Orbital Corporation Limited (OEC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Orbital UAV investor update. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Todd Alder, CEO and Managing Director. Please go ahead.

Thanks very much, Bernadette, and good morning, everyone, and thank you for joining us on the call today. My name as announced, 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 talk through the investor presentation that was released to the ASX earlier this week and focus on our recent additional contract win with Textron and the launch of a $6.5 million entitlement offer to support Orbital UAV's continued growth. Those that have an investor presentation in front of them, I'm flipping through to Slide 4, where I just go to Orbital UAV is a world leader in the design and manufacture of engines for military drones, specifically tactical unmanned aerial vehicles. On Monday, we announced the signing of an additional engine program with Textron Systems. This is a pleasing announcement and testimony to the growth of this relationship and another exciting engine development program. Textron, like Boeing Insitu, is one of the world's largest suppliers of tactical unmanned aerial vehicles or the military drones. I'll talk more about this contract later on the call. Just a quick recap. Last year, we made revenue of $31.2 million. We now have 2 engine development contracts with Textron Systems. We are targeting a move from 2 -- currently, the 2 engine production lines that we have through the 6 engine production lines over the next 24 months. We continue to review market opportunities both globally and domestically, specifically focusing on the U.S. Army's FTUAS program and Australia's LAND129 program. We are the primary engine supplier to Boeing Insitu, and revenue will be in line with last year's revenue, and we are on track to post full year net profitability. The tactical UAV market spent around USD 1.4 billion on production last year. That equates to an addressable propulsion market for us of around USD 210 million per annum. Now the tactical drones remain and have a growing importance in the defense equipment portfolio with their important intelligence, surveillance and reconnaissance capabilities. With each of these systems being worth somewhere between USD 1.5 billion or USD 4 million, it's critical that the propulsion system that they use is both reliable and also has a very small maintenance program out in the field. And that's where Orbital provides a solution, a solution that is significantly different and improved on our competitors. It's a solution that runs for 500 hours before any maintenance requirements compared to circa 50 hours for our competitors. It's a solution that, on the heavy fuel that is a requirement or a jet fuel that is a requirement for our customers, it's a solution that our engines start immediately versus a 20-minute warm-up cycle for all our other competitors. And it's a solution that Orbital provides that meets manned aerospace standards of propulsion systems, and that is another unique reliability standard of our propulsion system versus our competitors. And I think that's why we have been able to, over the last 24, 36 months, to increase our Tier 1 U.S. customer defense portfolio from Boeing Insitu to now Boeing Insitu to engines with Textron Systems, an engine with the largest Singapore defense company, and an R&D -- an exciting R&D program with Northrop Grumman. I'll now spend the next few minutes just going through each one of those relationships, programs, and to provide an update of where we are. Boeing Insitu relationship continues well with the existing long-term agreement which provides us with the opportunity to provide orbital engines across their entire fleet of vehicles. Boeing Insitu have, of late, faced increasing competition. There are new entrants into this expanding and exciting field, and Boeing Insitu are finding that they need to compete a little more -- with a little bit more agility. In addition, the U.S. military withdrawal from Afghanistan has hit near-term engine demand from Boeing Insitu. The ramifications of the outcomes from that were earlier in this calendar year, we announced a downgrade in production volumes for one of our engine production lines. We remain on track with a second production line with forecasted production volumes. And albeit there was a delay in our third engine production line, we're confident, as announced, that we'll have that starting production before the end of this calendar year. We do forecast continued or conservative volumes for the remainder of this year for Boeing Insitu as they work through their competitive landscape. We are confident that Boeing Insitu will return in 12 to 18 months' time with our more predictive and bullish volumes from them. Part of our customer diversification program has been based on Textron Systems, a key and globally significant supplier of tactical drones. We were thrilled to announce an engine development program earlier this calendar year. And of course, on Monday of this week, announcing a second engine program with Textron Systems. The exciting thing about the second engine program is that it is a 12-month development program, and will see us ready to provide production engines to Textron in financial year '23. Obviously, and as announced, those financial production volumes will be dependent on customer demand at that time, but what we're thrilled with is this growing and deepening relationship with Textron Systems. Our programs with Singapore defense company in Northrop Grumman. We remain on track with our Singapore engine development program. This is an engine development program for their domestic defense needs. The Singapore defense organization has aspirations to market their solution globally. We continue to develop the prototypes and we've announced to the market, the on-time delivery of 2 prototype engines and confident that we will have