Austal Limited (ASB) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for taking the time to call into Austal's FY 2020 Full Year Results Presentation. This is my ninth as the CEO giving results presentations but my last. So I'm very pleased as you will have, no doubt, already flipped through to the results to be doing that on what I think is a great set of financial results for this year. I'm joined today by Greg Jason, who's known to many of you. Greg has been CFO of Austal for 8 years. But in addition, I'm joined by Patrick Gregg, who is a 3.5-year veteran of Austal, is currently the Chief Operating Officer of Australasia and will replace me as CEO at the end of this year. And Paddy will make some commentary on the way through this morning as well. I'd also like to recognize that this is a week early for our results. I don't think we've ever come this early in the process before. And I think that's testament to the quality of the businesses and their ability and their organization through this but also of the finance department, who've done a great job in bringing together the results early this year. Today's presentation is titled Celebrating Success. I think it's good to see one of the great icons of Australian industry doing so well, not only locally here in Australia but also most significantly overseas. Austal remains the largest aluminum shipbuilder in the world. And we are -- remained the biggest defense contractor and exporter -- Australian defense contractor and exporter, and also the only company in the world who have prime contracted and built ships for the United States Navy, quite a legendary performance. The picture here is intended to depict that. And that's the -- even with all of the stresses and strains that we've had over the past 6 months associated with COVID and the industrial impacts of all of that. We recently delivered this magnificent trimaran to Fred Olsen ships in the Canary Islands, and you can see it leaving Henderson a few weeks ago and being celebrated with the 2 tugs there in the traditional fashion. So we're going to talk now about FY 2020. And I'm sure over the next few days, with all of you collectively and individually, we'll talk in a bit more detail about some of the future for the business as well. I'd ask you to turn to Page 2, if you're not already there, and I'll just give you a quick oversight before Greg gives some more detail on the financials. I said a couple of years ago that I thought the strong performance of the business from a profitability point of view and from a cash generation point of view was the new normal for Austal, and that certainly was the case last year. We continue to see that this year with very strong performance across the board. Our revenue is up 13% overall. But very pleasing to see a $100 million increase broadly in Australia, together with revenue increase in the United States as well, of course, helped by a tailwind during the year because of FX. I'm particularly pleased to see that Australasia now is 24% of the revenue base of the business and is a significant contributor to profit, 23% of the profit this year, and I do remember a few years ago, all of us being concerned about the fact that the Australasian business was a drag on the overall performance and pulling back against the great performance of the United States. And it's good to see that having reversed in a very solid and, I think, reliable and consistent way. Overall for the business, EBIT is up 19% on our original guidance, which was $110 million made -- must be nearly a year ago now and 4.3% up on our guidance made in June of $125 million. So over $130 million is a significant improvement on guidance, but also up 41% on our profitability in the FY '19 year. That's translated to a record NPAT of $89 million. But I think probably most satisfying for me and for us, from a financial point of view, is the operating cash flow. We had a really great performance in operating cash flow in the 2019 fiscal year, and that has been repeated again this year with a very strong cash flow, $164 million. And that's meant that cash holdings in the business are now just under $400 million, taking the business into a very strong net cash position. All of that, of course, is positive, both for the business and for shareholders and has allowed us to increase the dividend from $0.03 paid in the last results round to $0.05 that's been declared by the Board for this final dividend for FY '20. And I guess that's a testament really that strong cash flow coming through as a very significant increase in the dividend. I think it's very welcome in these difficult times, I'm sure for a lot of shareholders. My conclusion out of all of that is that we have a business here that's firing strongly on all cylinders. The U.S. continues to perform well. It's a very strong, very well-run business, operating in a good, solid market. They've grown. The shipbuilding business and dramatically grown the support business, once again, this year is a great complement to them. But as I said earlier, also now supported by the Australasian business, and it's great to see after all the investment and hard work that's been done by Paddy Gregg and his team, it's great to see the performance of that business now making a big contribution. Perhaps most satisfying is the fact that the opportunities set going forward, the opportunities that we see inside of the business are stronger now than I think I remember seeing any time for some years. So the present looks good. The future looks very positive as well. If you turn the page to Page 3, as I said, revenue, for the first time, over $2 billion this year, a strong order book of $4.3 billion. 