model production lines. We adjusted revenue guidance accordingly. In addition to the Boeing Insitu long-term supply agreement, we are progressing existing and new opportunities in line with our customer diversification strategy. We have, as noted on Slide 14, an engine development program with Northrop Grumman. We have an engine development program with one of Singapore's largest defense companies, and we sell critical engine components to Textron Systems. With a combination of our superior heavy fuel technology and the growing requirements for reliable heavy fuel engines within the UAV defense market, I remain confident in progressing our strategic objectives of customer diversification and increasing market share in the near term. To reiterate what sets us apart from our competitors: an engine that lasts 10x as long as our competition, an engine that doesn't need 20 minutes of warmup procedures before starting, and the only engine that can pass manned aviation standards of reliability. With our technology, people and strategy, we are well placed to continue this company's growth objectives. Our immediate growth plans are focused on the near-term commissioning of our third engine production line for Boeing Insitu, progressing existing development contracts through to production and bringing on new customer programs. Now that marks the close of our presentation. And as such, David and I would like to open it up for any questions.

[Operator Instructions] Your first question comes from [ Richard Char ] of [ Storage ] Pty Ltd.

Just in terms of the -- you were saying that the cash, term deposits and trade receivables was around $12 million. But if you kind of look at the trade payables on the balance sheet, it's $5.8 million. So would you say that the -- what you have available in terms of working capital is -- if you net that out, it's about -- around $6 million. Would that be accurate or not?

Yes, that's a good forecast.

Okay. And then just looking at the balance sheet, again, you've got current borrowings of $3.8 million approximately. What are the plans there in terms of are you going to pay that out or refinance that? Could you just comment on that?

I said noninterest-bearing state government loan that we repay. I think it's over an 8-year period.

Okay. And just final question. With the unrealized foreign exchange loss, if the Australian dollar stays where it is now, will that figure of $2.4 million, would that stay the same for the full year? Or if the current exchange rate is at the current level, would that double? Or how would that work? I'm just trying to ascertain that.

Yes. The -- just to answer that, if the Australian dollar is maintained at current levels, there'd be no further need to recognize an unrealized effect.

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