Paris, 3 May 2006: ESI Group (ISIN FR0004110310), a pioneer and world leading solution provider in virtual prototyping and manufacturing processes, today announced its consolidated results for the full-year ended 31 January 2006.

Consolidated figures – IFRS*

(*see IFRS paragraph below) Fiscal year closed 31 January 2006

· 2005/06 annual results

• Sales: +6.7%

As announced on 8 March 2006, ESI Group’s consolidated annual sales for its 2005/06 financial year recorded pure organic growth of +6.7%.

Licence activity grew by +7.5%, after a 2004 that had already seen a substantial increase (+26%) due in particular to the previous year’s acquisitions. This growth reflects a solid consolidation of the acquired installed base whilst favouring the adoption of a rental and recurrent business model. This financial year was again marked by an intensification of the seasonal effect on activity over the final quarter.

• Gross margin: 1.6 point improvement

The gross margin was 74.2%, or 46.1 million euros, up +9.0% on the previous year. This improvement is the result of virtually stable sales costs (+1.0%) and reflects the gains in efficiency of the organisation via Centres of Excellence that allowed the recording of a substantial improvement in the profitability of innovative services.

The +10% increase in the Group’s mean workforce, essentially in India and China, allowed the increase in costs to be limited to +5.9%, thus improving operating profit, which was up +20.8% within a context of sustained investment. The operating margin was +6.6%, versus +5.9% the previous year.

Net profit totalled +2.7 million euros and includes foreign exchange gains of 0.9 million euros (compared to a loss of -0.4 million euros in FY 2004/05) and a tax charge of +1.7 million euros (+0.1 million euros compared to the previous year). The net margin came out at +4.3%, up 2.7 points on the 2004/05 net margin of +1.6%.

• A sound financial situation

The cash position, net of debt, at 31 January 2006 was +6.3 million euros, up +40% on the figure at 31 January 2005. At the same time, indebtedness ratio (long-term financial debt over shareholders equity) was cut by 29% to 11.4% at 31 January 2006.

Alain de Rouvray, ESI Group’s Chairman and CEO, states: “These very satisfactory results show our capacity to continue recording buoyant organic growth whilst improving our profitability. They validate the actions we have implemented, firstly the organisation via Centres of Excellence close to strategic clients for innovative and technological products ; secondly an increase in our presence in India and China, for an acceleration in our software development, and in order to seize new deployment opportunities for our integrated solutions”.

• IFRS

The impacts of the application of IFRS accounting standards previously mentioned at the time of the publication of H1-2005/06 results were maintained and completed by the taking into account of software development costs:

In accordance with the requirements of IAS 16 and 38, and in line with the application in annual accounts of settlements relative to fixed assets and amortization of R&D costs, Research activities remain written down directly as charges, whilst Development costs are now locked in when they meet strict criteria and are amortized over a predefined period of 12 to 24 months in both annual and consolidated accounts.

In reality, the retrospective application of these standards had a marginal impact on the balance sheet situation and ESI Group’s P&L statement:

• At opening balance level, the activation of Development costs resulted in a positive adjustment in reserves, and therefore an improvement in the net situation of 6.0 million euros at 1st February, 2004.

• At 2004 P&L statement level, the activation of Development costs resulted in a reduction in R&D costs of -1.1 million euros (or -0.5 million euros after corporate tax) and, consequently, in an equal improvement in operating profit.

• For FY 2005, the impact of the application of IFRS remains limited, and resulted in a -0.65 million euro reduction in R&D costs (or -0.3 million euros taking corporate tax into account).

· 2005 – 2006 key events

• Strengthening of corporate accounts

Reflecting the pertinence of the upstream positioning adopted by ESI Group for the development of virtual simulation solutions in a full and integrated user environment, the Group consolidated its innovative collaborations with major industrial groups. In particular, in the European automotive sector, the “PAM-CRASH User Group” (PCUG) consisting of Audi / Seat, BMW, Renault and Volkswagen / Skoda was strengthened, increasing the prescription effect with Tier one and other suppliers and engineering services offices.

• Acceleration in the adoption of PAM-STAMP 2G

As announced when 2005 annual sales were published, the adoption of PAM-STAMP 2G licences accelerated significantly to allow the complete, integrated, scalable and streamlined stamping solution of the virtual manufacturing chain. The amount of orders taken over the period was thus up +18%, reflecting the suitability of our second generation offer to meet the evolution of client expectations in order to take into account product-process interactions.

