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open briefing - corporatefile

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    Date of lodgement: 22-Aug-2003
    Title: Open Briefing. Orbital Engine Corp. CEO on Improved Result,
    Record of interview:
    Orbital Engine Corporation Limited yesterday reported a net loss of
    $1.9 million
    for the year ended June 2003, compared with a loss of $26.8 million
    in the
    previous year. Excluding non-recurring items, Orbital generated cash
    operations, with positive EBITDA of $3.4 million in the second half,
    with an EBITDA loss of $1.9 million in the first half. What's the
    outlook for
    earnings in the current year to June 2004?
    CEO Peter Cook
    Expense reduction was our key thrust in 2003 and you'll see the full
    impact of that
    in 2004. Beyond that, it's difficult to forecast in the current
    environment. We do
    expect some growth in revenue but that's never guaranteed, and of
    course there's
    an impact on our results from forex and that's very difficult to
    forecast. But we're
    confident the cost reductions we implemented in 2003, while
    completed, will fully flow through in 2004 and improve our overall
    Orbital recently raised a total of $5.9 million via a share
    placement and the offer of
    a share purchase plan to existing shareholders. The funds were
    raised to place
    Orbital in a better position to win major programs of work. How do
    you expect
    access to larger projects to affect cash flow and earnings going
    CEO Peter Cook
    We're anxious to sell larger and particularly longer-term projects
    to our customers
    in order to access more stable and longer-term income streams. We
    felt that
    concern about our financial stability may have created a potential
    obstacle to that
    and we believe our stronger financial position will help to build
    client confidence.
    Time will tell whether we've been successful, but I'm comfortable
    we've made a
    step in the right direction.
    Does Orbital directly fund this work?
    CEO Peter Cook
    In this area, we work on a fee-for-service basis and receive
    progress payments all
    the way through a project. We do attempt to balance our expenditure
    with our cash
    receipts and it would only be in very rare circumstances that didn't
    Overhead expenses fell to $19.5 million from $25.4 million. What
    scope is there to
    further reduce overheads in the current year?
    CEO Peter Cook
    The major cost reductions, including redundancies, were completed at
    stages through 2003 so the full, annualised benefit will show up in
    2004. Whilst I
    wouldn't rule out some smaller overhead reductions, they'll have
    appreciably less
    impact than the $6 million worth of overheads we took out of the
    business in 2003.
    Synerject, your 50:50 joint venture with Siemens VDO Automotive
    profit of $1.4 million for the year, compared with a loss of $3.1
    million previously.
    However, the second-half contribution of $0.7 million was unchanged
    from the
    first half. How did your restructuring of Synerject, effective April
    2003, affect its
    earnings over the year?
    CEO Peter Cook
    Historically, Synerject's earnings have been skewed toward the first
    half but we
    expect the expanded business, which now includes our marine and
    systems business and Siemens VDO's non-automotive systems business,
    generate more evenly balanced earnings across the first and second
    halves. That
    trend started to emerge in 2003 even though the new structure was
    only in place
    for the last quarter of the year. We'd expect the trend to be more
    pronounced this
    System sales fell 18 percent to $29.3 million in 2003 and will be
    significantly reduced in 2004, reflecting the transfer of the marine
    and recreation
    systems business to Synerject. What's the expected impact on net
    profit in the
    current year?
    CEO Peter Cook
    This is a slightly awkward transaction to understand because
    previously both we
    and Synerject reported the same system sales and our respective
    portions of the
    profit. In future, all system sales will now be reported within
    Synerject, including
    the profit, and our accounts will reflect our 50 percent share of
    increased net profit.
    In 2004 under the new structure, Orbital's system sales will be
    zero. We expect
    minimal impact at EBIT level because even though there's a loss of
    turnover and
    margin, we've been able to achieve cost reductions that will
    compensate, most
    notably through the closure of our operations in Newport News in the
    US. At the
    same time, Synerject will pick up the incremental profit and get
    some synergies as
    a result.
    What are the growth opportunities for Synerject?
    CEO Peter Cook
    Synerject has achieved solid growth and is now a US$40 million
    business. Synerject's achieving that growth because it occupies a
    unique position
    as a specialist parts and systems supplier to the non-automotive
    market, a sector
    which has lagged the automotive market in adopting electronic engine
    management systems. That process is underway and as the only
    company in this area globally, Synerject is seeing substantial
    We're hopeful that conversion will continue and that Synerject's
    unique position
    in the marketplace will remain unchallenged, at least for a period
    of time. That
    should allow it to continue achieving solid growth.