45 ships under construction, which is a testament to the resilience and strength of the business across multiple shipbuilding programs in multiple locations, really helps risk reduction. 10 new ships ordered. That includes the 6 new Cape-class vessels for Australia, which really is, along with the Guardian Class vessels currently in build, is going to really underpin the Australian business for the next 3 years or so. Numbers in employees are up to 6,800. Most of that growth in Asia, of course, with the new shipyards having ramped up there, but strong increase in labor numbers. 2 new statistics on this page from ones that we have shown before, which I think are important. First of all, the total revenue from sustainment up now to 17% of revenue. I can remember, Greg and I are talking to shareholders 3 or 4 years ago, saying that one of our priorities was to grow that part of our business substantially, and we've seen really solid year-on-year growth in the sustainment business. I think it's a very important part of our business, creates an underlying strength in the revenue base. And in 2020, 85% of total revenue from defense contracts is a really important statistic at this time because it points to the resilience of the business given that the vast majority now of what we do is defense related. Broadly, long term, high-quality contracts with a really good sovereign partners for those programs. And I think that helps us through the next few months as we deal with COVID. Slide 4 now, if I could ask you to turn to Slide 4. First of all, just on COVID. One of our objectives through the last few months has been not only to keep people safe, that's obviously been a priority objective for us, but also to keep people in employment and to keep our sites open, people working because one of the things we know is that unemployed -- unemployment creates a great deal of hardship on people. And I think probably that one of the most satisfying things from an industrial point of view is the fact that we have managed to keep the sites open. We've learned a lot of lessons through this. Like everybody, we've been learning on the run. And I feel that we're in a much stronger position to manage that over the next months and years until we get to the end of this year. It has caused some problems, of course, with commissioning, particularly getting commissioning engineers out of Europe and into Asia in particular to get vessels commissioned so that we can get those up and running. Some pressures on the supply chain, although mostly, we've been able to manage that quite effectively. But we have been broadly been able to keep the ship programs going. Some of the deliveries are later than we would have liked because of the inability to fly commissioning engineers in. But none of that has affected us financially, and the reason for that is something that we've often talked about in the past and that is that many of our commercial contracts are positively cash flow funded by the customers. And we have very good quality contracts with the defense departments. Defense has been strong for us in the sense that in the United States, the U.S. government declared the defense industry a critical industry. And that meant that a lot of effort was put into making sure that the industry stayed open, which indeed it did. And in Australia, we have seen -- what I think is an unprecedented level of support from both the government and the defense department on maintaining the manufacturing base here in Australia across Austal as well as other defense contractors as well. And all of that has really meant that we've managed to keep the operations running well. If I look at the slide itself, on the top right-hand corner, we've had a 28% year-on-year revenue growth in support to $360 million that maintains the momentum of that business. That's still a lot of ships to deliver into those programs. So we can expect to see further growth as we go forward. The overall EBIT margin for both the United States and Australasia came in at 8.2%. So it was above our guidance range of 7% to 8%. So we're pleased with that. It's been interesting the way the mix has gone. So last year -- last half year, I think we had strong performance, EBIT performance in the United States, a weaker performance in Australasia, and then it's reversed in the second half, a really outstanding performance in Australasia. Some difficulties in the United States. And so those 2 have kind of canceled each other out a little bit. And we'll talk about -- we'll talk a little bit about that later on. But broadly, one-off issues in the United States and some issues associated with starting up the new facility in Singapore, which we don't think will repeat into the future. We've also continuing to look at investment opportunities in the support business. And we think the growth in ship numbers, together with that investment will drive future growth in support. As far as the U.S. is concerned, bottom left -- the box in the bottom left of Slide 4. Shipbuilding margin has increased from 7.9% to 8.1% across the year. 3 vessels delivered. And although we lost the FFG(X) program by the year -- during the year, it's interesting how one door closes but several others have opened, and we've seen tremendous support from the United States to develop the shipyard and get it ready for a whole range of new programs which will come forward in the future. And I have -- I'll -- we've talked about that a little bit in the strategic section at the end. I'll hand over now to Paddy, who will talk about Australasia.

