Austal Limited (ASB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Austal Limited H1 Fiscal Year 2024 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Patrick Gregg, Chief Executive Officer. Please go ahead, sir.

Hello, everybody, and welcome to the FY '24 half 1 results call. I'm Paddy Gregg, the CEO at Austal, and I'm joined by our CFO, Christian Johnstone today. We'll be presenting in the same format as we have done previously, with me giving a business overview and context, while Christian focuses on the financial details. And as always, we plan to present for no more than 30 minutes and allow time for questions at the end. I think you'll have seen in the press there have been a lot of government announcements in Australia this week following the release of the Surface Fleet Review, and this complements the announcements made back in November around Austal being the strategic shipbuilder in the west. And I'll talk a whole lot more about the order book later on in the presentation. When I look at the results, I'm pleased with them. It's a complex business and we always have issues to deal with. But we're right in the middle of guidance at the half year, which is a great place to be. And finally, whenever we've been through the presentation, the financials, I'll close with the strategic outlook and open for questions. So just for anybody who is not familiar with the business or new to Austal, we've got some key facts in there and it's a summary of what's going on at Austal. We operate 5 shipyards in 4 countries, 8 service centers in 4 countries. We've got 43 ships under construction or scheduled and 60 vessels under sustainment contracts. We've had a good half of deliveries and delivered 4 ships, 1 in the U.S. and 3 in Australia. And employee headcount globally is around 4,100 and growing in line with the order book. If I talk about the half performance summary, the way I think about it, we're delivering on expectations with ships being delivered and maintaining our guidance. We're realizing sustainable growth through the order book with wins like EMS and LCU in the U.S. and a whole lot of orders announced in Australia. We're on a historical high order book of around $12.7 billion, including the options on OPC and T-AGOS. And that $12.7 billion excludes everything that's just been announced in Australia. So tremendous opportunity to put longevity in the business. And that really gives us the opportunity to create long-term value through continued investment for growth. That investment is underpinned by the order book and the Surface Fleet Review in Australia is really, really very exciting for us. My summary of the financial headlines. Revenue down slightly on where we wanted to be, driven mainly by the Australasia segment. Again, Christian will talk more in detail on the segments in the financial section, but very pleased to say EBIT, EBITDA, NPAT all up and a half, really related to the provision taken on tax previously. But the profit has come from our mature shipbuilding programs and the sustainment business. We're generating cash flow, but finished slightly down on net cash, driven by the capital investment we're making mainly in the San Diego facility. But the outlook, the order book is really what I want to talk about. So if you look at the order book, you see a much different picture to where we were 3 years ago. 3 years ago, LCS was ending. We had significant uncertainty on what was next in the U.S. We had a lot of uncertainty around defense shipbuilding in Australia and the commercial market in Australasia. What you see today is a completely different picture. If you think about the US, you see us building ships in steel and aluminium for the navy, for the coast guard, in conventional shipbuilding, autonomous shipbuilding and indeed submarines. And in Australia, we were very pleased with the strategic shipbuilder announcement back in November naming Austal as the Commonwealth of Australia's strategic shipbuilder in Western Australia. At that time, they ordered additional capes and announced the medium landing craft and the heavy landing craft. And then especially exciting was Tuesday this week when the Deputy Prime Minister and Defense Minister announced another 11 general purpose frigates for Western Australia to be built through the strategic shipbuilder that is Austal and 8 of those will be built in WA, 3 overseas and 6 large optionally-manned surface vessels. So a huge opportunity to put 20-plus years of continuous naval shipbuilding in front of us, something that's often talked about but very rarely delivered on and it's really a very exciting time. And as I said earlier, all of these new programs in Australia come on top of the $12.7 billion order book we've talked about. I'll hand over to Christian to talk through some of the financial highlights.

