Austal Limited (ASB) Earnings Call Transcript & Summary

Hello, good morning, everybody. David Singleton here. I'm joined on the line with Greg Jason, our CFO, who's known to all of you, I think. He's in the room with me. But also, we have Craig Perciavalle on the phone. He's President of our business in the United States, and he joins us from his home, I think, in Mobile, Alabama. The reason for the call today is that, as you know, we went into a trading halt yesterday. The purpose of that trading halt was to prepare for an imminent announcement of a major program for Henderson of Cape-class vessels over the next few years. What we hadn't expected when we went into the halt was that the U.S. Navy almost coincidentally would be announcing the result of the Frigate program. So given all of that and the implications to the business of those 2 programs, we thought we would have this call this morning and give you a chance to: a, listen to what we have to say; and b, to answer questions about those programs as well. Of course, the elephant in the room is the Frigate program in the United States, so I'll turn to that first. As you know, this has been a program that has been talked about for some period of time as we went through the design phase of Frigate and then into the bidding phase that has now completed. And as I'm sure all of you are aware, we were unsuccessful in winning that program and was actually won by Fincantieri, who built the other version of the Littoral Combat Ship in Wisconsin. I want to say from the outset something that I have said to all of you that I've met in the past. Our absolute intention with this business has been to run it in a fiscally prudent way, and that means to bid for programs in a way that we believe that the risk and the rewards of those programs are well-balanced. And we took that philosophy into the rebidding of additional vessels for the Littoral Combat Ship program. And you'll remember that we said very clearly at the time, we are only prepared to win these vessels if we can win them at a margin and a risk level that is reasonable. And the outcome of that was that Craig and his team did a magnificent job, not only bid those at a price that has allowed us to show them as being significantly profitable, but also deliver them in a very effective way. And the reason that, of course, that you're seeing such strong performance out of the business today has been that we have taken that approach. In those vessels that we have won, we've seen good pricing and good returns and good cash flows as a result of that. That's exactly the approach that we took with the Frigate program. This is not about the glory of winning a program. This is about the ability to deliver strong financial returns to shareholders. And we took that decision in the clear and absolute knowledge that whilst the Frigate program is a large and significant program in the United States, it is not the only program by a long chalk. And one of the things that we know and are confident about in the United States is that not only do we have the most modern shipyard in the U.S., we are a low-cost shipyard that has been faultless over the last few years in the delivery programs that we've been doing. So we have been confident that there are programs around which will keep that yard going for some period of time. So as you know, the announcement was made, I think, about 5:00 this morning Perth time, 7:00 your time on the Eastern Coast, that the contract had been awarded to Fincantieri. That's disappointing for us. But I have to say we've been resolute about the price that we are prepared to put this vessel in at, and we still maintain that what we did here was reasonable and prudent and is the right thing for our shareholders. I'll remind you while you're thinking about the company that we have Littoral Combat Ship deliveries out to FY 2024. So a good runway, good solid runway of work on LCS, with what has been improving margins, consistently improving margins on that program through that period of time. We have EPF deliveries out to FY 2023. And great confidence, as I have said to you in the past, that there will be additional ships in the EPF program. And they are, as we've indicated in the past, in a very profitable, nowadays, very low-risk production-type vessels. And we ended 2019 with an order book of $4 billion, so substantial order book that continues. So we're seeing that strong profit and cash being generated out of those programs because of the approach that we've taken. And as I said, no intention to damage any of that. But what I thought might be useful, and the reason that we have Craig on the line is -- now you, I am sure, as shareholders or potential investors, us as a company, will be thinking now about, "Okay. Well, what's next for the United States?" And I'm going to ask, just in a second, I'm going to ask Craig to comment on that. He's obviously deeply involved. You heard me talked about some of the stuff in the past quite consistently, but there's nothing better than hearing it from the horse's mouth. And we maintain that our business in the United States is very strong. It's very capable. It's been delivering extraordinarily well over the last 3 years. And that's a great reputational position for us to take into future programs. So what I'll do now is I'll hand over to Craig. I'll let him introduce himself quickly, give you a little bit of background about his time in Austal, and then talk to you about how we see the future of programs in the United States. Craig, over to you.