So you will remember that we've previously talked about increasing the profitability in Australasia in line with the U.S. business, and I'm pleased to say that we are performing well on that journey. The investments we made in the Philippines and the Vietnam yards have certainly paid off, and we're demonstrating the capability from those yards and delivering vessels from them of great quality and for some satisfied customers. The Australia business is also performing very well. As David said, despite COVID, we managed to deliver the first photo vessel a few weeks ago, and we've certainly got line of sight to how we will deliver the 84-meter trimaran for JRK in Japan. Guardian program is still progressing well, with ships being turned out on time, and we're working with the Commonwealth on how we can get the Pacific Island nations in to accept the vessels. And of course, then the Cape-class vessels that we've recently won the contract for provide a lot of security going forward. So we've seen some significant growth and demonstrated we've been able to handle that, and we're well placed for the future in the Australasia business. I'll now hand over to Greg Jason to take you through the financials.

Thank you, Paddy. Good morning, everybody. I am now on Slide 6, which is the group earnings slide. As David said, records across a number of these metrics. We exceeded $2 billion of revenue for the first time in FY 2020. That was $235 million higher than FY '19, $106 million of that was due to FX tailwinds and $129 million of it was due to increases in underlying throughput. There was AUD 35 million worth of increased throughput coming out of USA, and that was fundamentally driven by the support business and there was $94 million of increased throughput from Australasia and that was driven by the shipbuilding part of the business. We translated our FY '20 USD results across to Aussie dollars at an average rate of just over $0.67 in FY '20, and that was just over $0.04 more favorable than we had in FY '19 that was over $0.71. 30% more EBITDA, 41% more EBIT and that translated into 45% more NPAT. So the reason for that pattern is that the depreciation and amortization that didn't increase by as much as EBITDA. And hence, we got percentage lift in EBIT, and we had no increase in the absolute borrowing costs from '19 to '20, and that's why you get an even larger percentage increase at NPAT level. EBIT was $37.6 million higher than '19. And of that, foreign exchange tailwinds benefited just over $7 million and the rest of it was an improvement in underlying profitability. Effective tax rate was 28%. Again, I'm sure everyone will be pleased to know that's pretty close to 30% and it doesn't get a lot of attention. 13 percentage points of that was or will be settled in cash, 14 percentage points of that will be offset using R&D credits that were generated in USA and Australia and the small balance of the number represents deferred income tax expense. Now I'm going to turn to Slide 7, which is the segment breakdown. This matrix demonstrates the breadth of earnings from shipbuilding and support in both of our business segments with USA and Australasia. So I'm going to start on the top left quadrant, which is USA shipbuilding. We had $63 million more of revenue. This was driven by $80 million of benefit from FX and a partial reduction in shipbuilding throughput to the tune of $17 million at the revenue level. We had an $8 million increase in EBIT. 3/4 of this was tailwinds on FX and $2 million of it was associated with the margin improvement from 7.9% to 8.1% during 2020, which was just above the middle of the guidance band that we gave for the year 2020. Support revenue has increased by $68 million, $53 million of this is associated with underlying throughput and $15 million is the benefit of FX. 5.8% EBIT margin is below the target band, and that occurred for the reasons that David spoke about a few minutes ago. We had some performance issues in the ramp-up of Singapore and also some issues with the timing of funding for some specific projects. These issues occurred in the second half of 2020, which is why you see such a stark contrast between half 1 and half 2 results in the year. Australasia had record revenue, 25% higher than the year before, almost reaching $500 million for the total segment. Shipbuilding revenue increased by over $100 million capped off the expansion of Asia. And the real reward of this was that both EBIT and EBIT margin more than doubled from the FY '19 level. Support revenue was flat year-over-year, but we had a bump in margin at 18.4%. Just over 9 percentage points of that margin improvement results in nonrecurring activities, including some nonstandard contract variations that occurred during the year and also the fact that we released the onerous contract provision that we had established a few years ago for Cape Class Patrol Boats 1 to 8 in relation to the sustainment contract. And we're able to make this decision because of the sustained improvement in cost performance over the past year. The other $2.2 million of higher EBIT was simply the result of higher-margin throughput. We still maintain a long-term target EBIT margin of 7% to 8% for this business, notwithstanding the bumper results that we had in FY 2020. Moving now to Slide 8, which is cash flow. Super strong operating cash flow and EBITDA conversion. Within these numbers, of course, we had the higher EBITDA. We did liberate cash from working capital during 2020, but it wasn't as much as was liberated during FY '19, and that's why we ended up on par with last year's number. We had typical levels of sustaining CapEx. We funded the tail end of the expansion in Asia. There were no go-zone debt repayments made during the year, but they're going to be reassessed during the first half of '21 as we monitor the COVID environment and also the capital investment decisions that are under evaluation at present. The lease principal repayments of $6 million, that's not new. It's just different landscape. They're now disclosed in financing cash flow and from operating cash flows in accordance of the new Accounting Standard #16. Just over $20 million of cash dividend net of the DRP, and that represents the $0.06 per share of dividends that were paid during the year, being the final dividend from '19 and the interim dividend for '20. The strength of the balance sheet has been a huge benefit during COVID-19, finished the year with $397 million of cash, $272 million of net cash after excluding the notional debt associated with the leasing arrangement for Cape Class Patrol Boats 9 and 10. This put the company in a super-strong position and gave the Board confidence to declare a final dividend of $0.05 per share and leave us plenty of ammunition to fund major capital investment opportunities that are either committed or under evaluation. This includes steel capability for the United States, which has already been committed to drydock for San Diego, which is still being pursued and possible acquisition in the Philippines that David has spoken about during 2020. Finally, I'll move to Slide 9. This is the long-term trajectory of net cash and debt. It's a great picture in terms of the sustained cash generation of the business, notwithstanding the short-term working capital sawtooth pattern that you see. And ultimately, $272 million at top right-hand corner, net of Capes 9 and 10. I'm now going to hand back to David to talk about the business priorities going into FY 2021.

So Slide 10 will be the last one we'll talk about in this session this morning. I'm sure we'll turn to some of the strategic slides in other presentations we do over the next few days. But just to give you an overview of business priorities, and Paddy and I will take you through those. I'll start with the United States. I said earlier that one door shut in the United States and immediately several other doors opened for us, which I think is a great testament to the strength of position that we have in the United States and the fact that we are a significant part of the defense industrial base, something we've talked about so many times before. Immediately after the FFG(X) decision was made, we were contacted by the Department of Defense who asked us to invest in steel shipbuilding activities at Mobile because they see a lack of capability and facilities in the United States for the shipbuilding program that's coming up. It's a $100 million investment, of which half of that is going to be paid for by -- with a grant -- a DPA grant from the United States government. That's something I don't know that I personally in all my years in defense have seen anything of that nature before. It's -- I would describe it as the single most important strategic step that the business has made since the original investment in the United States a dozen or so years ago. It really is quite -- will make quite a change to our business going forward. And what it will do is open up the opportunity set quite dramatically, and we've shown in later slides what that means. But I think there are something like 4x the value of programs that will be open to us when these facilities are complete in 2 years' time. And just so as you know, we are underway with this program. We are investing in equipment, and we are getting ready to build new facilities. And I'm sure that we will be heavily into the steel shipbuilding industry within 2 years. I'll hand over now to Paddy to talk about Asia.