Thanks, Paddy. It's a pleasure to present the half year FY '24 financial highlights for Austal Limited. On first slide shows our half-on-half comparison of group revenue movement. We closed the half year with a $57 million reduction in revenue and that's primarily as a result of lower shipbuilding activity in Australasia caused by lower commercial passenger ferry construction and lower construction on our Cape and Guardian Class programs. And this contributed $60 million of the revenue reduction, which is the largest component. [ Australasia ] support business had a lower emergent work from fewer Cape and Guardian Class dockings and that led to a reduction of $10 million. They were the 2 key revenue movements in the half. If we turn to group EBIT, group EBIT for half 1 FY '24 of $32 million was based on strong performance from the mature U.S. shipbuilding programs, which contributed $37 million in the half year. The U.S. support business contributed $17 million. However, this was offset with a decline in throughput from Australasia of $20 million and that was underpinned by the lower revenue that we talked about just a couple of minutes ago. When we look to the segment breakdown, we start with the U.S. -- U.S.A. Although U.S.A. shipbuilding revenue declined by just $8 million at the headline level, $11.5 million of FX more than offset this decline in throughput in the LCS program. Growth in other programs will replace this decline. And U.S. support revenue increased $8.3 million, including $3.5 million from favorable foreign exchange. It's pleasing that margins in both shipbuilding and support have improved on the prior year's performance. From the Australasia segment, revenue, as mentioned before, decreased by $59 million driven by minimum commercial ferry construction. Thus Australasia support had a $7.6 million decline driven by a high emergent work that happened in the prior half year which didn't continue through this half year for FY '24. Australasia was in an EBIT loss position for the half year. However, as Paddy mentioned, the announcement of the Surface Fleet Review is a positive indicator that this negative position may not continue. If we turn to the long-term investment proposition, this is broken up [ as it ] shows the Austal share price. I think we closed yesterday at $2.23. There has probably been a slight change this morning, but it's certainly up on this trajectory that we've had at the close when we finished the financial year. The order book is shown inclusive of all OPC, T-AGOS and LCU contracted options and as Paddy mentioned, it's a record order book of $12.7 billion with a lot more expected to come from the Minister of Defense Industry in Australia [ announced Austal will ] build 2 more capes subject to contract the medium landing craft and heavy landing craft that was announced in November. So that will have a significant increase to the order book when those intentions then come under contract. When we look at our potential group revenue, we've showed the position and expected the impact of those order book and how it winds down with an increasing trajectory for revenue. And on the top right shows what our EBIT guidance is for the half year. We're in line with our full-year guidance of 3% to 4%. So if we turn to the guidance, we started the year [ of an ] 8% to 10% revenue guidance on -- increase on FY '23. It's probably likely we'll be at the lower end of that revenue. But our underlying EBIT that we commenced the financial year at 3% to 4%, that remains our guidance. We remain in line with that. I'll now hand over to Paddy to take us through the business overview.

Thanks, Christian. So if I just try and summarize the situation as I see it before we open for questions, I think the highlight of the half for me is undoubtedly the contract wins we've had, the strategic announcements by the Australian government that will provide continuous naval shipbuilding for the next decade plus. The uncertainty we saw in Australasia is gone with the defense orders and that sort of trend has followed what we saw in the United States over the last 18 months, which has given us an incredible order book and runway today and government announced contracts to come that we will be busy getting into contract over the next 6 months. There are some operational challenges as we transition from the mature programs we've delivered over many years to the new programs. These new programs will give us that increased revenue [ strength ] in line with some of the graphs that we've put in, in the pack to help you understand that we see a fairly steady revenue growth going forward. And while defense has been very, very strong, perhaps we're seeing the beginnings of a few more opportunities in the commercial world. And a small order for our local customer, Rottnest Ferries here, which was very pleasing to receive. And then going to the other extreme, announcing an MOU with Gotland to build the biggest, most complex, green-fueled ferry that we've ever dealt with. So that could be an incredibly exciting project that would keep something like the Philippines busy for 3-plus years. Department of Investigation has been going for 4 years now and if we could resolve that in a similar fashion to the ASIC investigation, we'd like to get that behind us and really focus on the future with the order book that we see ahead of us. But I think, in summary at a time where geopolitical tension is rising, the relationship with defense, both in the U.S. and Australia is incredibly strong at this critical time. And that's demonstrated through that long-dated order book and the partnerships that they've announced with Austal. So I think very exciting future for us and put a lot of the problems of the past behind us. So thank you for listening. We'll now open up for questions.

[Operator Instructions] Your first question comes from Mitch Sonogan at Macquarie.

Can you hear me?

Yes, Mitch.

Yes. Just the first one, just quickly, I guess just looking out to FY '25 and beyond in your presentation, you obviously put that potential group revenue slide in there and obviously it doesn't account maybe for some of the more recent wins. But just when we think about the underlying EBIT margin, obviously you've reaffirmed the 3% to 4% this year. But I guess just looking out into the next couple of years after that, is there any reason why we'd expect anything sort of material to the upside or downside below that? And should we just expect you to continue to grow that?