All right. Thanks, David. Welcome, all. I'm glad to talk to you. I've been with Austal since 2007 and the President since 2012. And as David said earlier, obviously, this is very disappointing to us, but we're going to obviously keep moving forward. We have a lot of opportunities that we're pursuing. The key -- one of the key focus areas for us is the EPF or Expeditionary Fast Transport. As I think everyone knows, we are contracted through EPF 14. And one of the things that we are looking at doing, that has been discussed in the budget for the U.S. federal budget, is medical enhancements for those ships. That's something that we actually worked hard to get to, and it's been well-received by the Navy. So we have worked through incorporating or updating the design to incorporate medical enhancements into EPF 14. And we do expect that to be the first ship with that type of capability. The reason why I say that is because there has definitely been a focus from the U.S. Navy on upgrading the medical fleet. As you may have heard through the pandemic, there's been a lot of discussions about the Mercy and the Comfort doing tremendous things, both on the East and West Coast, United States. Those ships are well-aged and beyond their useful life, and we have had discussions about -- with the Navy about how those ships could be replaced. So we do believe that -- and they have communicated that one desire is to replace them partially with smaller, more distributed capabilities in the medical field that can be strategically located throughout the globe and then be able to respond to situations relatively quickly. So we do believe -- and there has been discussions about variations of EPFs beyond 14, which would include those enhancements plus more. That would continue on to an EPF 15 and certainly beyond that as well. At least, we're hopeful that it would be beyond that as well. There's also discussions about lengthening that ship and adding even more capability to make it a full-fledged hospital ship, albeit smaller than the 2 big ones that I previously mentioned. So we're pretty excited about those opportunities and there are active discussions about that. Other things that are being discussed or things that we've been pursuing are on the EPF variance, are also -- and including some high-speed logistics transport ships. One would say that EPF kind of fills that bill already, but there actually are some discussions about similar types of vessels supporting the Marine Corps. And we're very hopeful and working on those types of variants as well, plus maintenance platforms for Fjord-deployed ships. The other focus that we have in the U.S. is centered around unmanned surface vessels. I think there's been a lot of press from the Navy and from others in the industry about how the Navy is strategically shifting to smaller, both unmanned and optionally manned ships. The 2 programs of record right now are MUSV or our Medium Unmanned Service Vessel, and LUSV, our large unmanned surface vessel. I'll say the part of demarcation on that is roughly 50 meters plus for the LUSV and under that for MUSV. And we are actively pursuing both of those programs. MUSV is closer to an award, albeit a smaller ship, where LUSV, the program of record has to go through a concept design phase, starting relatively soon, do that for a 12-month period and then get into an award for detailed design and construction thereafter. One award that we did announce not too long ago what's called a Family of Systems contracts with the Navy, that is for unmanned systems. And what that is, it's basically an R&D contract that has us supporting the Navy's development of unmanned requirements for their fleet. And we do have that contract, and we are participating in that right now. We've also had discussions about even taking EPF and making it an unmanned platform. It actually is something that's -- we call it a doable do since the ship is so automated already. And we're hopeful and we think there's opportunities there from an LUSV standpoint, or even larger, in an LUSV, as an EPF-type platform. And again, one more thing I'll mention with regards to unmanned service vessels is there's also R&D efforts ongoing. One of them, in particular, is entitled NOMAR, which is No Manning Required. That is a bid that we actually are participating in now. And that would be an R&D vessel that would start from the keel up, being designed and constructed as a fully-autonomous vessel. So we are participating in that. We expect them to be multiple awards for that program and then we would move forward from there. The other thing I wanted to mention is -- and you've probably seen in the press here, is the Navy focus on smaller platforms, smaller ships, both manned, minimally manned and unmanned. We already talked about the unmanned. But there are other programs that we've been pursuing for a while, including small amphibious vessels, one being Light Amphibious Warship, which is a beginning program of record, which again is centered around providing more smaller, quicker, more distributed capability around the globe for the Marine Corps and for the Navy. And we also have our participating -- we won a contract award for what's called OPC, Offshore Patrol Cutter. That is actually a Coast Guard program here where the Coast Guard actually went back out. The program is actually awarded to a company called Eastern Shipbuilding. And the Coast Guard is actually evaluating, recompeting that program. They awarded a few contracts to some shipyards to do an R&D effort or an evaluation of the design that they have in-house, plus building that design at other shipyards. We actually won one of those contracts, and we are participating in that evaluation effort right now. So in essence, that's kind of -- quite a few, but the things that we've been participating in. Again, key focus on what we've been working on for quite a few years of the unmanned vessels, and we're pretty excited about how we're positioned there into the future.

Craig, could I also get you to talk about the maintenance of the industrial base in the United States? It's not a concept which is kind of well-known and well-understood here in Australia while becoming increasingly so, but it's very well-entrenched in the thinking of the U.S. government and the U.S. Navy. Can you just talk through the kind of implications of that and what that means to Austal and Mobile.

The service side, you're saying, is that correct?