So as I spoke about earlier, we have made significant investments in our Asian shipyards in the Philippines and Vietnam, and we're now demonstrating that they are very capable and able to build world-class vessels. You'll also be aware of the announcements around the Philippines Navy and our desire to build OPVs for the Philippines. And we think that's an incredibly powerful model where we get government support, and we use the benefit of export finance Australia and our relationship with them to really open up opportunities where we're building defense vessels for foreign nations with the prospect of sustainment work coming on the back of it. And we think that's a really, really important feature that we have at the minute whenever we consider the uncertainties around COVID and where that's going to take the commercial market. However, for every commercial opportunity there is, we believe with those shipyards in Asia, we are very, very well placed to be incredibly competitive whenever it comes to pricing in the future.

Okay. I'll pick the next box down on Slide 10, which is about technology. I -- one of the things that has really made Austal so successful over the last 30 years is its leadership position in the technical areas that it's involved in, mostly, of course, high-speed aluminum ships for many years. And we remain the only designer and builder of high-speed Trimarans in the world, which is now half of our production, so very significant. 2 years ago, I said we were going to triple the amount of money we spent annually on R&D, which we have done. And that's really paid off great dividends. We have software systems now for maintenance, support and for vessel control that create unique and great capability. And both of those, following the investment, have now been sold and are generating revenue and profit for the business. So that's been very positive. Also investing in electric boats, and I think we will start to see electric boats at the smaller end of the market. Now we've spent a lot of time working on the technology for these types of vessels. And these are the sort of vessels you might see in Sydney Harbor or Auckland Harbor running relatively short routes at the moment, but doing so without polluting diesel engines and the noise associated with those as well. So that's something coming forward. And unmanned surface ships, the United States has invested and put a lot of effort into autonomous ships for defense purposes, and I think that's going to be a part of their future. And that indeed is happening in Australia as well. So great things coming out of the investment in R&D. I'll hand back to Paddy.

So just the last box, I'll talk a little bit about technology and automation. With the growth that we've seen across the Australasia business, we've recognized we have a need to invest in our systems and processes to ensure that we have appropriate controls in place and we use that digitization of the shipyard to further improve our efficiency and maximize what we can deliver for our customers. So the beautiful thing about the strength of the balance sheet is we have the ability to invest in the business and really put it in a very, very strong position going forward. So looking at our ERP systems, looking at our 3D design capability, how we integrate with production and really, how we use our 3 shipyards as an integrated system to maximize the efficiency with which we can build ships going forward. So quite an exciting time. And as I said, the strength of the balance sheet allowing us to invest in the business for the future.

And then just to wrap up before Q&A, we are -- we have chosen not to provide further guidance at this time, recognizing the ongoing uncertainty around the world generated by COVID. We will, of course, update the market should there be any material effects over the next few months and we will see how that goes. As I said earlier, we are so much better at managing this event than we were 6 months ago, where we really were babes in the wood, I think we've got a good insight into things now. But nonetheless, none of us know what the future is going to bring. But at times like this when the strength of our order book and the fact that we are involved in defense. And next year, I think defense will be over 90% of the revenue of our business. That exposure, predominant exposure to defense is one of the great underlying strengths of the business. We will do an update to that at the AGM in October where we'll have a better insight into how the year and how this pandemic is evolving over time. Meanwhile, my closing statement would be that after a very, very successful year, we believe that the opportunity set going forward has never been greater. And it doesn't matter whether we look at the shipyard in the United States or the opportunities in Asia really is a very interesting portfolio of operations going forward and as we see the U.S. business evolve over the next few years. Okay. Thank you, and I'll hand over to questions.

[Operator Instructions] Your first question comes from Alex Karpos with Goldman Sachs.

Just a couple on my end. First on USA, just the support margin, the commentary provided is really helpful. Can you just confirm, one, that these headwinds are officially kind of wrapped up at this point in time? And if so, would you expect a pretty quick return to that normalized target band of 7% to 8%?

Yes, we expect to return to that normalized band for 2021.

Perfect. And then on to Australasia. Obviously, very strong margins here really across both segments. Could you maybe give a little bit more color here on that shipbuilding, specifically margin increase up to 4.2%. Is that sustainable? Or could it even creep higher from here when you look into '21 and '22?

Yes. I think this comes off the back of the investment we made. You'll remember, probably 3 years ago, we said, look, it's time for us to invest and reengineer the -- particularly the commercial segment of our business to lift competitiveness and profitability. And my God, I'm glad we did it when we did because that commercial market is going to be tougher over the next few years, but we put ourselves in a really competitive position up there in Vietnam and the Philippines. But also it's created an environment where we think that margins will continue to improve. I think I said 3 years ago that our objective was to lift operating margins in shipbuilding in Australasia up to the kind of levels that we see in the United States. And I think we're well on our way to achieving that. I think we all feel very good about the performance we've seen out of Australasia.

Perfect. And 1 more quick one. Just on the MARS acquisition you announced a few days ago. How should we think about this both in the context of the steel capacity expansion? As well as the long-term kind of, I guess, ramp for the support business for the USA side over the next couple of years?

Yes. It's primarily around the investment for the steel shipbuilding area. 3 elements, really. One was we needed a launch dock, a dried -- a floating dock, which that business has. So that means we're able to launch not only the current ships, but essentially, more importantly, the large steel ships that we believe we'll be making in the future. That's one thing. Second thing is that, that business had some deepwater wharfage on the other side of the river to our current facility, which will allow the deeper draft steel ships to be moored alongside. So that's derisk that area of the business, and it's created some additional space as well for the expansion that we need. So it's -- if you like, you should see it as the first step in that $100 million investment program into steel ships.

