Austal Limited (ASB) Earnings Call Transcript & Summary

Hi. Good morning, everybody, and welcome to the FY 2021 full year results call. I'm Paddy Gregg, the CEO at Austal, and I'm joined by our CFO, Greg Jason. We'll be presenting in the same format as we have done previously with me giving business overview and context, and Greg will focus on the financials. As always, we plan to present for about 30 minutes and leave plenty of time for questions at the end of the call. I think you'll agree, it's been a really challenging year for all of us with COVID, but we've successfully kept all our yards open and adhered to all the rules in the various different countries in which we operate. We've also been challenged with a strengthening Aussie dollar. And on the back of 5 years of record results, I can only report this as the second best set of results we've announced despite all the challenges. As always, we remain very focused on opportunities for long-term sustainable growth and profitability in the business. And replenishing the order book to keep our facilities full and our staff gainfully employed is always at the front of our minds. So if we have a look at the financial headlines, Slide 2, if you're following in the pack. I think the results demonstrate really continued strong operational performance. And although revenue is reduced and impacted by FX, our earnings dropped by relatively smaller amounts. The one area that continues to receive the maximum focus is replenishment of the order book and associated revenue. And I'll talk a bit more about those opportunities available to Austal, particularly in the U.S., later on in the presentation. I think for me, the standouts in the half where the increased shipbuilding margins from both the U.S. and the Australasia business. Real confidence in the balance sheet to allow us to pay shareholders another $0.04 dividend and continue to invest in both organic and inorganic opportunities for growth. We've maintained a very healthy net cash position, around about $232 million, really enabling us to deliver the returns to shareholders and the ability to self-fund investment in the long-term growth opportunities, as we've presented. And we're investing for future shareholder returns. And some of the notable investments that we've made and continue to make are steel in the U.S., which is a real key component in replacement of the revenue that we will lose from LCS. Finally and importantly, the results demonstrate how the nature of our business being heavily skewed to defense, probably 85% of our business, can withstand the current economic and operational challenges and still deliver a great set of results. If we look at some of the key facts around the business, we look at $1.572 billion of revenue. Greg will talk in more detail around that, but we're delivering in line with the guidance we've put out there. We are working through the order book down to $2.5 billion. And while replacement is a key focus for us, we should be very thankful that $2.5 billion amounts to some 29 ships under construction or scheduled, which is a very significant volume of work ahead of us over the next few years. I'm really proud of what the teams have delivered and managed to achieve great record ships delivered, 19 ships. I don't think there are many shipyards around the world that could say they've delivered 19 ships in a year. So a really outstanding and fantastic performance from all the teams despite the COVID challenges. Many businesses are suffering. But with the strong order book we possess, strong balance sheet, we're battling COVID from a really fortunate position that can be seen from the results we're delivering today. Service and support has had some immediate challenges, and we'll talk more about that as we go through the presentation. But we still see a really bright future and great opportunity for this division. And I'm really pleased to say the BSE acquisition that we made, we're now calling Austal Cairns and Austal Brisbane, the acquisition and integration has gone really well. We're now up to 8 service centers worldwide and some 35 vessels under sustainment contracts, up from 33 at the half, a real growing opportunity as we continue to deliver defense vessels both in the USA and Australia that we can add to that support work going forward. So following that summary, I'd like to hand you over to Greg Jason. He'll talk through the financials in some more detail.

