Austal Limited (ASB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Austal Limited FY '22 First Half Results Conference Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Patrick Gregg, Chief Executive Officer. Please go ahead.

Good morning, everybody, and welcome to the FY'22 half 1 results call. I'm Paddy Gregg, the CEO at Austal. And I'm joined today by our Interim CFO, Geoff Buchanan. And we will present in the same format as we have traditionally done, with me giving a business overview and some context, while Geoff focuses on the financial details. And as always, we plan to present for no more than about 30 minutes to allow plenty of time for questions. I think it's been another challenging 6 months for us, and we all recognize that COVID is still a feature of business, but we have continued to successfully keep our yards open and adhere to all the social distancing rules and continue to deliver ships to our customers. We're really focused on the opportunities for long-term sustainable growth and profitability of the business and replenishing the order book to keep our facilities full and our staff gainfully employed. So we hope that you'll see at a headline level, we've delivered another strong half year earnings. And as always, there are some movements in the segments that we will try to explain. So maybe let's start by looking at the financial headlines. I think it's another good set of results, albeit with some changes to the previous comparative period that I will now explain. In terms of revenue, slightly below target for the year due to some movements in manhours, driven a little bit by COVID impacts and some build efficiencies, and that's really helped us improve our EBIT position. The EBIT is actually a record half for us, and slightly skewed to half 1, this is often the case for us, driven by where the milestones on the programs land. NPAT really driven by the change in tax rate as a result of some of the recognition of previous losses in R&D tax credits. We're still in a really strong cash position, and this has not only allowed us to maintain a $0.04 per share dividend, we've continued to invest in the business for future growth and deal with some big swings on the programs due to where milestones land. So I'm really pleased to be able to announce full year EBIT guidance that's above the analyst estimates at a minimum of $107 million this year. This really reflects the strong operational performance of the business on those mature programs, our ability to mitigate risks, release contingency and also a feature of our growing confidence in the future based on some of the orders that we've seen to date and some of the items that I will talk through later on in the presentation. Thinking about the key facts of the business whenever we look at these statistics. Geoff will give you a bit more detail on the movements in revenue. And of course, we're working our way through the order book. $2.2 billion order book is still a very healthy number. And we are completely focused on the replenishment of that order book. And as I said, I'll talk a little bit about that later on in the presentation. Let's not get too worried because we still have 25 ships under construction or scheduled, and that is a real significant volume of work that we have ahead of us. We had some really significant wins in the half with orders like the T-ATS steel-hulled vessels in the U.S. And in the support business, the IDIQ award in Singapore, which will be a very big contract for us. I'm really proud of how well our teams are delivering in the U.S.A. and in Australasia, and we've already delivered 5 ships despite the challenges COVID has presented. Many businesses are suffering, but with a strong order book we have, the strong balance sheet, we're weathering COVID really well. And I think that can be seen from the operational performance that we're delivering today. 4,900 employees. A very stable workforce despite some of the challenges at lower levels with attrition and COVID and vaccinations. I'm really pleased to say that all of our employees are now vaccinated. So I think we're in the best possible situation to deal with any COVID issues going forward. Service and support business has had some challenges with less dockings of ships and less volume of work that we've been able to bid for, win and deliver. But the success of closing the MGBW deal in December means we are now in the process of setting up our own service center in San Diego. And as you know, that is the home port of many of the Austal built LCS vessels in the U.S. So that puts us up to 8 service centers worldwide with some 37 vessels under sustainment contracts. Really strong position for us. I'm now going to hand you over to Geoff, who will talk through a little bit of the detail of the financials before I finish with summaries at the end of the presentation. Over to you, Geoff.