Your next question comes from Mitchell Sonogan with Macquarie.

Can you hear me all right?

We can.

Yes.

Excellent. Just a quick one, following on the U.S. segment. Just looking at shipbuilding in particular, I know I haven't provided any specific guidance, but can you maybe give us a sense of how we should expect maybe the revenue levels or even margin coming into '21? The second half ship during May and margin came in at similar to first half. Were there any impacts on operations due to COVID? And I guess just should we continue to see that going higher into '21?

Yes. I think as far as COVID is concerned, there's been lots of impacts across the business, but they're being managed well and effectively. And the U.S. has managed its environment particularly well, and that's carried on through this process. We often say, don't look at the half-to-half movements in profitability of any of our segments because there's too many fluctuations that we've described in the past. So looking at the full year EBIT margin, I think, is probably the most instructive. But as I said earlier, we won't provide any more guidance beyond that over the next couple of years other than to say the order book is strong. The U.S. business, in particular, has been delivering exceptionally well. I mean, it's interesting, isn't it that we have a conversation 30, 40 minutes long and we don't talk about the delivery of ships from the United States, and that's because it's just consistent kind of delivery and is non-newsworthy anymore. It's just underlying performance. It just keeps going. And that's a great change from a few years ago.

Okay. And just a quick one, David. Maybe just a quick update on anything happening on the LUSV program? And also there was recent media articles about potential for stimulus package in the U.S. with EPF Hospital ships. Can you maybe talk about that because they have been flagged by yourselves over sort of 12 to 18 months now? A quick update across those 2 would be great.

Yes. I mean, I can't talk for the United States Navy other than to say that I do think it's significant when we see hospital ships in the stimulus package, the Republicans stimulus package, that would indicate that their ships at the United States Navy wants and needs. And if it's in a stimulus package, that says it's probably in a Navy requirements package somewhere else. So whether they come out of stimulus or whether they come out of the normal shipbuilding program in the future, I think it's good news for not only EPF and further versions of EPF, but also a bigger version of EPF that the emergency or the expeditionary medical ships sort of suggests. So certainly, lots of potential there -- undoubtedly, lots of potential there. The other thing that you -- checking back, what was it? You talked about LUSV. The next step in LUSV is the award of design contracts. So we expect to see that imminently could be in the next few weeks. That will be the design contracts for doing the concept designs for that vessel. And I think we're probably a couple of years away from contract award for a shipbuilding program.

Okay. Great. And just one other one. There's always a few questions on pivoting into a steel shipbuilding. Maybe you can just talk through any thoughts on your capability and any risks you see transitioning from the big aluminum operations in the U.S. into steel over the next few years?

Maybe I'll answer that because in Australia we've made that transition on the Guardian Class. So we've traditionally been aluminum shipbuilding and then successfully had all the quality standards and Commonwealth requirements for steel on the Guardian Class vessels. And in my mind, the ability to weld aluminum is much tougher than the ability to weld steel due to the heat control required for aluminum. So I'm pretty confident that the U.S. business will be able to transition to steel. Many of those employees have experience in steel before they joined us. So I think they'll be going back to something they know. And then couple that with the ability to invest significantly in the yard to get it set up to be as efficient as possible. I think the future looks very bright for steel with Austal.

Excellent. And maybe over to Greg, just really quickly. Can you maybe just talk through FX expectations into '21? And then also R&D credits in '21 as well?

You tell me that all of the resources at Macquarie Bank, I'm doing the FX forecast now. Am only joking. Fair enough. 2020 for us with an average rate of just around $0.67. And I won't just decide, I won't try and crystal ball what 2021 is going to look like but have typically talked about sensitivity of around kind of $1.2 million to $1.4 million of EBIT per $0.01 of FX and I talked about $7 million benefit we had in 2020 at an EBIT level when contrasting that to FY '19. So I think from now, I say it's going to choose your own adventure on what that will look like going into the year ahead.

Yes. And just quickly on the expectations for claiming R&D credits in '21?

On claiming, and I'd say, R&D credits work of qualifying activity. And in America, you have to raise the bar. So I'm going to make up numbers here. If you achieve 10 credits in 1 year and then you need to do better than that the year after and so on. And from our perspective, it's all about the qualifying activity that we're engaged in. And so that is not consistent from year-to-year. If we are making changes for the United States Navy, if we're involved in new vessel programs, then of course, they are conducive to generating credit. If we're in a real steady-state situation and that isn't conducive. So I think that's probably a long way of saying, I can't give you guidance on what that will look like for 2021, but we continue to invest the money in realizing those credits when they're available to us.

Your next question comes from Sam Teeger with Citi.

David, congratulations on the results and also a very great career at Austal. So I had a technical issue with the phone before. So apologies if you touched it, but the U.S. Navy has a history of having 2 shipbuilders on major programs due to several obvious benefits. Can you talk about the prospects for a second builder to be added on the FFG program? And if you think there is any possibility, how do you see Austal placed? And any thoughts on timing?