Good morning, everybody. I'm going to talk you through a very similar set of slides to those that I showed you at the first half with some additional content in there to explain key variances from full year '20 compared to full year '21. So I'm starting on Slide 5, which is entitled earnings. $1.57 billion of revenue, just above the guidance we gave back in June. That represents a 25% reduction year-on-year. There was a pretty big FX hit within that and also decline in throughput. I've got a couple of slides on that. I'll talk more to it in a moment. We had an improvement in EBIT margin across 3 of our 4 segments. And so that resulted in $114.6 million of EBIT with only a 12% reduction year-on-year. So there was some cushioning there. And then combining the ETR and the NPAT, we had a lower effective tax rate for 2021. And that flowed through into NPAT that meant year-on-year impact was only down 9%, and we posted $81.1 million. I'm now going to take you to Slide 6, and this slide depicts the movement in group's revenue from 2020 to 2021. So roughly a $500 million decline year-on-year. We had $161 million worth of FX impact on revenue, with average rate of translation in '21 at $0.75 compared to $0.67 in the prior year. Approximately 33% of the reduction was due to USA shipbuilding. We had significantly less labor and materials on LCS in the prior year as that just steadily progresses towards the end of the shipbuilding in 2025. We did have some pickup in EPF with EPF 13 and 14 but not as much as the decline in USA LCS. Support revenue decline represented about 20%, and there's some additional slides on that. Australasia shipbuilding came off as we came off the big peak of commercial work that we had been doing. We have done more patrol boat volume for the year, but it wasn't as much as the decline in commercial work. And then the green sliver of good news on this particular chart is Australasia support, although it's really low-margin work associated with the Cape Class patrol boat contract. And you might recall that for several years, that contract was onerous. We declared it to no longer be onerous during 2020, but it's still really only just washing its face as the contribution from that revenue isn't great. Moving to Slide 7. This slide depicts the movements between FY 2020 EBIT of $130 million down to the '21 result, $114.6 million. So you can see FX, $11 million. That's about 70% of the overall decline, although you can see there's other contributors that go up and down. Paddy talked about the improvement in margin in USA shipbuilding. I think it was really pleasing that despite the revenue drop, we had an increase in EBIT, and that came off a number of things. We have some incentives during the year. We also have retirement of risk contingencies, cost reductions and other efficiencies that generated the higher margin and higher EBIT. USA support in a way is kind of the surprise in all of that, and I'll talk in more -- later on. It's that we had such a significant drop in revenue but still had significantly more EBIT and EBIT margin. Australasia shipbuilding, just a little bit down on the prior year with less commercial work but more patrol boat work. Australasia support came off a fair bit, and that was driven by a couple of things. One is the high-volume, low-margin work that I referred to a moment ago. And the other thing is that 2020 was enhanced by a couple of factors. One was the declaration that the onerous contract was no longer onerous. So we reversed that position and booked good news in 2020. And we also had a -- one particular job that was very high-margin that I spoke of perhaps 12 months ago that really boosted the 2020 results, and that was not repeated. There's a few items in the other column, adding up to $10 million. The biggest part is that we have less R&D credits being recognized in '21 than the prior year. We have additional R&D expenditure, $3 million. And we also have a $2 million knock that's associated with the accounting treatment for the new ERP that we're implementing. The Interpretations Committee for the international accounting standards released new interpretation guidance in April of this year. And short version of that is many costs that were previously capitalized and then amortized over the life of the project, once it's implemented, now have to be expensed through the P&L. So that didn't exist in 2020, $2 million in '21. Moving to the segment breakdown on Slide 8. We've been presenting this format for many years in the investor presentation with the segments by geography as well as business mix. And this year, we've modified the reporting segments in the annual reports to bring them in line with the investor presentation. The one change you'll see is that the other column that used to be reported within USA and Australasia has now been moved into a group unallocated. So these numbers for shipbuilding and support are identical to last year, but the totals are different just by what was shown in the other column last time. So looking specifically at USA, you saw the slide previously that there was $161 million impact in overall FX. That was $130 million on shipbuilding, $30 million on support. The EBIT was only marginally lower in absolute terms for shipbuilding with the lower revenue but the higher EBIT margin, which was driven by cost reductions, risk mitigations that I spoke of. In terms of support, I'll talk in more detail about that in another couple of slides. So whilst clearly material and disappointing, the EBIT and EBIT margin blew us away. I'll also talk to that in a moment. So Australasia, total revenue decreased about 23%, whilst EBIT decreased about 44%. So the biggest driver, as I said, was about the commercial shipbuilding with 4 vessels delivered out of Australia during FY '21 and lower revenue compared to the previous year. And in terms of the projects that we're still working on, we experienced some COVID impacts that we spoke of in -- it was around May or June when we gave EBIT guidance. And we're experiencing a number of impacts. We've got resourcing concerns. We've had some material quality issues from third parties. That's -- all that impacted our productivity and, in some cases, prolonged the length of the contracts and induced additional costs. So the profitability of those projects fell a bit. And we also had progress impacts as a result of some progress that had originally been expected in 2021 is now going to fall into '22 and '23. Support revenue increased a lot, as I mentioned before, but a lot of low margin. And you can see that that's the one segment that's got a very significant decline in margin from a lofty 18% in 2020 to 1.3%. And as I mentioned before, it's really driven by this Cape Class contract that whilst not onerous, it's really just washing its face and therefore not a great contributor to the overall group. Moving to Slide 9. This depicts the movement in USA shipbuilding revenue. It's roughly $300 million. 