Orbital Corporation Limited (OEC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Orbital Corporation Limited FY '22 H1 results. [Operator Instructions] . I would now like to hand the conference over to Mr. Todd Alder, Managing Director and Chief Executive Officer. Please go ahead.

Thanks very much, Matt. Good morning, everyone, and thank you for joining us on the call today. My name is, as introduced, Todd Alder, and I am the CEO and Managing Director of Orbital UAV. Joining me today is David Bonomini, our CFO and Company Secretary. And the purpose of today's call is to present Orbital UAV's half year results for the 6 months ending 31st December 2021. David and I will be running through the investor presentation that was released to the ASX today and which can be followed via the Open Briefing webcast. Now noting our cautionary statement, I'll turn to Slide 3 of the presentation. Orbital UAV has established itself as a world leader in the design and manufacture of integrated engine systems for military drones, specifically tactical unmanned aerial vehicles, or UAVs. These UAV platforms are used for global defense forces to support intelligence, surveillance and reconnaissance missions. Today's presentation will provide an overview of our FY '22 H1 financial results, a review of recent events and an outlook for the year ahead. Looking at the half year in review for the 6 months ending 31st December 2021, the company achieved several key outcomes. And these included revenue of $8.9 million that was underpinned by existing engine production lines and engineering services on current development programs. In addition, the company achieved other income that was $2.3 million largely by meeting operational milestones set out in the restructured WA government loan agreement. In November, we completed a $6.4 million Renounceable Entitlement Offer, funding the company's production expansion and future product development. New engine development programs were won with Textron Systems, the world's largest supplier of UAVs to the U.S. Army, and Skyways, a pioneer and emerging leader, I suppose, in UAV cargo transportation. The company transitioned engine production activities from our U.S. operation in Hood River to Perth, Australia, leveraging operational efficiencies and also supporting the WA government loan repayment offset milestones. In December, we delivered the final Phase I evaluation engines to our Singapore defense customer with Phase 2 contract under negotiation, and we look forward to updating the market on this exciting and expanded contract soon. With that, I'll hand over to our CFO, David Bonomini, who will take us through the financial results for the period.

Thanks, Todd, and hello, everyone. I'll now take you through some of the key events that influenced our results and highlight some of the actions we've taken as a Board and executive to ensure our company is structured appropriately and best positioned strategically to continue to deliver on our long-term market opportunity. FY '22 H1 revenue of $8.9 million was impacted by Insitu's volume downgrades and delays in production of engine models 2 and 3. Despite the revenue challenge, it was pleasing to see our gross margin at 40%, in line with the corresponding period. Overheads reduction of $1.2 million during the period was driven by the prior year restructure of our business. Other income of $2.3 million includes the WA government milestone offset of $1.5 million and other favorable present value loan adjustments of $0.5 million. Underlying EBITDA is breakeven adjusted for FX gain of $0.6 million on the conversion of the U.S. intercompany loan to AUD, restructure costs of $0.1 million, obsolete inventory write-down of $0.6 million. Our FY '22 H1 reported net loss of $5.1 million includes tax expense of $4.1 million due to the Australian deferred tax write-off, WA government loan notional interest expense of $0.2 million and depreciation and amortization expense of $0.6 million. Moving on to the balance sheet. Net working capital of $6 million sees an inventory increase of $1.3 million for materials purchased for the Boeing-Insitu third engine model. As the inventory has already been paid for, it will have a positive impact to our FY '22 H2 cash flow. Deferred revenue includes an advanced payment for a third engine module of $2.4 million. Provision and lease liability decrease of $0.9 million due to lease commitments to reductions of $0.5 million and employee leave entitlements reduction of $0.4 million. Capital employed of $5.1 million reflects the following: intangibles increased to $0.7 million from the continued investment in our in-house design engines to support Textron and Singapore customer programs; DTA decrease of $4.1 million due to the Australian deferred tax asset write-down; and in relation to borrowings, the WA government loan of $10 million was reduced by $2 million due to the $1.5 million of loan repayments offset on the achievement of operational milestones and a present value adjustment of $0.5 million. And finally, we will have a look at our cash flow. Orbital's FY '22 H1 net cash flow from operating activities of $3.2 million includes inventory purchases and supplier payments to support the production volumes. Net investment activities includes new production development of $0.8 million and plant and equipment of $0.5 million. Net cash in financing activities include the capital raise of $6.4 million and the $4.6 million cash position at the end of December '21 provides us with sufficient working capital for our operations in FY '22 and near-term expansion of our engine production lines in Australia. Finally, we'll touch on our current capital structure and what we are focusing on from a financial perspective in FY '22. Following the completion of our entitlement offer in November, we now have $90.9 million fully paid ordinary shares on issue. As of 24th of February 2022, we have a share price of $0.21 and a market capitalization of $19.1 million. With the changes we have witnessed in H1, we are clear on our financial focus areas of the rest of FY '22. These are to continue to diversify our customer base, recover costs from the Boeing-Insitu third engine program, achieved the WA government loan offset milestones, deliver an ongoing cash flow efficiency and target a second half net profitability. I'll now hand you back to Todd for a strategic look at the year ahead.