Thanks, Paddy, and good morning, everyone. If we move to Slide 4, I'd just like to give you some of the highlights of our earnings for the year. As Paddy has acknowledged, our revenue fell half-on-half by about $118 million or 14%. But that's actually -- that hides a good news story in the sense that our LCS program is progressing well, and we were able to release and accelerate our contingency reserves. So that then flows through to a more positive EBIT line. And we realized about an additional $16 million as a result of those accelerated releases. We also did have the impact -- negative impact of some COVID -- of COVID-19 hours moving to future years. So we'll get some uplift in the second half from that. We also had a one-off event, which was -- had a negative impact on the results, and that was the impairment of our shipyard, some of our assets there as a result of a typhoon in December in the Philippines, Typhoon Odette, and that hit our P&L by $6.7 million. As Paddy has already alluded to, our impact reduced only as a consequence of a movement in the effective tax rate, which was driven by 2 things: firstly, we had a reduction in the effective tax rate for the first half of the previous year as a result of utilizing some tax losses in Australia and we had a corresponding increase in our tax rate this year as a result of recognizing some R&D credits, which flowed through to deferred tax. We do expect that tax rate to normalize in 2023 to around 25% as is historically the case. There's been a lot going on throughout the shipbuilding and support businesses both in the U.S. and Australasia. And I will get on to some comments on that in the segment section. Moving on to Slide 5. Just to analyze the revenue movements a little more. As I said, the overall revenue reduced by $118 million, primarily out of the U.S. because of the accelerated LCS program. We do have some COVID impacts, and we had some marginal FX impact, but not to the extent that we saw in the previous period. There was some reduced support activity due to COVID-induced reduction in support availabilities and some lower emergent work on the Cape vessels. There was also some minor impact from a change in mix between commercial and defense in Australasia support. Additionally, we had another 5-year early dockings for the Capes due to their life cycle. Moving on to the EBIT line then, the next slide, Slide 6. We are pleased to report an increase in EBIT, a marginal increase of 1% over the prior period due to the accelerated release of the contingency on the LCS fleet and also some minor other adjustments. But we did have some offset due to reduced sustainment availabilities and higher support margins in the full year 2021. In the U.S., we actually had a very high support margin due to some one-offs and write-back of bad debt. So we didn't replicate that in this half, but we are seeing a trending upwards of our support margins. Assets with a book value of about $6.7 million were damaged in Typhoon Odette in December and this forced us to take an impairment, but management are confident of an insurance recovery in the second half. The impairment charge actually [ marks ] a more positive picture of improving efficiencies and margins within Australasia support. Moving to segment breakdown on Slide 7 now. You'll note that, obviously, most of the reduction in revenue arose as part of the U.S. for the reasons I've already stated, but we did see a strong EBIT result. On the shipbuilding side, revenue reduced as a result of the throughput issue and small negative FX translation impact of $5 million. The EBIT margin increased by about 5 points due to milestones received and the contingency -- and accelerated contingency release on the LCS and EPF programs. The U.S. support business is more in line with historic trends. And as I've said, we did see slightly inflated margins in full year -- sorry, half year '21 due to a number of one-offs and reversals. In Australasia, the shipbuilding margin -- sorry, the shipbuilding revenue decreased marginally with the completion of ferries in Asia, which was largely offset increased defense -- by increased defense work. The one-off impact, the Philippines typhoon impairment neutralized our EBIT. So we saw a breakeven EBIT position there. Shipbuilding EBIT decreased, as I said, mainly due to the Philippines typhoon impact, but we are getting back towards more sustainable target margins in Australasia and a 7% to 8% plan. If we move to the cash flow slide, Slide 8. I think this is a positive story, as Paddy has said. Our operating cash flow has reduced only as a consequence of the timing of milestone receipts. And if you look at the sustaining and enhancing expenditure, it was significantly up, especially the specialty enhancing expenditure with the CapEx as a consequence of the acquisition of the leases in San Diego and the U.S. fuel transition program. FX conversion translates into a positive cash flow effect during the period as well. And despite significantly higher enhancing spend, Austal actually managed to maintain a very strong closing cash position, supporting interim dividend as well as continued future major potential expansion on our other plans. But simplistically, our operating cash flow paid for all our capital investment in the U.S., the completion of committed projects such as our steel capability facility in the U.S. and the San Diego dry dock. And at that point, I think I'll hand back to Paddy for the financial outlook.