40% of that was FX, and about 60% of it was due to LCS, lower materials, lower volumes. And then EPF, not big difference year-on-year. Moving now to Slide #10. This is the USA support revenue. And this message is really identical to what I talked about at the half year. We've come off a significant amount of revenue from 2020 to '21. And at a macro level, whilst there's some FX in there, we're just not sufficiently entrenched in the ongoing annual maintenance cycle of the vessels that we've built. And in February, we told you that there's 2 key enablers of breaking into that revenue stream. One of them is about admission to the panel Sustainment Execution Contract providers on the West Coast of the United States. And the second is about Austal establishing an Austal owned and operated dry dock in San Diego so that we can self-perform the majority of the work that we win. So you've just seen the announcements recently. We have been admitted to the SEC West contracts in the United States. And we have also been admitted to the SEC East contract, so that presents opportunities on the East Coast as well. And the team in USA are working very hard on the San Diego project, which is about establishing our own dry dock over there. And Paddy will talk to more -- to that in more detail in a few moments. Going down to the next level of detail on the waterfall, you can see the FX. You can see the big red block associated with post-delivery dockings. That's a set of dockings that the Navy is no longer undertaking because of the quality of the vessels that our U.S. team is producing. So full credit to them, and it means we're really victims of our own success there. And then you can see there's a number of other elements around engineering design studies and LCS Class support that's reducing the LCS program draws to the end of shipbuilding in 2025. And at the end, you can see MARRS. So that relates to the shipyard of the USA we bought just across the river from the primary site, and that has been doing very well. We've won some significant work there in the period since we bought it around August of 2020. And so that was a boost to the revenue. Moving to Slide 11. This is one that I included at the half year for the first time. The blue boxes represent the EBIT margin from USA support work completely in accordance with the accounts and international accounting standards. The application of the accounting standards drives some volatility, though, in terms of timing of revenue and therefore timing of profit. And we have situations where there can be award fees from one period that aren't judged and awarded by the Navy until the next period. And that occurred between 2020 and 2021. We also have some additional funding. So if a project has an increased scope of work and it's a cost-plus job, then the Austal business has to go back to the Navy to get approval for additional funding. And if that funding comes after the work has been done and crosses into a new accounting period, again, you can get a dislocation between when the work is done and the additional revenue. And then the other element is simply the estimation of profit. So the profit recognition through the jobs is done on estimates, and it's often not until the entire job is finished and all of the documentations being provided that a full wash-up can be done. And that can also result in dislocation between some profit and the underlying work. So you're looking at those numbers in 2021, saying that's way above the normalized range that I spoke of previously. 6 months ago, I talked about 7% to 9%. And even on a normalized basis, clearly, USA has blown that out of the park. So what's going on there is, if I'm looking for a silver lining in the lower level of support revenue, it's that a lot of the revenue that we've lost was lower-margin work, and USA has done an outstanding job in winning some higher-margin fixed price work, particularly in our new shipyard across the river in Mobile that's generated about 12% to 13% margin. So it hasn't changed my view on what long-term margins are for the defense part of the business. I still think in the short to medium term, it's really not going to be above 10%, but I'll happily take north of 10% when it's available and the U.S. team can secure. Finally, I'm going to talk to Slide 12, which is cash flow. Another year of operating cash flow in excess of $100 million, you can see there's a significant change at operating line relative to the year before. We had a very high level of debtors at 30 June '19. Those debtors paid in the early months of FY 2020, and hence, that really boosted the 2020 results up to the $164.5 million. That's the primary driver of the difference. It's pretty typical levels of sustaining capital, high levels of enhancing capital. And of course, that picks up the start of the investment in steel capabilities in America. It picks up the acquisition of the MARRS property and dry dock across the river in Mobile, which is now known as the Austal West Campus. It picks up the dry dock that we purchased for the Philippine shipyard operations so that we're now in control of our own destiny, not reliant upon heavy lift ships only. Third, the open market to go and launch our vessels as well as the acquisition of BSE Maritime in Queensland, as Paddy mentioned earlier. Going down to the financing section. The $7 million of debt reduction was really part of the enterprise value that we paid for BSE Maritime on the 1st of December and retired that debt immediately. You can see almost $8 million of lease principal payments, $31 million of dividends, which is $0.09 paid in the year, not to be confused with the $0.08 declared for 2020 and $0.08 declared for 2021. FX differences because we closed '21 at a higher rate of USD-Aussie resulted in a negative hit of $26 million, giving us net cash flow of negative $50 million. So we finished the year with almost $347 million in the bank. And in terms of projects for which we've got cash earmarked, it's largely around steel and San Diego. That's almost $200 million worth attached to that. And you can see even after dividends, those capital projects, maintaining our minimum cash buffer where we like to be north of $100 million means we'll comfortably do that and still have a strong balance sheet, giving us options for other projects. Ultimately, that came down to a net cash of other $199 million including Capes 9 and 10 notional debt or $232 million if we exclude that. And we've got a high level of confidence that those 2 vessels that are leased by the Commonwealth from NAB are going to be extended during FY '22 and don't believe likely that those ships are going to come back to Austal. That's it for the financials, and then I'm going to pass back to Paddy.

