Open Briefing. Orbital Engine Corp. CEO on Profit Improvement PERTH, Australia, Feb. 22 /PRNewswire-FirstCall/ -- Record of interview: corporatefile.com.au Orbital Engine Corporation Limited recently reported net profit of $2.1 million for the first half ended December 2003 compared with a loss of $2.9 million in the previous comparable period. The result is more than double your $1.0 million net profit in the second half of 2003 and was achieved in spite of a 67 percent fall in revenue.What were the key contributors to the continuing profit improvement? CEO Peter Cook The key contributors were the improved performance in our engineering consulting area, the increase in licences and royalties half on half, and the continuing cost benefits, particularly in our overheads, that are coming from restructuring we've put in place over the past 18 months. The revenue shortfall was expected and the result of the transfer of our marine and recreation systems business to Synerject, our joint venture with Siemens VDO, which was completed as at April 1, 2003. The restructuring's made a positive contribution to profit. corporatefile.com.au First-half EBIT was $1.9 million. This compares with an EBIT loss of $3.1 million previously and aprofit of $1.1 million in the recent second half. Is it realistic to expect this level of operational profit improvement to continue over the remainder of the current year ending June 2004? CEO Peter Cook We expect the second half to look pretty much like the first, excluding currency gains or losses. We're expecting the benefits of our restructuring to continue to roll out and on the revenue side, we'd expect to see similar results in our engineering consulting activities with some softening in our royalty and licence income due to timing. We also expect some earnings increases from Synerject. corporatefile.com.au Synerject contributed after-tax earnings of $0.9 million to the first half result, compared with $0.7 million previously. What were the drivers of this growth and is Synerject performing in line with expectations following its 2003 restructure? CEO Peter Cook In US dollar terms, Synerject's meeting our expectations following the restructuring. Synerject's a US business andits contribution to our profit improved in spite of the currency translation loss compared with the previous period. corporatefile.com.au Given Synerject's based in the US and some of its major markets are in Europe, what impact is the current weakness of the US dollar having on its pricing and margins? CEO Peter Cook Synerject essentially sources its componentry and builds its product in the US and does sell a reasonable proportion of its output in Euros. So in the current currency environment,it's had an improvement in profitability attributable to currency. Of course when we take up our 50 percent share of that profit and translate it into Australian dollars, the benefit's reduced. Generally, Synerject's reasonably well protected from currency movements but it did benefit in the first half. corporatefile.com.au What's the outlook for Synerject's earnings for the full year? CEO Peter Cook All I'm willing to say is that Synerject's underlying business is performing reasonably well and that it usually produces a better second half than first half. corporatefile.com.au In the first half, Orbital's engineering services income was $6.1 million, up 26 percent from the previous comparable period and ahead of your 20-percent growth target for the current year. What's driving this revenue growth and can you maintain the momentum? CEO Peter Cook The growth reflects our focus on the area and our ability to win business. But, while we do expect to deliver our targets, there is a timing issue and we don't expect to sustain that 26 percent growth over the full year. Work on hand indicates that a reasonable proportion of the orders we need in the second half have already been received. Sales are the key. We seem to be developing appropriate relationships with key customers and the market is receptive. However, we're primarily an outsource service provider and very dependent on the health of the automotive and power-train industries. corporatefile.com.au Engineering servicesmade an EBIT profit of $1.2 million in the first half. Will further profit improvement in this area depend purely on driving top-line growth? What's the size of the potential market? CEO Peter Cook The global market for engineering power-train services is estimated at something like A$15 billion. Probably about 15 percent of that's supplied by external engineering consultants such as ourselves, which makes it a market of more than A$2 billion globally. Obviously, we're a tiny, niche player in that market, and shouldn't be limited by the market size or the opportunity. However, all our work is under individual contracts of variable size that we have to win separately. The business does have an element of fixed cost, so what will drive profit improvement is clearly the top line and our ability to secure sales and assignments. That means being responsive to what our customers need and making certain we provide those services in a cost-effective way. corporatefile.com.au Royalty and licenceincome was $1.9 million in the first half, up from $1.6 million previously. What's the outlook for royalty and licence income over the remainder of the year? CEO Peter Cook Licence income's always lumpy, and we did receive a licence payment in the first half. We do have some concern that there'll be a deterioration in our royalty income from the 50 cc scooter market in the second half. That stems from some instability we're seeing in the European market, partly because of imports and partly because of underlying cost problems the European manufacturers are having. On the positive side, Mercury's new three-cylinder engine range is looking better than we'd have thought, which could partly compensate. corporatefile.com.au Cash flow from operations was negative $0.3 million in the first half, compared with negative $6.1 million previously. When do you expect the business to generate positive cash flow from operations? CEO Peter Cook We view our cash flow from operations as being positive. The negative $0.3 million at the end of December reflects the timing of collections and collections made in the early part of January have corrected that. We see the underlying business as capable of generating cash hence forth. We will have some cash outlays in the second half as we reduce our rental expense and relocate from our current leased offices into existing, owned premises. But those expenses are directed at cost saving. corporatefile.com.au Orbital's capex appears to have been minimalin recent periods while the business was being turned around. What will be the capital requirements of the business going forward, particularly if you're to sustain growth? CEO Peter Cook In terms of plant and facility upgrades, we do foresee the need for some expenditure over the next three years. We'd expect it to be well within our depreciation figure. corporatefile.com.au Orbital had cash in hand of $12.0 million as of the end of December, up from $9.0 million at the end of June. What level of cash backing do you require for your on-going operations and what's the outlook for cash at the end of June 2004? CEO Peter Cook We'd expect to generate positive cash from underlying trading in the second half. So excluding the capital spending for the office relocation, we'd expect cash in hand at June 30, 2004 to be similar to the December 31, 2003 number. corporatefile.com.au Thank you Peter. For previous Open Briefings with Orbital Engine, visit http://www.corporatefile.com.au/ For more information about Orbital Engine, visit http://www.orbeng.com.au/ DATASOURCE: Orbital Engine Corporation Limited CONTACT: Australia, Mr. Peter Cook, Chief Executive Officer of Orbital Engine Orbital Engine, +61-8-9441-2311, , or in USA, +1-810-245-0621 Web site: http://www.orbeng.com.au/ http://www.corporatefile.com.au/

Copyright