Thanks, Geoff. So I'll talk through financial outlook, then operational outlook and just summarize before we open for questions. So slight contraction in revenue as described on the call already today, but the good news that we continue to deliver all of our milestones and deliver our ships on time. So I think that recognizes the strong operational performance of the business. Strong first half on the back of the milestones that have been achieved, as Geoff has described. And we're really in that position now where we have these mature programs, we are mitigating risks, and I see a real stability in EBIT going forward, whether it's on the existing programs or the confidence that is growing in the future awards. So just summarizing the financial outlook, as I said previously, I'm really pleased to announce EBIT guidance is a minimum of $107 million this year. If I talk about the operational outlook for a minute. As you're aware, we are chasing a number of opportunities around the globe. And Slide 13 in the pack attempts to summarize what we're delivering today and what we're looking at in the future. So as you know, in the U.S., the focus is on continuing to deliver LCS and EPF efficiently. We'll be starting up the T-ATS vessels, the steel-hulled vessels in our new facility, which is due to open actually a month early in April. So very, very soon. And we concluded the San Diego transaction. So getting that service center up and running to really make full use of winning the SEC West contract award back in August last year. What does the future look like in the U.S.? Well, I think it's bright. There are a lot of big programs out there that can easily replace the LCS program that we know comes to an end at the back end of FY'24. And we're very focused on the offshore patrol cutter, that's the sort of next tender that we'll be awarded, and we anticipate that will be back end of May or early June whenever we should hear the results of that, but it's not all about OPC because we're also bidding for the T-AGOS vessels, very similar-sized program. And our view is that we are very well placed for one or other of those programs. You know that we've been bidding and being awarded entry into design programs for future vessels. And I'm sure those of you that look at Austal media online, you'll have seen things like the light amphibious warship design that we've put out there. And we're focusing on next-generation logistics ship. And let's not forget, frigate second source will appear in due course in the middle of these programs. So I think we are positioning ourselves very well for a bright future on numerous programs that we are getting in at the design stage and putting our best foot forward as the tenders come up. We're also seeing some additive opportunities, some smaller subcontract work. But as you know, we've got a focus on diversification of revenue stream and profitability, and I hope to be talking to you soon about some of those opportunities as we see them. Whenever we think about Australia, you know we've got the Guardian Class program, the Cape Class program on our support bases in Darwin, Cairns and Brisbane, and we are very much focused on delivering for Australian Border Force and Australian Navy. Again, bright future with the Force Structure Plan that we saw announced, and contracts such as the Army landing craft coming up in the reasonably near term, a great opportunity for us to continue shipbuilding and potentially grow our support business as we deliver the vessels to the commonwealth that are in build today. We're also starting to focus on systems in terms of how efficient can we be with either the performance of our vessels or how we undertake our work in the support regions. And again, there are a couple of slides in the pack to give you an idea of where we're focusing on there. When we think about the Philippines, very big catamaran in build at the minute, which should deliver at the back end of this year. And our focus is very much on Philippines Navy offshore patrol vessel. You'll have seen before Christmas, the Philippines announced that they had approved funding for that. And I can confirm we are in negotiations to try and turn that into a confirmed order for us. And then Vietnam. A commercial catamaran being built in our yard in Vietnam at the minute, but I very much see the future of Vietnam around commercial work. And as we see the resurgence in the commercial ferry market, Vietnam is incredibly well placed to fulfill those orders for us going forward. So I think that really sets out the strategy in terms of what we're anticipating our yards will undertake, the sort of programs that we are focused on and give you some confidence that there is a lot of work out there that we have the ability to win and keep our yards full going forward. So it remains a very exciting time for us. And with the investment we've made in the company, I think we're very well placed for a long and bright future. So maybe I'll just finish up strategically with a bit of an overview on where we're going. So another good set of results. Strong operational performance underpins those results. Yes, some challenges with things like COVID, but I'm confident we've demonstrated that we are well placed to continue to overcome those challenges and continue to deliver ships for our customers and results for our shareholders. We're helped by the strong balance sheet and the cash, and that allows us to continue to invest in the business for long-term profitable growth. We're much more diversified than we ever have been in the past, and we are really ready to expand in shipbuilding support and systems. And we see significant opportunities to do that, whether it's on current type vessels or whether it's on future technologies, things like autonomy in the defense world, and reduced emissions in the commercial world. So yes, we do need to continue to win new work as a project business. We're very optimistic about that and the programs that we can see on the horizon that are funded and we are bidding for. We've certainly got the capability to deliver in both steel and aluminum, in shipbuilding and support, in commercial and defense. So I think we're very well placed as a business to go out, win those opportunities and remain very profitable going forward. So with that, I would -- thank you for listening to us, and I'd like to open up to questions.

[Operator Instructions] First question comes from William Park from Crédit Suisse.