Yes, great question, Mitch. Thank you. You've seen the historical revenue margins grow as programs mature, and we mitigate risks and drive efficiencies through the build progress. So absolutely, we're in a period of transition at the minute. As we've talked about, some older programs that are very mature winding down and some newer programs starting. So yes, it's absolutely our expectation that as we get into those programs, mitigate the risks, drive the efficiencies, we should get back up to where we have been reasonably consistently in the past.

Yes. Okay. And just in terms of the strategic shipbuilding review, Paddy, can we just get a bit more information about how you see that potentially playing out? Obviously, it's pretty early stages. But what sort of investment might be required? Is that on officer's behalf or is the government going to put a lot of investments in new facilities over there? And yes, just in terms of timing potentially for things like the landing craft or even, yes, just in terms of the defense frigates and that sort of stuff. Can you maybe just elaborate a bit more detail on how you're seeing that all play out and timing?

Yes, sure. So I think at a macro level, the Deputy PM, Defense Minister, Richard Marles, in his press conference at Austal on Thursday, talked about in Western Australia this is $15 billion of work over the next 10 years. So there's an absolute need to get going on these programs. So much so defense have given us an early design risk reduction contract for the medium landing craft so we can get going. Their desire is the first medium landing craft will be delivered in 2026. So through this year, we will be finalizing the design, ordering the materials to cut metal back end of this year, very early next calendar year. That's closely followed by the heavy landing craft. And there's a desire to get those into service in 2028, the first one of those in service in 2028. So again, there's a real driver to get going, recruit the people, buy the materials, start building and deliver those vessels. So we're not talking about years away before this revenue increase comes. It's very much a case of getting into contract, and they would like to do that through the strategic shipbuilding agreement. The exciting thing about that strategic shipbuilding agreement is it goes away from very long-term tendering processes that take 18 months huge negotiation. This is the negotiation of a head contract that any other shipbuilding programs can be dropped into, designed to make it very efficient for the Commonwealth to actually get into contract, get us going and get assets delivered. And then on the back of that, the announcement on the frigates, 3 overseas, 8 onshore, I actually think that makes sense. Normally, I'd be up in arms about anything being built offshore when we've got the capability in Australia. But actually, when you think about the volume of work that's coming through the medium and heavy landing craft, if navy have the need for those general purpose frigates as soon as possible, alongside the army requirement for the landing craft, then the first 3 offshore is a very sensible idea. We can work with that provider, we can understand the design, we can do the tech transfer, we can train our people. So it takes all the risk out of the start of those general purpose frigates whenever we build those remaining 8 in Australia. And then slightly longer term, very exciting that navy and government have backed autonomy or optionally-manned vessels. We've often talked over the last couple of years about it doesn't stretch your imagination too far to think that taking people out of harm's way is a good thing for the navy. We've done some demonstrations in Australia with autonomous capability. Of course, in the U.S., we've delivered the largest autonomous naval vessel with the EPF that we delivered. You'll see in the pack that we've published today, we've also launched the OUSV 3 vessel, another autonomous vessel. So we're working on sail drone, again, autonomous. So we've talked for the last couple of years about Austal having autonomous capability in so much as we can integrate the technology into any platform. That's our expertise. And it looks like government has supported that philosophy with the announcement on the optionally crewed vessels in the future. And then finally, in terms of CapEx, I don't think the need for CapEx in Australasia will be huge. We will be working with the government on what the consolidated defense precinct looks like. We have told them we are ready, willing and able to invest in the future to deliver the order book that's coming. And we'll work with them to understand what that sort of defense precinct looks like and what's the best way to achieve it. So I think I'm most excited about the fact that for the first time ever, we've had more than a couple of years runway. And with something like 20 years in Australia, you can imagine the efficiencies with which we can build the ships, get away from the boom and bust, and put efficiency into both shipbuilding revenue and earnings. So, very exciting time about what's coming.

Next question comes from David Fraser at MST. David, your line may be muted. We just can't hear you.

Can you hear me now?

Yes.

Yes.

Look, just a quick one following on from Mitch's question on the EBIT margin, but I sort of look at EBITDA margins because I'm more interested in the cash flow. The U.S. business in ships and shipbuilding effectively, EBITDA margin was around about 10% and in support was around 23%, which is stunning turnaround from this time last year in the first half, but sort of reflecting something similar to the second half of last year. Do you think those sorts of numbers are sustainable or we're going to see a drop off as we start into the new builds? And look sort of -- just sort of a few comments on that. I mean, a bit of cost out coming through half-on-half, but it looks like very good EBITDA margins in the U.S. business.