No, no, no. The maintenance of the industrial base in the United...

Oh, I got it. Sorry. Yes, yes, yes. Yes, I'm sorry. So for us, one of the things that the Navy and the U.S. government does focus on is maintaining an industrial base. And obviously, here in Mobile, we've grown a significant industrial base, putting over $400 million in the facility, growing the workforce to actually over 4,000 at a time. We were just under 4,000 now as we've really driven performance and efficiencies in the builds that we're doing today. And it is certainly an important aspect for the government to maintain that industrial base. And it's something that is routinely discussed and routinely pushed and driven consistently. So we do have backlog for a period of time, as David mentioned earlier. We do believe there's plenty of opportunities for us to pursue. We do believe we have opportunities even with extending some of the existing programs like we talked about with EPF. And that will be an important thing for the Navy and the government to consider going forward. So I guess although we lost Frigate, we're not going out of business, that's for sure. And we will dust ourselves off and pick ourselves up, and then just keep moving forward and continue to grow.

And we've also -- just while you're there, Craig, Greg and I have spoken a lot to investors about our focus, absolute focus on growing and developing the support sustainment business because of the long-term nature of that business and the kind of low-risk, long-term nature of it. And you've done extraordinarily well in the U.S., double-digit growth year after year after year. Can you just talk us through how you see that moving forward?

Yes. We've been proud with the growth that we've had to date. I think one of the key things that I think is a telltale of the Navy's confidence in our ability to support our ships is the fact that we had won or have won prime contracts for dry dock availabilities when we actually do not have a dry dock. So we've partnered up with other shipyards on the West Coast and the Pacific Northwest as a prime contractor to support postshakedown availability dry dockings for our ship. With that, we have done well servicing our ships in Singapore. We have 2 LCSs forward deployed to Singapore right now, our LCS-8 and LCS-10. You're going to -- I can't mention much about the movement of Navy vessels, but the -- certainly, the plan -- the published plan for LCS is that they continue to rotate ships out. We do expect that to happen and continue going forward for the life of those ships. And we're actually even hopeful that the amount of ships in Singapore that are forward deployed is actually goes beyond 2. So we've even heard word about maybe up to 4. So that would be really great, and we're anticipating that. And we have established a service center in Singapore to support those ships which supplements our service center that we've established in San Diego as we speak. So we've got quite a bit of work going on in San Diego right now. We got a work -- quite a bit of work going on in the Pacific Northwest in Seattle, on LCSs as well as in Singapore. The other part of our service business that continues to grow is on the EPF side. So we -- those ships are pretty much deployed everywhere around the globe. And we've done work both in the United States as well as outside the United States, doing quite a bit of service work there. We've seen very good growth in that side of our business, and we certainly expect that to continue as the ships continue to be used and as we deliver more ships to that fleet to that side of the Navy as well. So we're pretty excited about what we've been able to do and we're certainly excited about what is forthcoming in our service business.

Great. Thanks very much, Craig. And I want to ask you for any comments on the virtues of drinking disinfectant because I know that's something you're kind of keen on in the U.S. I'm just going to move on to that, and I'm sure we'll come back to it in Q&A in a minute. But I don't want to forget the Cape-class program, that was awarded overnight. $324 million contract for the build of 6 ships. It feels funny because in a way, we were here in Henderson 2 years ago when we weren't selected for the OPV program, and people were worried about the future of Henderson back then. Since then, we've won a lot of work for Henderson that places at our employment level which is higher than we have seen in pretty well any time in our history. We've got ships lined up along the wharf here, and we've just won a major new program. That's the way that things go. We are really pleased with the Cape-class program. And as investors, you'll be pleased because this is a program where we've built 10 of them for the Commonwealth of Australia before. So there's a lot of knowledge and capability around that. We have 2 of them in-build right now in the sheds for the government of Trinidad. And so to build 6 more of these -- I'll never say that a ship program is 0 risk. But this is -- these 6 Capes will be as low down the risk profile as any ships we'll build ever, I would think, because we've had so much practice and experience with it, an ongoing experience as well. And for those of you who are trying to think about how that affects earnings, what I will say to you is that we were cutting metal today on these programs. We've -- in the announcement, tells you when we're delivering them, over the next 3 years or at least tells you when the first one is and when we deliver them after that. But we started metal cutting today. So activity levels have started already. Extends the total program to 18 vessels, so there's a support opportunity with these vessels going forward as well. We already support the vessel, all of the vessels, the 10 vessels we have with the Commonwealth of Australia. This contract does not include a support part. That will be contracted. It will be tendered and contracted separately to this. So that's an opportunity going forward. It does employ around about 400 people at the facility here. And so that means that we'll continue with a fairly significant amount of work going forward. So really present, to be honest, I thought this is going to [ ferry ] a fantastic celebration today, and it's -- that it's disappointing, these 2 things have come together, but that's the way the world works, I suppose. I'll just move on just quickly while we're on the phone and then Greg will talk a little bit on cash and guidance. COVID-19 has been a significant issue for everybody around the world. It's been challenging. But to be honest, the -- whilst it was challenging for us in the early days as we were thinking our way through the implications of it all, it's actually gone pretty well. There's been, obviously, little trips and things along the way. But fundamentally, we've kept all of our shipyards open. We've kept all of our shipyards operating. The United States, which is so important to our earnings going forward, barely missed a beat. They've done a fantastic job out there, as has Henderson and Vietnam. A little bit more difficult in the Philippines, but nonetheless, still pushing through. So increasingly, as the days go past and as we start to emerge out of this crisis, we can say that all of the measures that we took have been successful in keeping people safe, but also successful in keeping our business operating and running. And we feel very good and very positive about that. I'm going to hand you over to Greg now. Greg is going to talk a little bit about, I guess, cash and guidance.

