Date of lodgement: 03-May-2005 Title: Open Briefing®. Orbital Corp. CEO on Update Record of interview: corporatefile.com.au Orbital Corporation Limited said recently in presentations to investors that it’s seeing increased interest in four-stroke engine applications for Orbital Combustion Process (OCP), its air-assisted, direct fuel injection system. What’s driving this interest and what are the typical processes you go through before “interest” translates into earnings for the company? CEO Peter Cook The increased interest we’ve observed in four-stroke applications of OCP is publicly visible in technical papers presented at the recent Society of Automotive Engineers (SAE) World Congress, the SAE’s Small Engine Technology Conference and the Japanese Society of Automotive Engineers’ Spring Congress. It’s also visible in recent patent applications for technologies in which central airassisted direct injection is an integral part. Clearly what’s driving the interest is forecast changes in market conditions, where Original Equipment Manufacturers (OEMs) see emission and fuel economy issues becoming critical to the end consumer. The interest translates fairly quickly into earnings for us because we tend to participate in all stages of the technology adoption process, from working with our clients at the development level, through our Powertrain Engineering Services (PES) business, through to receiving longer-term royalties from the application of our technology in the final product in consumers’ hands. corporatefile.com.au High-pressure direct injection systems, which also reduce emissions, are available but have had limited success. Why? How does OCP differ from these systems? CEO Peter Cook High-pressure DI systems offer little improvement in toxic emissions, specifically NOx, carbon monoxide and hydrocarbons, and provide only limited improvement in fuel economy and CO2 emissions. They don’t offer enough incentive, versus their cost, to have been widely adopted. Some of the recent technical papers I mentioned demonstrate that OCP improves fuel economy and reduces carbon monoxide and hydrocarbon emissions whilst retaining the CO2 benefit of high-pressure DI. All at a comparable cost. In simple terms, OCP allows better fuel preparation at the injector, producing a finer, better dispersed and controlled spray. That’s our patented know-how. corporatefile.com.au You’ve highlighted that a combination of mechanical features such as variable valve timing, downsizing and turbo charging, plus advanced combustion control using direct injection will lead to significant benefits in fuel efficiency and emission reduction without high investment in infrastructure. Why has this type of combination not been introduced? CEO Peter Cook These technologies have been available for a number of years so the only conclusion you can come to is that consumers have been reluctant to pay the added cost of emission and fuel-economy improving technologies. The major change we sense is in consumer sentiment. Consumers are starting to become concerned about higher fuel prices and global warming as issues. SUV sales in North America for example seem to have plateaued. Manufacturers such as Toyota that have introduced fuel-economy market entries seem to have met a latent market need. We see the change in sentiment continuing. If it does, manufacturers of internal combustion engines will need to improve CO2 emissions and reduce fuel consumption, plus continue to deliver power over the full operational range of the engine. If a combination of technologies is applied properly to reduce emissions and improve fuel efficiency, the consumer would be prepared to pay for it. Consumers did so with diesel engines, and we forecast a similar revolution with gasoline engines over the next few years. Whereas diesel has particular problems with emissions, both toxic and particulate, that aren’t cost effectively solvable, the cost and technologies are known for gasoline emission control. All of these available technologies will play a part in a low-emission, fuel-efficient gasoline engine. However, we believe its central feature will be improved fuel preparation at the injector, with improved combustion control. This is an area we’ve pioneered, and our intellectual property is extensive and solid. corporatefile.com.au Synerject, your 50:50 joint venture with Siemens-VDO Automotive has become the major driver of earnings in recent periods, accounting for most of Orbital’s EBIT in the full year to June 2004. Can you comment on Synerject’s recent performance and the outlook for the current second half? CEO Peter Cook First, I’d point out that we did enjoy license and royalty income in the six months to December almost identical to Synerject’s contribution. And last year we saw a similar contribution from our PES business to that of Synerject. Synerject’s two major customers, Mercury Marine and Rotax are both growing and we expect the business to meet or exceed our budget forecasts. Synerject is looking at ways of increasing its presence in the Asian markets and is starting to invest in second-generation products to meet anticipated price points and its own growth targets. Additionally it’s addressing quality and delivery aspects of its performance to make certain it always meets all its customer expectations. At this stage we expect Synerject to deliver its budgeted EBIT. corporatefile.com.au To what extent will Synerject’s future growth depend on the growth of major customers such as Rotax and Mercury? What potential is there to expand Synerject’s client base? CEO Peter Cook Synerject has a wide range of customers. It continues to expand its client base and win new programmes. Also as I’ve indicated, its two major customers continue to grow. Synerject’s potential is driven by the conversion of carburetted nonautomotive engines to electronic management systems. Whilst this conversion is all but complete in cars and trucks, there’s a considerable market in two wheelers, in marine, recreational, light industrial engines and light industrial vehicles yet to convert. Synerject’s specifically geared to this market and is the only specialist company servicing the market. corporatefile.com.au What’s the growth outlook for Synerject? CEO Peter Cook Synerject’s addressing the growth markets of Asia, updating its product range and refining its quality and service. Its key customers are also expecting growth. That all looks promising for revenue growth in future years. corporatefile.com.au Orbital made a net loss of $1.5 million in the recent first half ended December 2004. Can you provide an update on the outlook for the current full year? CEO Peter Cook Despite the volatility in market conditions we expect the second half to be appreciably better than the first, although unfortunately we’re unlikely to see a profitable year overall. The earlier advice we gave the market was that we expected to deliver a positive NPAT in the second half, and that remains our forecast. As always, foreign exchange movements could have an adverse influence on the final reported result. corporatefile.com.au What guidance can you provide regarding the earnings outlook for the 2006 financial year? CEO Peter Cook We see upside for each of our business sectors in fiscal 2006. We have a licensee, in Bajaj, due on stream in the middle of fiscal 2006 and we’re led to believe Mercury Marine’s expecting growth in Optimax volumes as well. I’ve already indicated our prospects in PES are as strong as they’ve ever been, although I stress they’re not firm orders, and that the outlook for Synerject is positive. With continued control of costs and appropriate R&D spending, we’re looking at fiscal 2006 in a positive light. corporatefile.com.au Thank you Peter. For more information about Orbital, please visit www.orbitalcorp.com.au or call Peter Cook on (+61 8) 9441 2311 For previous Open Briefings by Orbital, or to receive future Open Briefings by email, please visit www.corporatefile.com.au DISCLAIMER: Corporate File Pty Ltd has taken reasonable care in publishing the information contained in this Open Briefing. It is information given in a summary form and does not purport to be complete. 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