Thanks, Sam. We didn't talk about this, so you didn't miss that on the way through. I actually think in the presentation we show what is a significant number of new steel shipbuilding programs coming through in the United States in the sort of 2022, '23 period. So there's new programs that don't have an incumbent but which are ships of a size and nature that we will be able to build in the new facilities going up in the U.S. And I think that's probably where the short-term focus should be. We all have -- these programs are coming through at -- it's probably no -- it's not by chance that the new facilities going up in the U.S. will be ready about the time of 2022 and these new programs are really beginning to kick off. So I think that's the major thing to focus on and the priority. Do I think that there will be a second source of frigates going forward? I think that's a distinct possibility. As you say, it is normal procedure in the United States, particularly for the large capital ships to have a second source. They do that for DDGs and so on. So I think that's a distinct possibility. But probably that's 3 or 4 years out until that is seriously considered rather than a couple of years out for these other programs. So something to look forward to for the medium-term rather than the short-term.

Got it. And do you think if that occurs, it would be the second builder building the Fincantieri frame design or with their own design?

I think it will -- I think the Navy has chosen its design of frigate and that will be the base for frigate production for the next decade or 2.

Got it. Makes sense. And did you provide any update on specific Navy before?

No, I didn't. So we have indicated that we are involved in the acquisition of additional capacity in Asia. And that process has probably been delayed quite a bit by the impacts of COVID. But I'm still reasonably confident -- or very confident actually about that program. And I think importantly, it plays to this thematic, which we've talked about a lot today, which is really a pivot towards steel production as a second but significant part of our business going forward. So that's not to reduce the importance of our aluminum shipbuilding, but to say that now -- it's now time for steel shipbuilding to become a significant part of our business. We can do that in the United States through the investment we're doing and we can do that in Asia through the acquisition of new capability.

Got it. And then when you consider those 2 acquisitions, the investment you're making alongside the U.S. Navy to Mobile and the small acquisition there, you still have a lot of cash. Can you talk about the prospects for capital management going forward?

Yes. I think so. I mean, obviously, you've seen us react by bumping up the dividend quite significantly. That wasn't a hard decision to make, quite frankly. I think absent of COVID, we probably would have taken the decision to look harder at repaying some of the debt. And I think we'll return to that in the next 6 months or so. Let's just see how things move. But I think we feel good about looking at that particular subject. And as you say, there are a number of opportunities for us to significantly grow the business, both in the United States and in Australasia by using some of that money effectively. And all of that can be done with current cash holdings rather than having to raise new equity, which I think is a very positive position for the business. So I think it's going to be across the board is the way that cash is going to get used.

Your next question comes from Russell Gill with JPMorgan.

Congratulations, David, on finishing your career with Austal. I note some of the accounts, so you got a very busy 4 or 5 months still to go with all the objectives to compete the rest of the year. Just first question on your guidance. You're not giving guidance. Usually at this time of the year, you gave sort of a revenue guidance. You said there will be, I guess, an EBIT update in October. That's only 2 months away. Is there an expectation that maybe you'll see some announcements in the next couple of weeks? Just wondering why the aversion, given it's only a 2-month difference, to not provide at least revenue guidance for next year?

I think it's more of a certainty issue, to be honest, Russell, given -- I think all of us have been caught by surprise just out dramatically and how quickly things change. The big thing that kind of rocked me was what happened in Victoria when the whole industrial base of Victoria were almost shut down overnight because of governmental decisions. And when we've got fairly widely dispersed business these days in Asia, the United States and here and other areas as well and who knows what will happen over that period of time. So I think -- we're not saying that we will necessarily put full guidance in place in October. What we're saying is that October is a great place for us to sort of revisit that and have a look at that again and see how the world's moved on.

Great. And then in your segment analysis, you have this the Other column, which my understanding last year, had the big provisions go through. It turned positive in the second half. Just wondering if you could talk through that other line and possibly what that -- what drove that? And maybe an update on where the provisions since what was released and where it sits at the moment?

Russell, it's Greg here. So yes, we had some small movement in provision that gave that number that you're talking about and the FY '19 number related to investigation provision for USA. We're not going to get into disclosing each of the individual elements of provision movements beyond what is shown in the annual report and the provision for now.

And I guess going forward, though, should we just assume that, that will be a nil net impact going forward? Because in the past, these used to be, I guess, some government lobbying and things like that, that used to go into that column. How should we think about that cost base going forward?

Yes. I wouldn't say that as a positive EBIT contributor as an ongoing basis.

Cool. We think -- David, you didn't spend much time on it in the presentation. Just some of the slides you've got following when you went to Q&A is about your investment in Mobile. And just on Slide 13, you talk about the increasing of your, I guess, total addressable market quite meaningfully as you transition into steel. Just so I understand this correctly. On Slide 14, you talk about the new shipbuilding projects that have -- I'll graph USD 2 billion a year and 1/3 you're saying would be aluminum. So should we be thinking FY '22 onwards there's an availability for you to be shipbuilding, I guess, revenue of $650 million in aluminum? Is that how I should be interpreting those slides? And then secondly, can you just possibly give me some breakdown on that Slide 14 of what sort of vessels you think that you'd be able to bid on? And what sort of makes up broadly into those potential projects?