Just on the guidance, could you perhaps sort of unpack that at the revenue level and EBIT level. I just wanted to understand whether you -- what sort of, I guess, assumptions that you're factoring in, in terms of the throughput challenges that you've mentioned. And then whether if you are including any of the contingencies being accelerated in the second half? And also whether if you are -- what your expectation is with respect to, I guess, skilled labor shortages across the globe, particularly in WA, please?

Yes. Okay. If I start with revenue and perhaps the supplies to the profit as well. There's nothing baked into those numbers that requires us to win new work. And so that's very much based on the current order book. It's very much based on our resource numbers in terms of headcount and people. And the fact that we're going on giving guidance, it suggests that we are highly confident that we can achieve those numbers. You asked about contingency releases and there's no accelerated contingency release in the second half. As part of our full year audit, our auditors were very keen. We reviewed the level of contingency that we hold on the program overall based on the fact that we have, for a long time, been successfully mitigating the risk that, that contingency is held against. And the question was asked, do you hold too much at this time in the program based on the maturity and the success you're having. So there was a one-off exercise in the first half of this year, which we're through. And now we're back to contingency release based on achievement of milestones and mitigation of risks. So I think the numbers are pretty self-explanatory, but we have a high confidence that we're able to give that guidance, and we're able to achieve it.

So just to clarify, the 107 -- minimum of $107 million, that doesn't include any contingencies flowing through? Or is that -- does that include some expectation from your end with respect to contingencies?

So as normal, it will include some contingency. As we achieve milestones, we will release it, but there's no special contingency review or acceleration or anything like that.

Just moving on to, I guess, the support side of the business. Previously, Austal has talked to $500 million of support revenue ambition. I mean, is this still an ambition for you? Or is this currently being sort of reviewed given, I guess, your inclusion in SCC panels and you deal with the -- in San Diego recently?

Yes. Will, $500 million is absolutely a target that remains for us. And if you get into the detail of the pack, I've tried to put a slide in, which articulates where we see that coming from. What I've tried to articulate in the slide deck is the fact that we -- our current workload is currently a fraction of what is out there and what's available and what we will be going after. So I think $500 million is very achievable for us over the next 5 years. And that $500 million is underpinned by all of the actions we are taking today that you see. So whether it was last year the admission into the SEC East and West panels, the investment we've made in San Diego to capture as much of that work as possible in the West. What's this space for what we do next in the East. And you've already seen in November last year, we won a very big contract in Singapore, which supports the LCS vessels that are stationed in that part of the world. So I think it's shaping up very well. At a strategic level, yes, we've seen some immediate headwinds in this half, largely driven by COVID and the number of dockings of vessels. That's really just a function of programs rather than a problem. And yes, unfortunately, in Australasia, we chose to shut down the Brisbane yard for a period of time while we upgraded it and invested in it, which really just saw us breakeven. But I think the results you've seen in the Australasia business, historically, suggest that it is a profitable business. The order book looks very full now that we've made those investments in the yard, and I'm confident that we'll have a much better result for the full year in that respect. So -- and to come back to your original question, yes, $500 million is absolutely a target for us. We think it is very achievable over the next 5 years, and we've tried to put some material in the pack to help people understand how we're going to get there.

I appreciate that. And just a last one from me. Perhaps this one is for Geoff. Could I just ask about the effective tax rate in the second half? Do you expect that to sort of track in line with what you've reported in the first half, please?

Thanks for the question. And I think, no, we would expect to see that reducing into the second half, but it was quite elevated at 33%, the effective tax rate. But we hope to recognize additional tax credits going into the second half, but I can't quantify what those may be at this point of time because we still are working with the IRS and the ATO on that issue. So -- but yes, we expect to see a resumption of more normal tax rate, at least into 2023.

Next question is from Russell Gill from JPMorgan.

Handful of questions. Just if maybe you could step through the one-offs -- or what might have been one-offs for this period. It looks like there's a profit on sale of the China JV of $2.5 million. Was that booked in this period as a profit on sale included in the numbers?

It was. Yes.

Okay. Secondly, the impairment charge of the $6.7 million, I think you just said on the line there, and I don't really understand if you explain it to me that you're expecting an insurance recovery in the second half. Does that mean that you write back the profit and you get the cash in the second half? Or how does the cash and the earnings regarding an insurance recovery work through in the second half?