Yes. Thank you, David. Good morning, everybody, on WA, and afternoon, if you're in the East Coast. So we have previously talked about cash levels, full year and in the half year gone. We had about $150 million of net cash at 31 December '19 and talked about the fact that we were retaining significant levels of cash with prospects around investment that could be required off the back of FFG. That leads you to the obvious question about what happens with those cash holdings. So the short answer is it's too early to say today. We are certainly taking stock, of course, of the announcement that we've got. Tying this into COVID, I think there'll be plenty of companies of our scale who would be very pleased to have walked into the COVID crisis with the cash starting point that we did, and that will also feature in our thinking. We're really fortunate in the defense side of our business that we've got the government customers that we do, that the products and services have been deemed essential service and status. And obviously, tougher on the commercial front looking forward. So we'll take all that into account and think about the types of opportunities that Craig has outlined today in the United States market and make decisions accordingly with the Board over the coming months about what that means for the cash levels. In terms of 2020 guidance, I think the most important point is to say that the FFG outcome makes 0 impact on the 2020 guidance. It's a guidance that we maintained just a couple of weeks ago with the COVID-19 update. Capes 11 to 16, as David said, production started today. But in terms of the time to run between now and June, there won't be a significant amount of progress on those Capes that makes a difference to 2020 profit, but clearly, a positive for '21. And reiterate, we're maintaining our guidance at the moment. The COVID crisis has had an impact on us in terms of all the typical hygiene measures that all businesses are going through, but it has not had a significant financial impact on the group. And at the moment, the conditions in each of our shipyards are still conducive to achieving that $110 million of EBIT for the full year, and the better than $1.9 billion of revenue and U.S. shipbuilding margins still in the 7.5% to 8.5% range as previously advertised.

Okay. Thank you. I think if I could hand it over to the moderator now for Q&A.

[Operator Instructions] Your first question comes from Sam Teeger from Citi.

Yes. Just a quick question for Greg, just to make sure I understood what he said. He said for the guidance, you committed to maintaining $110 million, but wasn't the guidance to be greater than $110 million?

Yes. Sorry. We're maintaining the guidance that we provided. That is we will achieve $110 million or better.

Got it. All right. Fantastic. And then second question, and maybe for David and Craig together. Just kind of given what's happening with planning yard and what happened with this Frigate award, do you feel that Austal is spending enough on lobbying on The Hill to compete with the big gorillas in the industry?

All right. That's a great question. And I'll get Craig to give you a kind of near-term view on that.

So I think the answer is yes. I think we've proven in the past that we've actually done well with lobbying. If you remember, we've gotten contracts awarded to us that were not even in budgets in the past. All the EPFs basically past EPF-10 were basically provided through Congress. And I think planning yard was another unfortunate loss. I think with that, that was us entering into a new market that the Navy decided was to go to a somebody that already had a mature planning yard program. And I think it's still yet to be determined what exactly are the drivers of the Frigate competition. But I think we have a very strong relationship and focus on our efforts on The Hill and in The Pentagon. And I think that will continue to bear fruit going forward as it's done in the past, notwithstanding some of the hurdles that we've just -- that have just happened over the frequent -- over the recent months.

Yes. I think that's a good point. Isn't it, Craig? The success that you've had through the lobbying you've done with the senators from Alabama to get additional ships out and into the program as you've needed them, that's been a real mark of success. But also, a way of thinking about how the future might pan out.