Yes, I think at a high level, and then I'll let Christian give his thoughts too. We're in that transition period. We are well into the tax program, we're well into the floating dock program. We see OPC maturing through the design and getting ready for cut metal and then T-AGOS on the back of it. So I think we're through the worst of the downturn and we're ready for the future to really get into our stride delivering the new programs over the coming years.

That was yes from Christian.

Yes.

Second question was, obviously touched on CapEx in Australia. There's been a lot of speculation in the press about CapEx in the U.S. Could you [ give ] us a rough view on the sort of growth and capital spend over the next couple of years to build out those new shipyards further up the river?

Yes. So we've got -- we've made an investment in land. So we're ready to start with buildings. We've authorized a small amount of design funding today to work with specialists in terms of the facilities that we'd like to put in, in the U.S. And as that design matures, we'll understand the size of the CapEx and the best funding routes. I think the one thing I'd say is with the share price where it is below net tangible assets, our preference would be debt rather than equity. We have some debt on the balance sheet already, but we're in conversations with various lenders, both government lenders and banks, about what's the most appropriate way to secure that long-term funding for these assets that will have 30 to 50-year lives. So work in progress, I think, is the easiest way to say it. And certainly by full year, I would think we'll be in a position to update on exactly what we plan to do, how we're going to fund it and what that payback looks like. But it's all on the back of the very big order book that we've now secured.

Your next question comes from James Lennon at Petra Capital.

Okay, guys. Well done on the results. Just one for me, really following on from Dave's question around margins. Just curious to know with support there, looks like the cost of delivering those services, like your revenue was pretty much [ $195 million ] for support, but the cost of delivering that service fell quite substantially. So just wanting to know what would be a normal year for support. Is it just because the composition of that work has changed? Or what's sort of driving that greater efficiency?

What we've seen in support is it can be a little bit lumpy in terms of when you spend the revenue versus when you can recognize the profit. A couple of years ago, we did a graph in the pack that tried to normalize the profit between halves, recognizing when an EBIT is actually generated versus recognized. And by that, I mean sometimes in the support world, you do a job, you spend all the revenue, then you produce all the documentation and proof that you've done it correctly. It's been checked and commissioned appropriately, and you only recognize the revenue once you've done that. So there can be a bit of a disconnect between when we spend the revenue and when we recognize the profit. So I wouldn't jump up and down and expect us to be at 19% going forward. But that sort of 7% to 10% range is a reasonable range if you average it out over the years.

Your next question comes from Sam Teeger at Citi.

Just a question today on AFDM. I saw there's a $10 million provision. Just a bit of background to that, please?

Yes. I think if you look at what happened with tax, we had some concerns. We made a provision. We announced it in line with our continuous disclosure obligations. We've worked hard over the last 6 months to better understand that and put some mitigation in place. We've been able to reduce the tax provision. It's very early days on AFDM and you know we like to be prudent. So rather than releasing all of the tax provision, we've had a look at what we think or would we need anything for AFDM, and that's really recognized in the financials and there's that small provision that we've created on the floating dock.

Got it. But does it relate to like additional labor than you expected or the materials ended up coming through to be more expensive? Is it more complicated? Like, what's driven the increase...

Very early efficiencies on the program. So we're maybe 15% to 20% complete on that program. And if we look at the efficiencies and forward projected and all the assumptions you have to make around learning curve and how it will pan out, we just wanted to put some prudency into that.

Okay. And then just on the request for equitable adjustment on tax, any update there?

Yes, we've had productive discussions with navy. I don't want to go into any detail because technically it is a commercial negotiation, but they're being very constructive and listening and understanding the circumstances and arguments we've made to them around the justification for that REA. And some of those discussions have allowed us to reduce the provision and work continues to -- work with navy to get the right result that's fair for both parties.

Would you expect to have that finalized by year-end?

Yes, absolutely. That's our target.

Cool. Yes, I imagine that cash would be helpful given the CapEx bill which would be coming up. Excellent. And just a small part of the business, but just on the Philippines. Can you elaborate on that cost guard opportunity and the timing around that? And also, you talked about commercial shipping, ship construction being subdued, but seen a couple of announcements come through that Cebu is planning some work. So just if you can talk about that, please.