production-ready engines for our Singapore customer also ready in FY '23. The Northrop Grumman-funded research and development program is a really exciting one for us. We see the market requiring more electrical power for either increased payloads or for electronic pulse requirements. This is demanding creative ways of providing this energy, rather than just larger and larger engines. And this is the work that we're doing with Northrop Grumman on a hybrid engine capability, and we remain on track with that program for a bench test solution early next year. As noted, with the additional customer portfolio, we continue to target the expansion of our engine production lines. Currently, 2 engine production lines looking to have 6 engine production lines up and running within the next 24 months. To support this growth, we'll be investing in our contracted engine development programs. We'll be investing in enhancing the company's production facility capabilities here in Perth, and obviously, in continued research and development of products for this exciting industry. In addition to the growth of the 6 -- the targeted 6 engine production lines, we keep an eye on the market developments. And as I noted, particularly, there is a significant program, the United States Army Future Tactical Unmanned Air System program. That is a replacement for the current platform they have, which is the Shadow unmanned vehicle. There are 4 down-selected customers that are competing for this program. We have relationships with 2 of these customers, and are talking to the other 2. The FTUAS, the United States Army program, is divided into an increment 1 and an increment 2. Increment 1 will be flying, and that's a small expeditionary force, enabling the Army to assess -- the U.S. Army to assess capabilities, before then down-selecting to 2 bidders for an increment 2 runoff. Increment 2 is the significant uplift for those that are selected in any production volumes, and that is likely to be out in FY '24 or FY '25. Before then, there is work for us, and production runs smaller batch engines on increment 1. And as and when they are nominated, we would be advising the market. Here in Australia, we've got 2 programs at work. They're called LAND129, which is for the Army obviously, and SEA 129 for the Navy. We're very excited to be for the Army, the propulsion system of choice for both down-selected bidders, Insitu Pacific and Textron Systems. We would hope to make an announcement sometime this year when the Army has selected the winner of those programs. SEA 129, the Navy process, there are 4 down-selected bidders for that. It is running 1 year or 12 months later than the Army down-select process. There are 4 down-selected sort of bidders. We have engine solutions for 2, and we're talking with the third down-selected bidder, and I'd hope to be able to announce something with them in due course. Another couple of exciting opportunities that we're looking at is there is a U.S. Navy opportunity. And we are talking with the platform provider. They are requiring a heavy fuel engine solution. We have established some credibility obviously, with our work with Textron and Boeing. And we would hope that we would be a preferred engine developer for that exciting U.S. Navy opportunity, and that is the U.S. Navy, again, surveillance and intelligence. But there's also an additional market or opportunity that the U.S. Navy are looking at, and that is logistics, so cargo logistics. They have a lot of helicopters or ships doing ship-to-ship or ship-to-shore cargo deliveries, and a lot of those deliveries are for packages that are under 10 kilograms. The U.S. Navy has been funding an unmanned solution, and I'm happy to say that we are in conversations with the platform providers to look to supply a propulsion system for that exciting opportunity. Now obviously, nothing is signed, and nothing may be signed, but it's another area or another market for us. And I would hope, in due course, we could announce something to the market further on that. So we sort of see that the UAV industry with the work that we currently have on contract, the UAV industry with the exciting opportunities in the U.S. Army, the U.S. Navy and then both here in the Army and the Navy here in Australia, to be quite buoyant. But also, we're quite buoyed with the overall defense budgets, particularly here in Australia, supporting companies like ours that are in the defense industry. And I note that we have announced the entitlement offer to help support our growth aspirations. I note that we announced a $6.5 million funding program with an issue price of $0.50 per share and a 1 for 6 offer. It was pleasing to have a cornerstone shareholders, both UIL and First Sentier, commit to their full entitlements as it was that each of the directors have committed to their full entitlement. We note that offer booklets will be going out this Friday and also that the offer extends through until the 5th of November. I think with that to run down of where Orbital UAV is and with both David Bonomini and myself here, Bernadette, I would open it up for any questions, if we have any.

[Operator Instructions] There are no questions at this time. I'll now hand back to Mr. Alder for closing remarks.

Look, in conclusion, just Orbital UAV continues to deliver on our customer diversification strategy. We're a growing business and targeting those current 2 engine production lines to expand to 6 engine production lines over our next 24 months. And we continue to track the exciting new opportunities within the UAV market and we remain on track to deliver revenue in line with FY '21 and net profitability. So I'd just like to thank those that have participated on the call, and we look forward to continuing to announce positive news as we round out this calendar year. So thank you very much, Bernadette.

That does conclude our conference for today. Thank you for participating. You may now disconnect.