So we have -- well, thanks for the question. We have vertical certainty that we'll get some insurance recovery. Obviously, there will be deductibles. And we're going through an assessment process with our broker at the moment. The cash -- depending on the progress of the rebuild of elements of the shipyard, the cash might follow a little later. So we hope to recognize some recovery, if not full at the half year less deductibles, but we won't necessarily receive all the cash then.

So does that mean that -- so the $6.7 million might or a portion of some of that $6.7 million might be written back in the second half is what you're saying?

We anticipate that, yes.

Okay. And then just on the provision release or the contingency, the accounts say that the amount to be delivered from the LCS program is tracking about $98 million at the end of the year. That's kind of halved year-on-year. The way that you've released $17 million this half, should we be, I guess, high level looking at the movement of that contingency in your accounts going from $180 million in this time last year to $100 million this year, the amount that was leased to the P&L and sort of think of that delta as a potential future release as you move through the remaining part of the program?

I think that's a fair assumption, Russell, obviously, all predicated on us continuing to mitigate the risks and therefore, allow us to release the contingency we hold against those risks and milestones in the program. So yes, fundamentally, we either have to use that risk because something has impacted, or we have to release it by the end of the LCS program at the end of FY '24.

Okay. And then 2 more questions. Just on the CapEx. Can you actually give us some insights on what you think how much CapEx will drop in the second half? What will sort of drift into FY '23? And then how are you feeling about the sustaining level of CapEx in the business now that you're operating, I guess, very different manufacturing facilities and these sites in the U.S.?

Yes. Okay. So we've spent a lot of time investing with the conclusion of Marine Group Boat Works and predominantly the steel facility in the U.S. has been the big chunk of the money we've been spending. There is some more to come in the second half. As we've said, in San Diego, we've completed the acquisition, but we are now investing in a floating dock for that facility, so we can increase capacity. We'll sort of spend that money over the next 18 months. And as we're always looking for long-term profitable growth, so we have a number of opportunities on the horizon in terms of continued investment in the business for some inorganic growth. In terms of the sustaining CapEx, most of the facilities we're buying are in pretty good shape. So I don't see a radical change in that or a huge draw on the cash going forward. So for us, it's a case we'll continue to use our cash wisely and invest in things that give us long-term profitable growth.

So I mean just on that investment over the next 12 to 18 months that's, I guess, the growth CapEx in the steel related in your San Diego site CapEx. Can you give us an amount that's still to come that we can phase in before we get to a level of sustainability?

So FY '22 investment will be round about $65 million in the Alabama shipyard, 50% funded by the government. So about $33 million of our money. And then in FY '23, there's probably about another $10 million to invest, so $5 million of our money, and that gets us up to more or less the $400 million that we committed to invest that was 50% funded by the U.S. Navy.

And then just a final question. If we roll forward to the end of FY '24. And you're obviously bidding on a lot of programs at the moment. So this is, I guess, a very high-level question. But your U.S. shipbuilding margin is benefiting right now as you're coming through the maturity of a very profitable LCS program, but also your JHSC program as well. When you're bidding on these contracts or your thoughts about what -- because you made comments that you think you're going to see some stability of EBIT going forward. What sort of margin should we be thinking about sort of FY '24 onwards on these programs you're doing, albeit it's steel and you'll take some contingencies and the like? But when you're thinking about this business, what should your U.S. shipbuilding margin look like as the business progresses into steel?

You're right. We're at the back end of the program, and it's the most efficient phase of shipbuilding. Traditionally, I see shipbuilding margins in the sort of 7% to 10% range, depending on the risk that you take on the program. So if it's a build to print, there might be slightly less risk in the program, and therefore, potentially more profitable. If it's design and build, maybe we'd be slightly more prudent in terms of how to start trading because not only have we got to prove that the design meets the requirements, we've also got to prove that the build is done exactly to the design. So it's a reasonably high-level answer to a high-level question. But more normal levels of profitability in shipbuilding, in my mind, are in the 7% to 10% range going forward.

Next question is from James Lennon from Petra Capital.

Apologies, my questions were asked just before.

Okay, James. Thank you.

Next question is from Mitch Sonogan from Macquarie.

Paddy and Geoff, can you hear me?

Yes.

Just staying on some of the sustainment business there. You answered some of Russell's questions around the actual timing, a little bit more flowing through FY'23. I would just get a bit an update on that San Diego facility when the floating dock is going to be fully completed? And just how you see the ramp up of that facility heading towards that $150 million to $200 million of service revenues in flag -- in that slide in the presentation?