Thanks, Dave. Our recent announcement advising of Boeing-Insitu canceling one of their engine development programs shouldn't define this company's outlook. The unmanned aerial vehicle market remains a dynamic and growing sector, providing significant opportunities for this company. As we can see from the Teal Group's market analysis, the latest analysis, unmanned aerial system production is forecast to be USD 32 billion annually by 2029 or approximately USD 3.2 billion spent on propulsion systems every year. Orbital UAV maintains, and its growing reputation supports, that it has the superior technology, development and production capabilities to capitalize on this opportunity. It's also worthy of noting up here that over the coming decade, the commercial drone sector is set to overtake military spend with industries such as agriculture, construction, energy and logistics. Orbital will be exploring these opportunities within this sector. However, our team is currently focused on near-term production and development programs within the defense market. With that, let's have a look at our near-term addressable defense sector market. Our current production-ready propulsion systems are ideally suited to the tactical UAV market. Defense currently spends around USD 1.4 billion in production each year, of which circa USD 210 million is spent annually on propulsion systems. Despite our recent cornerstone customer setback, this market remains a significant opportunity for Orbital. The long lead times experienced in the defense sector generally rewarded with long-term production contracts, supporting defense equipment with 10-plus year life cycles. Orbital has and continues to establish itself with a wider portfolio of both Tier 1 defense contractors and new market disruptors, improving our opportunities to support these long-term defense contracts. Founded on the company's growing reputation for superior technology, the development and production capabilities, we have expanded our working relationships to now include: Insitu, originally signed in 2016, designated primary engine supplier in 2020, and currently, we have 2 engine models in production; Textron Systems, selling components in 2013 and in 2021, announced 2 new engine model development programs. Singapore, announced in 2020, first prototype engine delivered June 2021, subsequent prototypes delivered December 2021 and contract discussions underway on Phase 2 of the program, leading Orbital to become their incumbent engine supplier for Singapore's domestic UAV program. Skyways, a new market opportunity in maritime cargo transport, with this pioneer and emerging leader in UAV cargo transportation. Orbital will continue to add new customers and production opportunities this half as various in-train discussions and negotiations are completed. Our news with Boeing-Insitu. Now we remind the market that Boeing is one of the largest aerospace and defense companies in the world. We have a long-term contract as Boeing-Insitu's primary engine supplier. We have 2 engine model production lines in operation, both now in Perth, Australia. And despite the third engine development program being terminated, Orbital recently submitted its design proposal for the proposed fourth engine model. Yes, Boeing-Insitu are currently facing some challenges. However, Boeing's investment in Autonomous Systems is unwavering, and this Tier 1 defense company will return to form, and we will be there to support them. So right now, what do we have going on in our Perth and Hood River facilities? Our teams are currently focused on progressing the following contracted production and development programs: Boeing-Insitu, 2 engine model production lines operational and fourth engine development proposal submitted; Textron Systems, 2 engine model development programs underway with preproduction and prototype engines to be delivered to this priority customer this half; Singapore Defense Company delivered the final Phase 1 evaluation engines in December with expanded Phase 2 contract under negotiation and due to begin this quarter; Skyways, delivery of a first prototype made in February 2022, evaluation, feedback, design and integration activities to be undertaken this half. In addition to the above activities, we have a further 6 near-term opportunities we are progressing to further expand our product and customer portfolio. Further, near term and material government defense contracts include the U.S. FTUAS award and Australia's LAND129 and SEA 129 awards. The U.S. FTUAS contract would replace the U.S. Army Shadow UAV, one of the most prolific UAVs across the U.S. defense force. 4 winners are expected to be selected from white papers submitted in October 2021 and will be carried through competitive prototyping and critical design phase scheduled for late 2022, with a fly off to determine who will advance to low rate initial production in 2023. Orbital is well represented as the propulsion provider with key prime supplier competitors and our growing U.S. Army contacts. Here in Australia, the winner of LAND129 is expected to be announced very soon with Orbital represented on each of the competitors, Textron and Insitu. SEA 129 is expected 12 to 18 months later. And again, Orbital is well represented, supporting each of the key prime suppliers. Our customer and product portfolio, contracts and opportunities continues to expand on our growing reputation of the superior technology, the development and our production capabilities. Specifically, we have an engine that lasts 10 times as long as our competition, an engine that doesn't need 20 minutes of warm-up procedures before starting and the only engine that can truly pass manned aviation standards of reliability. With our technology, our people and strategy, we are well placed to continue these companies' growth objectives. Specifically, growth objectives over the next 6 months are achieving production targets for Boeing-Insitu engine models 1 and 2, meeting program development milestones for Textron Systems, Singapore Defense and Skyways, securing additional national and global customer contracts from the 6 opportunities we are progressing now, continue to realize the WA government loan offset milestones and deliver second half net profitability. Looking further afield and considering Orbital's advantages and the market opportunities, we maintain a positive outlook for this company's growth. Our superior engine technology, design and production solutions, a technology and capability highly relevant to the UAV market's growing demand for longer duration and higher reliability issues, together with an expanding portfolio of customers, products, which will be strengthened further with current opportunities across defense, civil and commercial markets, supported by our balance sheet strength for planned production expansion, contracted development programs and research and development into the growing commercial opportunities sees the Orbital Board executive and staff maintain a buoyant outlook for this company's growth. And with that, David and I are happy to open it up to any questions.

[Operator Instructions] Currently, there are no questions in the queue. We will pause for a brief moment while we wait for a question to register. There are no further questions at this time. I'd now like to hand back to mister -- pardon me. There is a question in the queue. This question comes from [ Patrick Moore ] from [ K&P Super ] .