The -- I suppose the answer to your question is that what we've done here is to take what we see as the aluminum programs going forward, some of -- many of which are published in the Navy plans, some of which are not and steel programs likewise and for programs where there isn't currently an incumbent. So that's -- we see that the kind of opportunity set. Now that doesn't -- we're clearly not going to win all of those programs. So that's an important thing to sort of just acknowledge in that would be strong in the aluminum programs, but we won't win all of the steel programs, I'm sure. So that's the size of the opportunity. There are a number of programs, both in the Coast Guard and the U.S. Navy that we're looking at. There's the law program, there's the large unmanned surface vessel program, there's Coast Guard vessels, there's emergency medical ships that we've talked about previously, there's additional EPFs. So quite a number of programs in there. It's not intended to provide a revenue kind of guidance, but really to say, actually, the opportunity ahead of us, the annual opportunity ahead of us is strong. And I feel that, obviously, we've got a big transition coming forward with LCS coming to an end in 2024. And this just shows us how strong the replacement market will be beyond 2024.

And so I guess on that $600-odd million in the U.S. seems quite large for aluminum vessels going forward post LCS coming off? Is it -- are you sort of -- are you thinking that maybe there's some EPF replacement cycle coming through in that? Or is it your large on surface vessel program is that big, the addressable market? Is that -- is it kind of -- it just seems quite large relative to my expectations that's all.

Yes. We see a really good future for EPF. We see a potential future for a larger version of EPF in the future as well. So it is quite a -- and the other 1 is LUSV could be an aluminum vessel. We don't know that yet. That may well be in the aluminum category that we've got here. So there's a few of those programs going forward. And as you say, it does look stronger than you might otherwise think, which is why the analysis is there.

And just previous comments on the EPF about the 4 medical vessels. Has that been confirmed to you guys from the U.S. government that's regarding the EPF? My understanding, there was actually a potential large hospital ship manufacturer that could also been designated for those 4 vessels? I know it was put in it last moment by the Alabama centers. So I'm not sure, is that actually 100% confirm that, that does relate to your EPF program?

So what is a 100%, is that we have an award, I think it was about a year or so ago to convert EPF 14 to a medical variant. And we have an expectation that there will be further vessels of that class that will be to the medical variant. The larger medical ship that's being talked about, I don't think that's been fully definitized. So no, it would be wrong to say that, that was 100% certain for us at all. I mean that's a matter for the Navy, exactly what they want to buy. I think we feel pretty good about it. And you would take a signal, I'm sure that the Alabama Senator was not pushing for that program because he thought it was going to get built somewhere else.

That would be a surprise. And just on -- as you transition to the steel ship aging facilities in the U.S. The CapEx, you said it will take about 2 years, I guess, to get the operations up and running. Can you bid on projects and it might possibly just maybe indicate which projects you're sort of thinking that you could actually bid on ahead of the actual facility has actually been done? Just -- and explain to you, can you actually bid on these projects even though the facilities aren't in place? Or could there be potentially a 6-, 12-month timing delay between facilities up and running and you guys been able to, I guess, bring work in?

I think it's highly likely that we will bid for steel shipbuilding work in that facility before it's finished.

And what sort of projects you're talking about i.e., likely are these vessels that you'll be building on someone else's design? Could you just talk through the difference between, I guess, some complaints relative to prime contracting on those type of vessels?

Well, it could be somebody else's design or it could be our own. I mean if I look across the opportunity, so some of them are likely to be pre-existing designs and some of them maybe all new designs. So any of the above, to be honest, Russell. But I do -- I don't think it's a matter of build the facilities and sit there with your arms crossed, waiting for the next program to come along. I think there will be programs maturing over the next couple of years which we will bid for on the basis that they will go through those facilities. And I feel confident about that as the way it will turn out over the next couple of years. I think that's what we're going to see. And I think you'll see some indicators of that over the next few months.

And just a final question. You made commentary about the commercial ferry market likely impacted by COVID-19, which is a massive surprise. Could you just talk through how you manage your business if the COVID extends a couple more years and extends, I know you're bidding on a few other things like the Spirit of Tasmania and a few other things like that. But if it extends a bit further and that, I guess, that the market does drive it, how do you manage the overhead in your cost base as you go through that economic environment? It's not something you've seen before with an external source hitting the business so hard. So how do you manage a large fixed cost operation through that dynamic?

We have seen it before, of course, in the financial crisis a decade or so, I guess, over a decade ago, I guess. We -- one of the things that we really thought about hard when we set those facilities up was to be able to manage the cost base up there quite effectively if given the fluctuations that we see in the commercial shipbuilding market. I'm actually -- although clearly there will be some impact on that market, there's no question about that, I think my confidence level is stronger than you might otherwise think. We are seeing a relatively high number of programs around that are supported by the fact that they're on subsidized routes or government-mandated routes where new ships are required. And I think the difference now is a much more competitive for these kind of vessels than we were a few years ago with these new facilities. So we're going to have -- I think we're going to be in a good position to win those programs that do exist. So as I say, I do feel more confident than I did. And we've got a reasonable order book in -- particularly in the Philippines over the next couple of years. So we've got a reasonable runway there. But it is an area both in Vietnam and in the Philippines where we can manage the overhead base very effectively.

Great. That makes sense.

Worth remembering, by the way, that the Vietnam facility is at least short-term leased facility. So -- and it was set up specifically on that basis. So that gives us a great deal of flexibility.

And just on that David, because the -- I guess the Filipino employee base is structured very differently to how like the Henderson shipyard employee base would be structured?