Yes. Sure thing, Mitch. So the deal closed 15th of December, and we started moving into the facility towards the end of January. So establishing our team in there, starting to make some minor investments in the existing infrastructure. Pre-Christmas, we also placed the order for the floating dock. And what the floating dock really enables us to do is effectively double the revenue going through that business. At the minute, it's a business that undertakes work on the top side of vessels. So while they are afloat alongside of a jetty, our plan is to order that floating dock. It will take about 18 months for it to arrive. And when it does, that allows us to not only work on vessels as they float alongside, but to lift them onto the water and to really have a step up in revenue in about 18 months' time.

Yes. And I guess just thinking about that in terms of the actual revenue run rate that you see doing, is it constrained slightly but pretty much capped out now. From what I understand, it's pretty hard to get space in that area for any sort of sustainment work. Is it almost at capacity now in terms of the run rate that's doing or is there still plenty of scope to ramp that up over the next 18 months?

There will be an opportunity to ramp up over the next 18 months with the space we've got available. You're absolutely right in terms of capacity. One of the real attractive things for us of our investing in San Diego was -- our analysis shows that San Diego as a whole is oversubscribed. So we hope we will have an incredibly high utilization of that yard. So we're not starting to bid for the first work to do in our own right under the SEC West contract in that yard on one of the LCS vessels that we built. And so it's exactly the model that we set up to deliver. So in terms of execution, it looks like it's going according to plan.

Maybe just jumping a couple on steel construction. First of all, I just noticed -- just sort of quickly, can you give a quick update on the Philippines OPV, but I did say about the steel hull. I just can't remember, was it always planned to be a steel hull there? Maybe just a bit of an overall update there and then I'll jump to the U.S.

Yes, sure. So it was always going to be a steel hull, and very much forms part of our pivot to steel strategy that we started really a couple of years ago with the Guardian Class vessels in Australia. They were the first steel-hulled vessels that we built. And as you know, we've successfully delivered 13 of those now, 14 due for delivery in about 2 weeks' time. We then got the investments in the U.S. as part of that pivot to steel. So that's going incredibly well, and indeed Rusty will open that 1 month ahead of plan around about the 12th of April. We're planning on a grand opening. Panel lines in and absolutely ready to go on the T-ATS vessels. And really fantastic that U.S. Navy not only gives us money to pivot steel because they see an industrial capacity need for it, but then the direct award 2 with an option of a further 3 T-ATS vessels for us. And then coming back to your question on Philippines Navy OPV, yes, it's a steel-hulled vessel. We are now reasonably familiar with steel as a business and demonstrating we've got the standard procedures, capability and understanding. And as I think I've said on some of these calls before, moving from aluminum to steel is much easier than moving from steel to aluminum. So I'm very confident the skilled workforce in the Philippines will have no problem making that transition to a steel-hulled program. In terms of overall status, you will have seen the press pre-Christmas where the Philippines government released the funding for that. There have been numerous debates over the last 2 years, really, I guess, around, would that be funded with some support from Australia through an export finance agreement, or would they fund it direct? And they have chosen to fund it direct. So a good thing that the money is there and available. Having waited -- the best part of 2 years to really get in the detail of the negotiation, we got a call pre-Christmas about starting negotiations. We were, obviously, ready because we've been doing a lot of prep for this, but we're somewhat surprised that having waited 2 years, we were going to start negotiations over Christmas. But nonetheless, they did. So we started over the Christmas break getting into the detail of finalizing technical requirements, finalizing specifications, and then, of course, working up the bid that we've put in and the funding they would require. And as is usual, in defense understanding whether the driver is technical capability or budget available. We've heard quite a number of iterations with the Philippines officials and the Philippines Navy around specification, affordability and pricing. So that's progressing pretty well. We are seeing super fast turnaround from them with answers and responses and feedback, which is great after the 2 years of model of a contract. And I think in terms of what could be a driver for this, as you know, there's a presidential election coming up in the Philippines and they like Australia will go into caretaker mode in advance of that. And that caretaker mode date is the 24th of March. So we are both pushing as hard as we can to try and get this deal done before the 24th of March. So it doesn't slip into post election new incumbent in post. So if I'm optimistic, we'll get through this in the next few weeks. And if it's successful, hopefully, 24th of March is a significant date for getting into contract.