Sure. And this Frigate award, it's come earlier than most were expecting. And when you speak with some of your competitors in the U.S., they're also finding that some of the Navy award to the moment are coming a bit quicker than expected. Just kind of keen for your thoughts on potential for timing around this EPF extension and the unmanned vessels. And just when we're talking EPFs, I think the original ones costs USD 150 million per vessel. And how much will the next ones be with the medical enhancements?

David, you or me?

Yes. Sorry, Craig. Yes, that one's for you. I was looking at you without asking you. So yes, please.

So with regards to EPF, I think the -- what you've seen so far are programs that were awarded more quickly that were already programs of record and either -- or already future options. And unfortunately for us right now, we don't have any price options that are available on a program of record for EPF, and we know where we stand with LCS. So that being said, I will say that EPF-15 was budgeted, did get reprogrammed. There are discussions about stimulus packages and other things to help the industrial base. And I'm confident or -- I don't want to get in any trouble, but I believe that there's a lot of active discussions. I know there's a lot of active discussions on EPF-15 and beyond for -- in the reasonable short term.

Right. And was I right, around the USD 150 million for an EPF ship for the ones you've done today?

So Sam, we haven't -- we haven't published figures on this, Sam, but that's off the bottom end of the scale.

Your next question comes from Mitch Sonogan from Macquarie.

Can you just give a little bit of an estimate or guidance on what the FY '21 revenue expectations across Australasia would be in light of the Cape-class award? And I guess following on from that, given your confidence in construction in this vessel program, will there be any delay in profit recognition or will it just be a normal recognition straight away?

So I'll have to answer that in the general, Mitch, because we don't -- I haven't given out specific figures for next year. But we have been indicating that revenue is likely to go down next year, but we would expect profitability to rise, so average margins to increase. So that's the guidance we've been giving. The Cape-class program, obviously, supports that very, very strongly. You asked about profit taking, and I'll let Greg take a view on that. But I will say this, that this is really a question about risk that we see in the program. So if the risk in a program is high, then the profit taking would be later in the program as we deal with those risks. And we're comfortable we've got past those risk positions. Then we're able to trade profit associated with the vessel. However, as I indicated, the Cape-class vessel, this is a -- for us, is a uniquely low-risk program given the amount of work we've done and the fact we're already in production for them. So that would kind of lead you to believe that we'll need to be less prudent than we perhaps have previously. And I'll ask Greg to comment on that because he's much more prudent than I am.

I don't think you need the CFO on the call. I think you've covered it well. I mean that's exactly it. All I'll do is reiterate David's comment. When we say high risk, we defer. When we say lower risk, it's easy to recognize profit earlier. We take a risk assessment at the outset of every contract, and then we refresh that risk assessment every single month for every project across the group and take decisions cleanly. So what does all that mean? There will be profit taking on the Cape-class 11 to 16 fleet from the beginning. But refer back to my earlier comment. The amount of progress in the remaining weeks of 2020 is not going to be all that significant relative to the scale of the overall contracts. So don't expect a significant impact right now.

Yes. Maybe just a quick one, also for Craig. Any thoughts you can share on the final determining factors on costs of not getting the FFG, like in terms of design and performance or cost? Can you maybe just give any insights that you can share with us?

I can a little bit, but we're still trying to get the information from the Navy. So what will happen next is we'll have a debrief with the Navy in the coming weeks. That will be scheduled here within the coming days. And then they'll give us a full assessment of the competition, at least, our part of the competition, and let us know where that goes. We obviously haven't had that yet so we don't know directly. What I will say is there is some public information out there that people can get to that kind of shows Marinette's strategy. I think what you will find, if you take a rudimentary calculation about the total weight of the shift in LCS and the price per ship that they've gotten in the past versus the weight of their frigate and the price per ship of their frigates that they've just won, I think it comes out to about half of the costs, half of the price of a frigate as it is that they're building or that they got for an LCS price per ton. So that's interesting to me. We, obviously, we're not remotely close to that aggressiveness, given the fact that we were already winning competitions on the LCS side of the programs. They were pretty darn aggressive, and that may have had something to do with it. But we'll learn about that more as we go through the debrief.

Okay. And just one follow-up, one, just on the OUS fee. You talked about going through the current design contract, and then a D&C contract probably in 12 months time. Any thoughts on when that program actually starts ramping up in terms of procurements and manufacturing?

Yes. We're still a little ways off. We have -- we're still going through the competition for the concept design. I expect that award to happen within the next, I'll say, just a couple of months. And then that will be about a 12-month period. And then they'll get into the DD&C contract and competition and then award thereafter. So I think we're still a good year -- 1 year, 1.5 years away on that one, 18 months away.