    Orbital's engineering services income increased 15 percent to $10.1
    million in
    2003. What was the profit contribution of this sector of the
    business during the
    year and how is it positioned in terms of profitability and growth
    going forward?
    CEO Peter Cook
    At $10 million turnover, the engineering services business is about
    which is what we've managed to achieve out of our restructuring and
    refocusing of
    the business over the past year.
    The indications are that the turnover can be improved and that we
    can achieve
    higher turnover with no increase in costs. We're hopeful that some
    small overhead reductions can be achieved, which will have a
    positive impact on
    the overall performance of the business this year.
    What are the drivers of external demand for Orbital's engineering
    CEO Peter Cook
    There are three underlying drivers that give us confidence in the
    sector. First, we
    now have a wider engineering services product offering than simply
    the traditional
    Orbital combustion process, which two years ago was all we were
    setting out to
    Second, there's as much interest now among OEMs in Orbital's
    process as there ever has been. And remember, it's OEMs looking to
    how OCP works on their engines that write business for us. So that
    underpins a
    reasonable amount of our turnover.
    And thirdly, a point that shouldn't be overlooked, there seems to be
    an increasing
    propensity for OEMs to outsource the engineering services we
    provide. With the
    objective of keeping their own fixed costs under control, they're
    looking to
    outsource varying proportions of their work, particularly peak
    loads, and we're a
    beneficiary of that trend.
    Orbital's royalty income rose to $3.2 million from $2.7 million,
    while licence
    income fell to $0.7 million from $3.8 million. What were the drivers
    of these
    trends and what's the outlook for royalty and licence income in the
    current year?
    CEO Peter Cook
    The reality is that licence income's lumpy and there's no
    discernible "trend." We
    feel that around $1 million a year would be a reasonable average.
    On the issue of royalties, our income's a function of the number of
    incorporating our technology and the success of those models in
    markets, for the OEMs.
    We'd cautiously forecast some growth in our royalty income because
    the number
    of models using our technology has increased. History indicates that
    models can succeed or fail, not necessarily because of our
    technology, but seasonal
    effects, for example a good summer, increase sales of jet skis and
    Also, we're just completing the second summer season of sales of
    four of the
    scooter models that carry our technology in Europe. So the outlook
    depends partly
    on whether in the third season the OEMs are able to get even further
    growth and
    market penetration from those models.
    In February, you announced a technology cooperation agreement with
    Indian parts
    and systems maker UCAL. What progress has been made in getting
    technology accepted by Indian motorcycle and 3-wheeler manufacturers?
    CEO Peter Cook
    Our engineering programs appear to be delivering the required
    results for the
    OEMs and UCAL continues to encourage us that it's on track in its
    initiatives with
    the OEMs in the Indian market.
    Orbital had an equity deficiency of $12.0 million at the end of June
    2003. No
    value is ascribed to the OCP technology on the balance sheet. What
    should investors look to as a guide to the value of the technology?
    CEO Peter Cook
    Bear in mind that the deficiency exists for more than one reason.
    One is a $19
    million interest-free loan and that's the substantial part of our
    liabilities. It doesn't
    require repayment, except in unusual circumstances, before 2014
    although it is
    carried as a loan.
    And as you've pointed out, our intellectual property is carried at
    zero value. It's
    particularly difficult to put a value on it but we'd steer investors
    to look to our
    licence fees and royalties, which are currently generating about $4
    million a year.
    That income is derived entirely from our intellectual property.
    Yesterday you also announced the appointment of a new Chairman, Don
    to replace Ross Kelly, who is retiring. What skills and attributes
    does Don bring to
    the business?
    CEO Peter Cook
    Don has extensive commercial experience at both an executive level
    within Ford
    Australia, Consolidated Press and Davids Holdings as well as at
    board level with
    Crown Casino, Olex and Australian Technology Group.
    Don's experience, particularly with the commercialisation of start-
    up IT and
    technology ventures, will be particularly valuable as Orbital
    continues to
    commercialise its technology.
    Thank you Peter.
    For previous Open Briefings with Orbital Engine, visit
    For more information about Orbital Engine, visit www.orbeng.com.au

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