Perfect. And maybe just a final one, pretty high level as well, but you made a mention about commercial potentially rebounding there. But can you maybe just touch on that over there given targeting the Vietnam facility, some of that work, but also, I guess, coming back to the Philippines OPV. You're in a bit of a -- I guess, an environment of heightened maritime security concerns for that whole region. Do you have any other sort of inbounds coming in for other similar vessels like the Philippines OPV more broadly for the region?

Okay. Thanks, Mitch. Yes, so you're absolutely right. And we'll have to see what continues to happen with China or indeed whether the Ukraine and Russia situation has any impact on navies in that region. It's certainly not going to be a heartful thing for a defense company, I don't think. So really 2 questions in that. One was around, do we see any opportunity for things like the OPVs in that region? Yes, we absolutely do. And the uniqueness of our bid and our concept with the Philippines Navy OPV was trying to build a very fit-for-purpose vessel that meets the specification that those sort of navies require. Some of the European vessels are incredibly sophisticated and have capability to interact with the entire fleet. And therefore, can be overcomplicated for the Philippines unless they've got a whole of fleet solution. So our theory was go and work with them, give them exactly what they want, something that is fit-for-purpose. And we think that's a model that we can replicate with other countries in Southeast Asia. You will know as a long-term holder in Austal, but we've got great historical success in entering a country with commercial work, building up capability, building up credibility and then moving into defense. We did it in Australia. We did it in the U.S. We're doing it in the Philippines. As you know, we've got a commercial yard in Vietnam, and we're starting to pitch our capability to the Vietnamese. And we're also enjoying the support we're getting from the Commonwealth internationally at the minute and then thinking about the countries, the ultra trade countries that Australia has publicly stated it would like to work with. We see a great opportunity to work with Australia to try and either export defense vessels or set our capability to build in country. So if you think about the portfolio that we are going to have, we will have an OPC -- OPV, sorry, an 83-ish meter vessel. And we are also publicizing and going to launch a steel version of our Cape Class vessels. So aluminum is great for a whole lot of reasons, but some of these navies like the robustness and durability of a steel-hulled vessel. So we're about to launch a steel-hulled vessel Cape vessel, that could be armed as many of these navies want. And then, of course, we've got the Guardian Class boats that we're only delivering for the Commonwealth or the Pacific Island Nations today, but there's a kind of fleet of readymade warships in steel that we think will be perfectly suited to Southeast Asia and various navies in that region. So we think this is just the tip of the iceberg, and there's a whole great opportunity to get out there and start selling more naval vessels at much more affordable price than what comes from the U.S. or Europe, which we think will be really attractive to either the countries we're already in or countries in the future. It's a very long-winded answer, but you did have a question on commercial shipbuilding as well. So we are starting to see a resurgence. It has been painful with COVID. Operators have been incredibly unsure as to what the future looks like, and therefore, what they should invest in. But pretty much every potential order we see coming in today has a feature around reduced emissions and green technology. As you know, about a year ago, we launched a battery boat electric drive concept called the VOLTA. Now that concept could be expanded to pretty much any type of fuel you can consider. Maybe it's methanol, maybe it's LNG, maybe it's ammonia, maybe it's hydrogen, maybe it's battery. But with the extensive capability we've got in our design department, we are pretty much technology agnostic, and we can work with a customer on any technology that they would like based on the logistics of fuel supply and what they're thinking in their country of operations. So my confidence is growing that the commercial market is showing some resurgence and we're certainly seeing a lot more inquiries coming in over the recent weeks and months.

Next question is from Patrick [indiscernible]

This is a very, very low-level question. What -- how much depreciation that you provided for in the first half of the year?

It's a kind of number I have of the top of my head.

Yes, I would have to get back to you on that. I don't know...

It's fine. It's fine. The other thing, in the longer run, what do you see the breakdown between your commercial shipbuilding and your naval shipbuilding? What you really desire maybe 4 or 5 years? What talent would you like to see?