Thanks, Greg. And so before we open for questions, I thought I'd talk a little bit about the outlook. So if you're looking at slide -- Slide 18 talks about the operational outlook. So I was keen to put some focus and attention on where we think the greatest opportunities for the company lie in the future and why LCS finishing is not something we -- that we enjoy. I want to reiterate, as I did at the half, just how much opportunity we think is out there. And I've tried to paint that opportunity by the facility. So if we look at what's happening in the U.S., some tremendous opportunities with the OPC tender submitted. And that's the next multibillion-dollar program that is going to be awarded in the U.S., and we have put our best foot forward on that, submitted our tender. And we stood here in the first half of 2022 calendar year on the outcome of that. I was particularly pleased with the T-ATS functional design award, so really getting into steel. That's an award that was directed to the team in the U.S., and they're busy currently negotiating for the build of some T-ATS vessels as well. So for us, that wouldn't necessarily be important in terms of revenue and profit but really important for us as a business to demonstrate our steel capability and put the new production line through its phases, ready for something much bigger and much more complex. Still an awful lot of opportunities coming downstream in the U.S., both in aluminum with EPF continuation and in steel as we go forward. And we are placing ourselves in a great position to be able to bid for those and be very competitive as we go forward. We look at Australia and some great performance on the Guardian Class vessels, probably the only shipbuilding contract with the Commonwealth that's currently on track and something we're very proud of. And we're making great progress with the Cape program, too, and a number of other programs that we're currently bidding for, both in shipbuilding and support. So with the Force Structure Plan as announced, the support that will come on the back of that, we think there are still some great opportunities for more growth and long-term work in Australia. Philippines, performing very well now, due to deliver the second Fred Olsen trimaran in the next few weeks. That's passed all its sea trials and done very well. You know we've got the Mols vessel in build, which keeps us busy all the way through to December of 2023. And the big prize in the Philippines is the OPV that we're currently tendering for. What we really need to see there is the MOU between the Commonwealth of Australia and the Philippines being signed. And that will enable us to really get into the detail of the negotiations and trying to target the win of the Philippines Navy OPV. Vietnam, as we talked at the half year, that was the one that concerned me the most because we'd worked really through the order book, and we only had some modules to support the yard in the Philippines to do. But the announcement last week or the week before that we won the new ferry really keeps us in business in Vietnam for -- right into 2023, so 18 months' worth of work there, which is absolutely fantastic. And that helps us ride this COVID storm and the commercial downturn that we've seen and keeps that yard operational ready for when hopefully the world returns to normal or whatever the new normal is. So lots and lots of opportunity in terms of the programs. And it gives me great confidence that with the investment we're making, how the business is performing, that we'll be in great shape to capitalize on those going forward. And then maybe just to wrap up before we go to questions. Slide 22, last slide, strategic outlook. When I look at what we're delivering today, it's another great set of results with strong underlying operational performances and a lot of challenges we've overcome to deliver the second best set of results on record. Strong balance sheet, as you know, has really helped us during COVID, and we're riding that storm pretty well. And not only are we delivering on the orders that we've got and winning new orders, we're investing for the future and opportunities for growth. We're a much more diversified business than we used to be. People -- some people still think of us as an aluminum ferry builder, but with 85% of our revenue coming from defense, we're well established in shipbuilding, support and growing in systems as well. And there'll be more to talk about the system side of things in the future. I think the big macro factors that are driving the U.S. Navy growth are also apparent in Australia. And with geopolitical tension, that's a great time to be in defense shipbuilding. Six Cape Class vessels and construction runway for a whole host of vessels with the Force Structure Plan with Defense in Australia. Great opportunities in the Philippines, as we've talked about, and starting to focus some of our R&D on the future, whether it's low-emission vessels, batteries or other greener fuels. But certainly, us advancing the technology that we put in vessels to make us the leading provider of efficient vessels going forward is something that we're putting a lot of effort in. Yes, so it goes without saying, we absolutely need to fill the void of LCS, but I think we are very well placed to do it. We delivered pretty much every single one of the commitments we made at the half, ready for this second half. I think the business is in a very strong position with the capability to deliver vessels in steel and aluminum in shipbuilding and support. We can work in commercial, we can work in defense, and there's a whole lot of opportunities out there, programs out there that we can go and win that will give us a great long-term future and growth opportunities for the business. So I think with that, I will open up to questions.