Your next question comes from Russell Gill from JPMorgan.

You've obviously talked about the opportunities in the unmanned surface vessel market. If we think about your business and you're delivering that last this [ Monday FY '24 ] fleet. Picture the shipbuilding shape of what your revenue book will be. Can you just talk through the size of those opportunities? And obviously, this is very political in nature. You do employ 4,000 people in Alabama. On the assumption that you do win all the work that you're sort of talking about, what will that workforce look like in a couple of years?

So let me just give a little bit of an overview on that first. I mean one of the things that we've been saying, as you know, Russell, for some period of time is that the downside scenario, which is post an FFG program, if you like, has matured and changed materially over the last 2 or 3 years to one where we feel that in the medium-term, there was a good opportunity for the business to be of a similar size and profitability level to what it is today. It's hard to predict that because there's so many moving parts and so many variables on time scales, and size of programs and profitability, and how many more EPFs they end up buying, and so on and so forth, and the way that the service and support business grows, which has been a great asset into the business. But there certainly are good quality scenarios that says the business, it doesn't have to be significantly smaller than it is today in a few years time.

I guess when you're coming in discussions with your auditors, obviously, when you're modeling your cash flows in the future, you've had a pretty good shot at the FFG(X) where a lot of this other stuff arguably are far more uncertain. Is there a chance you see a write-down in your -- in the shipyard in the U.S.?

No, Russell.

Okay. And then if we're thinking about the working capital movements around the LCS project as it does wind down, can you give us some -- what are we thinking on in terms of cash inflows, the outflows? So as we progress through this next couple of years, are they matched in terms across the business in terms of inflows and outflows?

Russell, so this is a question about the EPF and LCS in U.S.A., and they run through profit versus cash, right?

Yes. Correct. Just so we get a feel for -- I mean the per property is an estimation. I guess, the future of the cash flows, probably a bit more knowing, just so if we're thinking the inflows, the outflows, whether there's working capital movements, you're getting paid ahead of outlining the cash for a few things like that. Or does it just stage? Is it cash flow matched as we move through the next couple of years, both in and out?

If nothing, it's a growth simplification, but there's nothing else happened. And theoretically, as in no more awards came and overheads were tapered to match the throughput, then we'd end up with more cash, because if you go to the balance sheet, you can see that there's significant work in progress. The U.S. contracts are always structured in a way that results in Austal doing work, many expending cash on labor materials and overhead that ends up in with before we are able to bill the U.S. Navy. And so if you're running a pure liquidation case, we'll end up with more work, with more profit. And we'll get the cash on the work that is yet to be done and we'll get the cash from the work in progress that has already been completed to this date. That's -- it's a simplification, but I think it focuses on what you asked, which is profit versus cash on the ships in the order book.

Exactly. That's it. But that's the dynamic that I thought as it goes? So thanks for clarifying that. And just as we, I guess, move forward, going forward to your business in terms of -- you do highlight the EPFs are much higher margin, I think, than the LCSs. We'd worked an assumption of that last year. I think it was USD 185 million. Is there any sort of guidance there you can give about what margins we should be thinking? Because the shipyard does have a decent amount of, I guess, overhead within the yard. A lot of unknowns here. But how should we think about the differential in margins between LCSs and EPFs?

So for commercial reasons, Russell, as you know, we don't give out profitability on individual programs. What we do do is we give guidance on the average profitability of the shipbuilding programs and the support program separately. And that's been strong and getting stronger. The curve on that has been positive for some period of time. We expect that to continue.

Okay. Great. Can you give, I guess, a feel for the -- I guess the overhead in the yard then? So what's the overhead that runs in the yard?

So again, it's not a number that we publish, Russell. But over -- the overhead and the manufacturing business is something that is very carefully managed. Craig puts a lot of effort into managing the overhead and making sure that we've got an overhead that's appropriate to the volume of work going through the facility. That's an everyday task.

And just on the yard, when we're talking about capabilities, you clearly can churn out the EPFs very efficiently. The other things that you're talking about, a bit more service work, that you're going to the unmanned vessels. If we went down that path, is there any CapEx required? Or can you sort of shift around your yard to undertake those capabilities if we're thinking -- if that's the progress of the yard in the future?

Yes. So I think on aluminum vessels, that's a great question. Why don't you answer that one, Craig?

Yes. So I think I'll also add in LCSs because those are going very well, too. And we do have flexibility to adjust the existing facilities that we have for other opportunities, including the ones -- most of the ones that I actually mentioned earlier. We shouldn't have an issue at all building them in the existing facility.