Yes. So it's risen significantly over the last few years towards defense. So I think as we stand today by revenue, we are probably around 85% defense. And I think that stood us in good stage throughout COVID. If we had been where we were many years ago with the downturn in commercial market, we would have been in all kinds of trouble and having to take some pretty serious action in some of our commercial yards. But that skew towards defense has really helped us. I say it's continuing in that way. We are very much a defense-capable company today. And certainly, our U.S. business, I think, will focus exclusively on defense. It looks like Australia will be exclusively defense going forward. The Philippines is moving towards defense. But the real challenge is to keep growing Vietnam. Vietnam is a yard that we can scale, and we could grow. So as the commercial market comes back, I would like to keep growing the overall company, but I dare say the split will be -- continue to be focused on defense as it is today.

Patrick, it's Geoff here. Just to add [indiscernible] on depreciation. There would be some uplift but not fast material because the right-of-use assets, which were the San Diego leases, are amortized over 29 years to 2050. So the net impact is not material.

We've got $10 million in a year then?

Yes.

The next question is from Sam Teeger from Citi.

You mentioned given the resurgence in commercial and the fact that Australia, U.S. and Philippines still primarily going to be doing defense that you have to look at Vietnam. Would you need to acquire that site next door to your Vietnam yard and how much CapEx would that be?

Good question. So Vietnam has an opportunity to expand both to our left and our right. So our existing landlord has quite a bit of space that we have actually utilized for some modules in the past. So we know they are amenable to increasing our footprint. And yes, you're absolutely right. The strategic marine yard is next door. I think middle of last year, that went up for auction and was bought for, I want to say, $7 million to $9 million. I can't remember the exact figure, but it was a reasonably low number, which tells me either there'll be very reasonable rent available if we wanted to rent space or indeed, if we saw a real long-term future and a true resurgence with a great order book going forward and the right thing to do was invest, I would suggest for less than $10 million, we could make an investment and own a facility on our own.

Right. Okay. And then in the accounts, we talked about the delayed commercial vessel. Just wondering how confident are you can finish that by February 2023 if you don't have to take possession of that vessel?

Yes. So the real delay was on the Mols vessel that we're building at the minute, as we went through COVID, and some of that was a knock-on effect of the [indiscernible] vessel that we had in the yard probably 2 years ago whenever COVID really hit us hard. And because of the size of these vessels, it was literally blocking the production line, believe it or not, the 100-meter long, 34-meter wide production line was blocked by the fuel [indiscernible] vessel, which had a knock-on to the Fred Olsen trimaran, which has now been delivered, which in turn had a knock on to the Mols vessel. All of those knock-ons getting slightly less every time. And I'm confident since we took the hit on the Mols vessel, we've absolutely been on program. And even with the anticipated impact from the typhoon, as Geoff mentioned, the yard is fully operational, functional and we've got a high level of confidence that we'll be delivering that vessel on time in accordance with the program.

Right. And in order to deliver that vessel on time, you're going to have to throw a lot more labor at it. And then should we expect a lower margin than you would have otherwise?

The impact of that has already been flowed through the finances at the full year. So what we've got in the numbers at the minute are not anticipating another deterioration on that project.

And last question, you might have touched on this before, but I just want to make sure, I mean, it's crystal clear. So in the provision for delivered LCS and EPF, it fell by $51 million. How much of this has flowed through to first half EBITDA you just reported?

So it's a good question. Not all of it directly flows through because we've got a share line to consider and we trade profit based on a percentage complete as we go through it. So not the full $50 million reduction has gone through to EBIT as it stands today. But it will give us opportunities in the future because we have made the decision to release it and as the percentage complete on the project improves towards delivery, then it's kind of in the bank for us to be able to deliver it.

Right. I just wondering -- maybe it's more than accounting question. If a certain part of it doesn't flow through to the P&L, where is it going as you release it?

That's right, Sam. So it also flows through to the EBIT line. So it constitutes most of that $17 million uplift in group EBIT in the first half. So that would represent the percentage complete effectively of the $50 million that was released that actually flows through the EBIT line.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Gregg for closing remarks.

Okay. Well, thank you very much, everybody, for dialing in to the call this morning. As always, we are available for more detailed questions should they come up as you've had a chance to digest the results. I think in summary, another good set of results. I think, great opportunities for the future and growing confidence that there isn't a big hole coming or a big problem coming. And we continue to invest in the business and get it set up for long-term profitability. And it's that diversity that we're now seeing built into the business, I think, is a great platform that we will continue to grow on for a long, bright future. So thank you very much for your time this morning, and we'll talk to you all soon.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.