[Operator Instructions] Your first question comes from William Park with Crédit Suisse.

Firstly, just looking at your revenue guidance of $1.5 billion for FY '22, can you just unpack that for us? Like what does this entail? I mean I appreciate that this includes the EPF 15. And second part of my question is, do you see any -- I mean you stepped out some of the opportunities there, but any sort of near-term catalysts that could change your view around this?

Yes. Sure, we'll answer this in 2 parts, William. I'll go first, and then Paddy will go second. So we're not going to unpack the revenue guidance and give you [ 48,000 ] is there. The $1.5 billion is assuming $0.75. And given that transparency, so of course, you can choose your own crystal ball on what the FX rate is going to be. As you said, it does assume that EPF 15 is fully definitized and flows through. It also reflects the recent contract award, there are many, Paddy spoke of going into Vietnam.

Yes. And I think just to build on what Greg said, well, the near-term drivers, we've had some really pleasing announcements in the last few weeks, so things like admission to the SEC East and West contracts, a critical part of our strategy to grow support work. And the acquisition in San Diego is progressing exactly to plan, and hopefully, we'll have news on that in the coming weeks. The win of the ferry in the Vietnam yard, really strategically important to keep that going and ride the sort of COVID storm and understand what's happening in the commercial world. There are a number of other opportunities that we are getting very close on commercially. So I'm getting some green shoots there that the commercial ferry market will come back. We know there's an aging fleet out there, and time is certainly not standing still, so I'm confident that there will have to be a replacement in the future. And then one of the really interesting ones for me was the T-ATS functional design, a really great indication that I believe signals that coupling that with the steel investment and support from Navy, we are very much part of the U.S. industrial base, and there's a lot of programs there for us to go after. So I'm pretty excited about the future and what opportunities we have.

Yes. Just -- go on.

Yes. I was just going to add one more thing that I think will add a bit of confidence to the number. If you include EPF 15, then 90% of the revenue within the $1.5 billion is contracted or will be contracted when EPF 15 is definitized.

Okay. Appreciate that. And just a final one for me. Does this support revenue target of $500 million, is that still how you're thinking about growth in sustainment opportunities? And does the San Diego dry dock strategies get you there? And how are the discussions sort of tracking at the moment with that?

Yes. So $500 million is absolutely an aspirational target, and I'm really confident that when we get there, we'll set a new one. But as we've talked about, getting admitted to SEC West allows us to bid as a prime. And if we can conclude our acquisition of facilities there, having our own yard with our own people bidding as a prime is absolutely where we are most comfortable, and I'm really, really optimistic about what that will bring. And we know most of the Austal ships are home-ported in San Diego, and that's why we see it as really strategically important. And if we can invest in a floating dock, I think that opens up opportunities to do work on non-Austal-built vessels and just a great opportunity for future growth.