• CATIA V5 growth relays: launch of PAM-TFA and development of PAM-DIEMAKER

PAM-TFA (Transparent Formability Analysis) is the extension of PAM-STAMP 2G in the CATIA V5 environment developed within the framework of our partnership with Dassault Systèmes. This product was successfully launched in September 2005. It enables users to execute simple pre-simulations in one go, directly from CAD models, whilst maintaining a dataflow that is coherent with detailed PAM-STAMP 2G simulations and in a continual iterative improvement process. PAM-TFA thus allows a significant time and cost reduction in the design and tuning cycle. Its deployment is planned for the current financial year in liaison with the PAM-DIEMAKER tooling design product.

PAM-DIEMAKER is our second product in CATIA V5 within the framework of the Dassault Systèmes partnership, and is directly complementary to PAM-TFA. Its development is nearing completion, and the launch is planned for the second quarter of 2006.

• Frost & Sullivan award given to ESI Group for its ProCAST solution

Frost & Sullivan gave its 2006 European Technology Leadership of the Year Award to ESI Group for its ProCAST product. The software has been recognised for the precision of its physical models supported by the unmatched performances of its multiprocessor version. Coming from a renowned group of industrial experts, this prestigious prize rewards ESI Group’s know-how internationally.

• Further acquisitions in 2006: increased presence in Asia

  • February 2006: Acquisition of IPS International’s service branch (South Korea) with the integration of an experienced team of 14 specialist engineers and doctors,

  • April 2006: Announcement of the acquisition of ATE Technology International activities (China) with the integration of a team of 32 top-level engineers and specialists.

Clearly showing ESI Group’s firm intention of becoming closer to its clients by adding to its geographical coverage and by offering high value-added services, this increased Asian presence should also allow the Group to benefit from a privileged access to some major strategic industrial projects and amplify the adoption of ‘realistic simulation’.

Alain de Rouvray, ESI Group’s Chairman and CEO, concludes: “2005 was a significant year for ESI Group in terms of its realizations, both financially, where figures confirm our profitable growth, and in terms of our sales and technical activity. Not only have we been observing a very positive basic trend for ‘realistic simulation’ accounting for product-process interaction, but 2006 should furthermore see the initial benefits of actions undertaken in 2005; in particular, the intensification of Virtual Manufacturing (VM) solutions with the continuing deployment of the PAM-STAMP 2G, ProCAST and SYSWELD offer. Lastly, the recent strengthening of our positioning on the high-growth markets of Korea and China should also contribute significantly to the growth of our simulation activity and the development of new integrated industrial solutions projects. 

All of these positive factors lead us to a sales growth target of 10% to 15% for the current financial year and support the prospect of achieving annual sales of 100 million euros in the medium term. This increase in activity will allow us to improve the amortization of our fixed costs. Similarly, the integration of our recent acquisitions will generate further synergy effects. We therefore anticipate a further improvement in profitability, with an operating margin target of 8% to 10% for 2006 and 15% for the medium term.”

About ESI Group

ESI Group is a world-leading supplier, and a pioneer of digital simulation software for prototyping and manufacturing processes that take into account the physics of materials. ESI Group has developed an extensive suite of coherent, industry oriented applications to realistically simulate a product’s behavior during testing, to fine-tune manufacturing processes in accordance with desired product performance, and evaluate the environment’s impact on product performance. ESI Group’s products, which have a proven track record in manufacturing and have been combined in multi-trade value chains, represent a unique collaborative and open virtual engineering solution known as the Virtual Try-Out Space (VTOS), enabling virtual prototypes to be improved in a continuous and collaborative manner. This integrated protocol allows all the company’s solutions to work with each other and with applications developed by independent software vendors. By significantly reducing costs and development lead times and enabling product/process synergies, VTOS solutions offer major competitive advantage by progressively eliminating the need for physical prototypes during product development. The company generated sales of €62.2m in 2005, employs over 500 high-level specialists worldwide covering more than 30 countries. ESI Group is listed in Eurolist compartment C of Euronext Paris. For further information, visit www.esi-group.com.

ESI GROUP has been qualified as “an innovative company” since January 20 2000 by the ANVAR and is eligible for inclusion in “FCPI” (venture capital trusts dedicated to innovation).

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