Yes, it is. Our ability to move numbers up and down quite rapidly in those markets is there and we can respond very quickly to changing levels of work.

Your next question comes from Scott Ryall with Rimor Equity Research.

I was wondering, David, if you could just give a few thoughts on your support business. You've highlighted the growth, some pretty useful charts in the pack today. In your mind, what is the key to winning support business? When is the best time to win it? Is it at the time that you're in a construction contract? Or is it ongoing? And where can the revenue mix get to? So where can that 7%, 8% get to in the medium term? What would be the aspiration?

So this is mostly a defense-related activity. So we don't see anything like the sort of strength in the commercial market, tends to be much more fragmented support business. The defense support is extremely sophisticated. So we might think about it as fixing ships that need repair, and that's certainly part of it, but there's a whole deal more that needs to be done. So a few years ago, we invested quite heavily both in the United States and in Australia to put the systems and the procedures and the type of people and processes in place that could do this work. And that was quite an investment several years ago, actually. And that creates the base on which a defense contract -- sorry, a defense buyer like the United States Navy or the Royal Australian Navy will look at you to take responsibility for support. The most important single factor is being the OEM, and we are the OEM provider to Cape to Guardian to LCS and to EPF for those slightly different market EPF. So that really underpins what we do. And as long as you provide that service and support in the way that the Navy need it, then you can usually regard that as being a long-term revenue stream. The other factor that's important is to put the facilities in place that is necessary to support those vessels. So the United States, invested in San Diego, set up a base in San Diego, where many of the ships are based, and that's helped to grow the business. We've talked about further investments in San Diego that we would like to make and that will further grow that business. We set up Singapore. That's because those LCSs are being deployed to Singapore. We have facilities in Cannes and Darwin where the Royal Australian Navy does it support activities. So all of that is an important part of growing the business as well, having both the capability, the OEM knowledge, but also the locations to support these vessels. And with the pivot of the U.S. Navy into Southeast Asia, the region north of Australia, we're ideally suited now with locations in the north of Australia, in Singapore and in the Philippines and growing in the Philippines, we're in a great place physically as well as having the OEM status. So I think that's why we've done so well. And then your last point was about where that would grow to. It's funny -- actually, I used to talk about we -- our aspiration was to get it to 30% or 40% of the revenue base of the business. And if I go back to what the revenue base was, when we talked about it, we're probably there. It's just at the top line, we've seen so much top line growth in shipbuilding as well that it's still only about 17%. But I'd love to see the support base be 30% of our overall revenue base. I think that's where -- that would be a really comfortable position for us to be in. And we've made a lot of progress towards that.

Okay. Very clear. And can you tell me the electric boat system that you've developed, and this is back on to the commercial, I think now what -- are these batteries or hydrogen? Or could you just tell me what the underlying technology is?

So we've done a lot of research into the types of batteries to use. At the moment, they are lithium-ion type batteries, the sort of thing that you'd see in the electric car. And they seem to be best suited to the sort of routes that we're looking at. So the longer routes -- the batteries still don't have the capacity and the recharge times for the longer routes that our ferries go on. But the sort of riverine type routes, as I say, Sydney Harbour, Auckland, Porto Lisbon, we looked at recently, those sorts of places, these small electric boats that do maybe 5-, 10-, 15-minute type journeys, we're now seeing that the technology is capable for that. And we've done a lot of work on being able to put those proposals forward.

Your next question comes from Oliver Stevens with Hartleys.

You touched on the performance productivity out of the U.S. and the margins sort of been pretty stable, which is great. Given COVID sort of kicked off there and, obviously, it's been impacting your factory as well, sort of the back end of FY '20 and into the start of '21, has your productivity being maintained? And what are your thoughts sort of going forward on that?

Maybe I'll answer that. So we've worked incredibly hard to keep all our yards open and keep everybody employed and adhere to all the social distancing guidelines. And as we've previously said, we have been able to keep the yards open. Yes, there have been some inefficiencies through shift working and transitions as we move people to working from home and understanding how we protect all our employees, keep them safe within the rules. But broadly, we've been able to keep on delivering. The main effect has been the delay of some of the handovers, but I'm really pleased with how mature all of our customers have been in terms of the contractual elements of everything that comes with delay. And we've got a very good working relationship with them. So I'm confident we will keep finding ways while we can to keep the yards open, keep people employed and keep delivering the vessels.

And Paddy, more specifically, though, on the U.S., is that -- are you seeing productivity impacts into the early part of this financial year, given the sort of increasing cases there?

So the U.S. is exactly the same strategy. They've worked hard to keep the yard open, and they've employed the same sort of measures as we've done in Australasia. And they are -- they're in exactly the same situation. But while we've seen some impacts, they've delayed us rather than stopped us.

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

Okay. Well, thank you all for your time. As I've said to you, I think not only as the performance being very good this year, but the opportunity set when I look forward is greatly enhanced over the last couple of years. So it's a great testament really to what the teams have done in the United States, both in delivering performance and getting the confidence of the U.S. Navy to get the kind of support that we have seen. So well done to them. But also in Australasia as well, where the improved performance here and the increased competitiveness here is seeing us being able to be involved in opportunities going forward. But perhaps we wouldn't have thought about or looked at previously. So present is good, but the future is looking equally good as well. So thank you for your time, and I appreciate you listening in this morning.