Great. And then just a final question while I got you, David. Since I think we -- the last time you guys -- Henderson had a conference call in February. The oil price has taken a significant downturn. In speaking to some customers, there has been some level of correlation between the commercial ferry market and the oil price. Can you just talk through, I guess, your thoughts on the outlook for the commercial ferry market over the next couple of years given that we've just had a dive in the oil price in the last month or 2?

Yes. I mean it's a good question, actually, Russell, and sort of one that we've been talking about a little bit as well. I mean, obviously, the impact of COVID-19 and people not traveling has had a downward pressure on the ferry industry. It's not been as severe as we see for the airline industry. It's a different kind of transport. But it has been -- it will have a downward pressure. No question about that in Europe at the moment. There's a couple of things that are getting talked about. And first of all, the biggest cost for ferries, the type of ferries we built, is the fuel cost, the oil cost. And there's no question that that's going to help them significantly. It's a big -- it's a lot of leverage that comes out of the oil price. So I think that's going to help them repair their balance sheets very quickly. The other thing which is perhaps not quite so obvious is we're seeing a lot of talk now about people saying, "Well, we're just not going to travel so far on airplanes as we were thinking about before." And so travel inside Europe, inside Asia. Now people and companies now expecting to see, when it all matures and gets back to normal again, an uptick in that kind of travel, because you can get in your car, load it all up with all your gear and your children, and it's not the same as getting on and off an airplane and going through an airport. So we do think there's likely to be some benefits there as well. So we've been saying for a period of time that I think we'll hit the pause button on new ferry contracts for a period of time. There are some other programs out there that are not affected by this personal-type vessels. And we'll see what happens when we come back. But there's no question that the oil price is good news for the shipbuilding industry.

Your next question comes from [ Vincent Cook ] from [ Cline ].

In terms of the margins in Australasia, the improvement that you're targeting there mostly about Vietnam and the Philippines or is actions in Australia and these new Cape-class vessels material in the equation there? And then also, are you looking at acquisition opportunities in the current environment?

So I think all of the above in a sense. And certainly, military programs into Henderson where we're not faced with foreign competition, low price competition, means that we should get much stronger margins out of the Henderson facility for the programs that we've now got in there. And I think it's very much the case in the 2 programs that we have here at the moment, Guardian and now the Cape-class programs and the Capes for Trinidad. So we feel good about gross margins in Henderson. And of course, the Philippines and Vietnam is all about lifting and driving up margins and competitiveness in that part of the market. And as our production switches into Asia, as it is well-advanced on doing, we've now got full shipyards in the Philippines and a reasonable position in Vietnam, that should do exactly that, drive margins up. We're a very differentiated business. We win programs at good prices. But when we can build at an internationally competitive price and win because of that position that Austal is in, then that should really drive margin performance. So there's no question. And I have to say, saying it the other day, no one wanted COVID to happen. But thank God, we made the changes we did to moving the commercial stuff out into Asia when we did because it's left us in a very, very competitive position. As far as acquisitions are concerned, it's definitely part of our landscape these days. And we've got a very strong balance sheet, as we've talked about. We've been preserving that balance sheet to make sure that the opportunities that arise, we can take account of. I do think that it's not hard to imagine that opportunities will arise through this period of time as we see companies who not have the balance sheet that we've had go through this crisis. And we are very alive to it and very focused on it as an activity.

Your next question comes from Alex Karpos from Goldman Sachs.

Just one for me. I'm hoping to get some more color on the upcoming Navy force structure assessment. I realize it's a couple of months late now. But more specifically, what we should be think of when we hear a more distributed fleet architecture? What that means for fleet composition, and what that means for Austal?

Yes. Great, great question. And we've often commented about how that change in [ 4 ] structure in the United States should move things in our direction. I'll let Craig comment on that.

Well, I think it all centers around what I mentioned earlier on that smaller ships. So there's no doubt that when we talk about distributed capability, that's about smaller ships strategically located -- in higher quantity, strategically located across the globe to be able to respond and provide capability quickly. And I think that, that actually fits our strengths at Austal USA. And we'll see how all that pans out because it's still something that we're -- the Navy is still working on. But you can read it, you could see it, that it's about smaller, more distributed capability that can respond to crises or responds to situations more quickly.

Your next question comes from Oliver Stevens from Hartleys.

You mentioned EPF program extends out to '23, and the LCS is out to '24. Just for how long does the existing U.S. order book enable you to continue operating at your current capacity in the States?