Yes. So we've done a bit of work with the Philippines coast guard in terms of what would they need to defend their borders. As you know, it's a nation that has quite literally thousands of islands. And as such, with some of the challenges they face around Chinese fishing vessels and things like that, they think they have a need for quite a high volume of patrol boats, similar to the Capes and Guardians that we've built in Australia. So we're working with the coast guard and the government as high up as having briefed the president around our capabilities, around the shipyard that we have in country, what it could do economically for their region, while also providing them very efficient ships that do exactly the job they're looking for. So while, yes, predominantly, we have built commercial vessels in the Philippines, we think there's a great opportunity to work with the Philippines Coast Guard to build some patrol boat type vessels as well. So a good opportunity. And as we learn more and understand more, we will, of course, brief everybody on what that looks like.

Great. And then just on the commercial side, seen a couple of wins come through recently?

Yes. So great to be able to support our local friends at Rottnest Ferries. That's very nice to win a commercial order whenever it's been really tough over the last few years. The Gotland opportunity is very, very big and if that comes off, that would see us filling the Philippines yard probably for the best part of 3 years. That's a dual fuel ship. They are currently bidding for the route that they have held the license to operate on for many, many years, which -- good luck to them winning that. And on the back of that license coming through, they say they'd like to place an order with us for that new vessel, 130-meter vessel, which would be certainly the biggest that we've ever built and provide a whole lot of certainty in the Philippines, which would be fantastic.

[Operator Instructions] Your next question comes from Benjamin Jones at JPMorgan.

Just first one on OpEx. You've called out in the past you need to hire 1,200 workers in Australia. When do you expect those employees will come in? How should we think about the cash flow impact until that revenue is booked?

So a couple of things that didn't quite come off in Australasia in the first half that we expect will pick up the second half. So I wouldn't expect a repeat of the first half in the second half. We are basically recruiting now as the orders come through. We've had the order for the 2 Capes. We're in discussions about the potential for future Guardians. And then, of course, back end of the year, the army landing craft medium will commence. One of the other questions I've been asked is, does 1,200 people worry you? And I think if you look at where we peaked about 4 years ago, we've released over 1,000 people since that time, mainly due to lack of work. So now it's incumbent on us to try and attract those people back. And I think we should be able to do that because we've never been able to give such certainty for a 20-year order book. For the first time ever, we'll be able to offer people careers and confident they could see out their working life at Austal. So I think being able to attract people back is something we can do. We've done it before. We've had it before. And with some of the concerns around some of the minerals in Western Australia with lithium or with nickel, maybe that's a good opportunity for us to pick up some of those people who want to come back to shipbuilding.

Perfect. And then just on your tax rate, I mean, it came in this half quite a bit higher than expected. I mean, could you just talk to drives of that increase and where do you see that coming out in the second half?

Tax rates based on where our earnings profile is, we've obviously got sectors that are split majority in the U.S. and we've got a high tax bill in the U.S. because we earn money in the U.S. We've had losses in Australia, but because there's 2 jurisdictions and that doesn't come through any losses that you have, doesn't offset in a different tax jurisdiction. That's the real driver of it as well as in the financial statements there's notes around long-term settlements we've had through inter-jurisdictional taxation from MAP and BAPA processes, and it's disclosed around what the cash impact as well. So I think we certainly look forward to try and manage as much as we can within the realms of each of the jurisdictions that we have to try and manage what that tax bill is, because obviously, we've just [ booted ], there's a lot of capital expenditure and that crystallizes cash out the door. But it's based on good performance being profitable in those jurisdictions. So you can't argue that federal governments have to take share when companies make again good profits.

Your next question comes from Sean Smith at The West Australian.

Just 2 questions. The first, I noted you talked about the labor requirements, but I just wonder what else you have to do to actually attract some of those trades. I mean, you said that the mining sector implosion will push some people towards your way, but other miners are also battling for those people. So what else do you need to do because I don't think Austal can still pay those guys what they could probably get in mining? And secondly, just down at Henderson, what else do you need to do to actually build that precinct up to ensure that as a precinct it can compete for the work that's coming your way over the next 20 years?