Your next question comes from Mitch Sonogan with Macquarie.

Just the first one, just on the U.S. shipbuilding margin, obviously, a really strong result there. But can you just provide a little bit more detail about how we should think about that looking to FY '22, please?

Yes. Greg here. So we are at the mature end or mature stage of 2 programs, being LCS and EPF. And so of course, you'd expect us to be doing well, provided we can continue to mitigate any risks that arise as we progress through these engineering modifications that have been introduced on both vessels. And then when we progress in some new shipbuilding programs, naturally, you'd expect us to see lower margin typically because it would be prudent around revenue and profit-taking on a first-of-class vessel on a new program until that vessel was well complete. And that's the pattern we went through in Guardian Class where we didn't recognize any profit whatsoever on the first ship until it was over, and then we've commenced profit recognition on 2, 3, 4 and follows. So staying fairly strong. Of course, that relies upon continued execution by the U.S. team. It is also anchored to both the success in winning additional work and our assumptions of winning additional work, and that might sound a bit confusing. But in the U.S., every project has got overhead allocated to it, and we have to make assumptions about what work we will win because that influences how much overhead is allocated to each vessel. And so there's a few variables floating around in all of that, that didn't move the result better or worse.

Yes. And I guess just following on from that, talking about the overheads there, I know there's assumptions built into winning other contracts. And in terms of the LCS program specifically, that winds down over the next couple of years. How should we think about the costs associated with the facility and overheads there? Is there potential to wind those down with the program? I guess just trying to think about it from a LCS perspective but also the overall U.S. shipbuilding perspective as well.

So Mitchell, I do want to check I'm understanding the question. That question is about ability to scale overheads, isn't it? It's not a question about whether we'll [ see ] sustaining CapEx as the facility gets a bit older?

Yes, correct, Greg.

Yes, sure. So naturally, there is a fair chunk of cost in the shipyard that is fixed. Some of it is noncash, such as the depreciation. Other costs just come with being there. There is also a substantial portion of overhead that is associated with variable activity. And therefore, as hours go up and down, we expect to see the overhead go up and down. We've still got a significant order book in the USA with a good runway of work for the next couple of years. And therefore, we're confident in winning that work and not needing to dive deeply into overheads. But of course, it's always in the back of the mind if it takes shorter or longer amounts of time to win that new work.

Yes. Final one for me. Maybe, Paddy, just on the LUSV, just hoping you could provide a bit more detail on your latest thoughts there. Any changes you're thinking from the Navy [ term ] and also the EPF conversion to autonomous?

Yes. So LUSV is still a relatively young program, and it's one that we're interested in and taking part in the design of. So we will continue to progress that. And we saw design contracts awarded to the likes of us, Huntington Ingalls, Fincantieri, Bollinger, the usual suspects. But there's a lot of questions on exactly when that program will come to fruition. I think for me, EPF 15 is -- sorry, the EPF 13 autonomy is really, really interesting. So I'm really quite excited about it because Austal having an autonomous vessel on the water, 100-meter plus, which is LUSV-sized, I hope it gives them real cause for thought about whether they need autonomy in terms of LUSV and EPF, and we might be first people to the party with this. So I think it stands us in really good stead going forward. But we'll continue to support both programs because if LUSV does come along, that would certainly be very interesting to us as well as autonomous EPF.

Your next question comes from Russell Gill with JPMorgan.

A handful of questions. I might just try and ask Mitch and Will's questions slightly differently. As you manage the U.S. shipbuilding yard over the next, I guess, 12, 24 months, 36 months, what does the operational workforce look like? And what did it look like 12 months ago? And what do you see the head count in the business looking like in the next year or 2?