Well, just as we say, those programs go out 3 and 4 years. We're expecting more EPFs into the future, which will extend it further. So there's quite a runway of production there. And as Craig has pointed out, we'd expect more programs to come in over time which will continue to push that forward. So I think the work balance certainly over the next period of time will be pretty strong.

Okay. And just separately, obviously, there's other things going on, but any update at all on the Philippines OPV?

We still feel very good about the Philippines OPV program. It's a program which -- a bit like Trinidad, Trinidad really. We've got a lot of Commonwealth support, which we're very thankful for, diplomatic-type support. We've got a lot of support from the Commonwealth on financing-type structures for the customer, which is a major, major differentiator. And of course, we've got a substantial shipyard in the Philippines that's building and exporting ships. So that means that the Philippine government can build -- can meet their Build, Build, Build strategy to build more capability in the country. So those 3 things come together, I think, is what's put us in a strong position we're in. No question that COVID has created a delay to that because we've seen quite a big shutdown in the government in Manila and eyes are off the ball a little bit across the world. But I think that program's a strong one. I think it's a good one. And actually, it's interesting when you think about it, it's a fabulous piece of stimulus for the Filipino government, funded in part at least by the Australian government. So you think this would be a program that they'll be very keen to push forward when they get back to work in the next few weeks. And of course, the threat environment in that part of the world, that hasn't diminished 1 job, not 1 iota. In fact, I'd argue that it's got worse in the last few weeks. So the need for those ships remains strong. And certainly, everything we see suggests that this program will go forward.

Your next question is a follow-up question from Sam Teeger from Citi.

David, just wanted to know if you could please talk about any other opportunities that's out there with the Australian Navy. And then just in this recent -- an award you won overnight with Capes. Is anyone else bidding?

So on the Cape-class program, no, it was -- that was a single source program to us. So it was really, I said to somebody else this morning, the competition was, do they continue with the Armidales that they've got in service for another few years or do they replace them with newer ships? We were able to demonstrate to the government that buying new ships and replacing the old ones because of the support costs and the management cost of those was actually cheaper to the Commonwealth than continuing with existing vessels. And that was really it. So no competition on these vessels going forward. There are a number of programs in the Commonwealth in the future. And probably, the latest of that is there's a in-service support program for the OPV program coming up as well which we'll be bidding fairly shortly going into the support business. We've invested quite heavily in our support business and into the kind of digital tools that we're able to employ in our support business. So we're able to bring something sort of fresh and new to that program as well. I think though if you cast your mind to where's the opportunity going to come from, I think there is outstanding opportunity for naval programs through Asia over the next 10 to 15 years. I think we've got a 15-year burst of activity in Asia because of the threat environment that exists up there and overlapping claims around regions and islands and all of that sort of thing. And every single nation that I can think of in Asia right now is talking about shipbuilding programs. And a lot of what we did in moving into Asia, putting manufacturing facilities into Asia, has really been about engaging much more strongly, much more positively with the Asian military environment so that we're there for those military programs. I mean the OPV program for the Philippines is a very big program. It will be our biggest military program ever outside of the United States if that comes off, and there are multiple numbers of those programs around Asia. We have learned how to build in Asia. We're learning how to design for Asia. And we're definitely learning it with the support of the Australian government, how to sell into Asia. And I think that's our richest vein of future programs over the next 1, 2, 3 years.

Sure. And you talked about OPV in the Philippines. Any chance you can just give an update in terms of Subic Bay?

Nothing much I can say on Subic. We've kind of said everything we are going to say on Subic in our ASX release that we did some while ago. Still there, still moving along. I still feel good about it.

Got it. And then last question. Do you think you're planning on protesting the FFG award? And if so, what would you hope to achieve?

Protesting, did you say? I have no comment on that at the moment. That's -- it's always something that you consider, but I certainly -- we're not in -- we only learned the outcome a few hours ago, Sam. We haven't kind of figured that stuff out yet.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Singleton for closing remarks.

Yes. Thank you all for coming in and thank you for spending the time. I think there were over 140 different people on the line today, which is -- I think, a record actually in the time that I've been doing this call. So thank you for your interest and your time. I'm really pleased about what's happened with the Cape program here in the United States -- sorry, here in Australia. The United States is a fabulous business. It has got some good opportunities ahead of it. Obviously, this is not the way we would have wanted things to have happened, but I see nothing but good things happening in the United States over the next few years. And they're certainly doing a great job with the programs that they've got at the moment. And as we've said in the past, our focus continues on the support business and the value of -- the long-term value of the support business to the company, both in Australia and in the United States. So thank you for your time. And no doubt, I'll talk to some of you in the future.