Greg had a go last time. I'll have a go this time, my turn. We're a project business, and we are very used to flexing with the volume of work going through. So please don't sit there and think that revenue is reducing and we're keeping overhead high and therefore just going to burn cash and profit. Rusty and the team over there know exactly what levers to pull to keep that business efficient. And we regularly flex the workforce to reflect the volume of work that's going through the yard. So it is an interesting time because the revenue has reduced. And typically, you'll see engineers, design guys going first, followed by fabrication, the natural life cycle of design and build as we go through the downturn that those people start dropping off. And Rusty is already taking action with the design team and various recruitment freezes on other areas and letting attrition take care of some of the surplus workers that we have as revenue reduces. It's just something we do on a daily, weekly basis. We consider it very normal business. We do it in a very considered way, making sure that we would never cut below a critical mass. And there may be some things that we'd want to retain because they're a very unique or special capability. But as a project business, whether it's the U.S., whether it's Australia, we're very used to flexing variable overhead with revenue as it goes through the business.

And 2 more questions. Greg, I was hoping you to -- sorry, I was hoping you could help me out just on some of the technical accounting here. In the accounts, it says that you raised an onerous provision regarding the delivery of the last LCS. So just in your forecast, can you just talk through how that works, that $8 million number and how that works in terms of the shipbuilding margin you're reporting today and your assumptions around the future? And it could be a technical thing. Just explain it to me.

Yes, absolutely. So -- and I'll start with the accounting ABCs. So the first part is that if you identify that you have an onerous contract under the accounting standards, you've got to take that into account straight away. Second part is that the amount that you see in the accounts relates to the last LCS. The last LCS has got the lowest level of percent complete. It has got the greatest exposure and sensitivity to labor rate changes and, in particular, overhead rate assumptions for what are the overheads, what are the work that we win out there and therefore higher or lower levels of overhead attached. So we're being prudent about how much overhead is assumed for that vessel. And because it's the least complete, it's got the highest level of contingencies still attached to it and applying a consistent methodology at the moment that says that, that vessel is upside down. And as the program progresses, if risk contingencies can be released, get more certainty about the work in the years in which LCS 38 is being produced, then that will give more certainty on to the overhead rate and potentially reduce the rate. And so that vessel could be reversed from being onerous, but we're booking in accordance with the accounting standards at the moment. So we'll continue to book in accordance with the accounting standards.

Okay. So just in layman's terms, essentially, you're forecasting assuming a level of overhead today and the yard, essentially under those forecasts, in the future may be less efficient, therefore, makes it onerous looking through today. But in the future, you could -- the efficiency could go up with more throughput, et cetera, et cetera, and therefore, you unwind that onerous provision.

Yes. And -- but just to be clear, what we mean by efficiency, this is not so much about the productivity of people building the ship. It's about not assuming huge amounts of hours that have not yet been contracted when determining an overhead rate to apply to that vessel. And it's about being prudent. And it's certainly one of the bigger accounting judgment that gets plenty of discussion with Deloitte, our auditor, ARC, Board, et cetera, because it's a big judgment, and that is noted in -- what is it? Note 2, basis of estimates. Your understanding is right.

Great. And then another one for you, Greg, just on the CapEx. You highlighted $200 million that will be deployed across steel shipbuilding in San Diego. Can you just give us a timing of CapEx spend in FY '22, FY '23 and what the new level of sustaining CapEx in the business is over the medium term?

Yes, I don't see the sustaining capital changing huge amounts. I think last year, it was very low, only a couple of million dollars. And maybe the highest in memory is somewhere around the 15 mark. Clearly, as we have more assets, there's more to maintain, but then they're also new. So I don't think sustaining capital is going to change a lot. In terms of the steel program, you know that we've got approximately USD 100 million for the program in its entirety. And then there is up to $50 million match-funded by the U.S. government under the DPA pact. So the -- a portion of steel, about AUD 30 million already fell into '21, and maybe -- I forgot the numbers, about 80% of what's left will be in '22 and then the balance in '23. And then in terms of San Diego, if we can hit the go button on all of that, then I'd expect maybe 70% of the expenditures to occur within '22 and the balance to occur in '23. And this just ties in with what Paddy was talking about earlier. And one of the questions was about the pursuit of a $500 million revenue target for support business. If we can keep this program on the timetable that we're pursuing, spend the CapEx '22, '23 and then roll into '24 in strong position with a dry dock in place. Now that is not certain, that is not locked in, so I don't want to create the wrong impression, but that is what we are driving for.

And I guess from your accounts perspective, you're booking just your contribution to it rather than the gross number and then getting a rebate through a different line from the U.S. government on the steel program?