That's great. Thanks, Sean. Yes, on the labor front, you're right around the rate. What mining pay is not something we're able to match with the type of contracts that we have. As I said earlier, that hasn't been a problem in the past because we offer, in my opinion, a better work-life balance. So we offer a 4-day week with 40 hours Monday to Thursday, overtime on Friday. You still see the kids go fishing, watch sport, do whatever you want to do at the weekend. You get home every night. And one of the things we always struggled with was the longevity and the fact that we were more of a project-based business and only really had a 2-year look ahead. This sort of 20-plus year look ahead, I think, allows us to offer careers. So it will be attracting people back to the business. We've also been very good over the years at building from the bottom up, so bringing in graduates and apprentices. And over the years we've trained in excess of 3,000 apprentices, and we've been very good at bringing people in, training them up. And then when we have had senior levers, we're big believers in promoting from within wherever we can. So giving those younger, less experienced people the opportunity to step up and take roles as supervisors, foremen, leaders in the business. So really, it's a whole infrastructure. We work very closely with the [ TAFEs ] and get great support from them in terms of being able to bring those people in and links with the universities around the graduates that we bring in. But I really think with that long-term order book, a lot of the big concerns that people have had in the past have gone away. So it's going to be really interesting to see over the next 6 months just how attractive we look in the market. And then in terms of infrastructure, there's a lot to be worked through in infrastructure, but actually we have time. So if you look at the capes and guardians we're building today and you look at the medium landing craft, we can do all that with existing facilities, maybe a handful of millions of dollars investment, but really we've got that capability where we need increased capacity comes with the heavy landing craft or the consolidation of the heavy landing craft. So in FY -- sorry, in calendar year '27 is really whenever we need facilities. Defense have a desire to create a defense precinct that we would be very happy to operate in. Other options that we look at include things like the common user facility down in Henderson, a state-owned facility that's available for lease and that's an option we could look at for consolidation of the vessel if defense and the overall defense precinct has not been finalized and established and created.

Your next question is a follow-up question from Mitch Sonogan at Macquarie.

Look, just following up on the strategic shipbuilding agreement, and I'm not sure if this has been finalized or you can disclose that. You talked about the strategic shipbuilding process moves you away from that typical tendering process and we'll get designs and shipbuilding happening much faster. But just given this structure, obviously moving away from that [ to be with ] tendering and competition, should we think this is going to be more just like a lifestyle contracting structure where you probably just have your schedule and you get a cost plus margin reimbursement? And I guess from that perspective, if it is that sort of structure, would it allow recognition of more consistent profit early in the program?

Yes, it's a good question and to be honest, it hasn't been determined yet. We're in discussion with the Commonwealth. And when it is going to be single source, we will have to be more transparent on a daily basis with our costing, profitability, et cetera, et cetera. But we generally bid everything in line with Commonwealth procurement guidelines, which detail acceptable profit levels. So the thing I see changing most is less time spent tendering and more time spent building ships. And I think it's the longevity of the order book and the consistency with which we'll be able to work with the Commonwealth around. These are the most sensible ship delivery dates to avoid any boom and bust and just put that continuous naval shipbuilding steady revenue stream and then hopefully steady profitability on the back of it for the next 20 years.

Your next question comes from [ Ryan McGregor ], private investor.

Congratulations on the recent wins. Sorry. Can you hear me?

Yes.

Great. I just, further to the discussions about recruitment, wanted to know how recruiting in Mobile is going. Are you finding that the demographics in the town are resulting in people moving to Alabama or to the coast?

Yes, good question. I think there's a great push generally in the U.S. to increase employment in the south and bolster that economy. So there are a lot of opportunities for employment in the area and we are seeing growth. I think in the first half of the year, we recruited something like 600 people in the Alabama U.S. business. So there are people out there. There is still competition for jobs. But again, the bigger wins, the longevity we put in the order book, being able to offer people a career, long-term employment, and exactly the same in the U.S., as I said here, the ability to bring people in, train them, turn them into shipbuilders is something that we've done for years in the U.S., recognizing that 20 years ago, when we started the place, we brought in, set up our own training school, and really had to generate that shipbuilding talent. Now that we've got the core nucleus of very skilled shipbuilders that have demonstrated their capability over years with all the ship deliveries, it's much easier to add to an existing high-performing team than to start from scratch. So I'm confident we'll be able to attract the people, train them up and grow that revenue and deliver on our commitments to coast guard and to navy.

Excellent. And I wanted to also know, obviously, both projects are sort of in their infancy and design stages. But how do you anticipate that project to construct the transit bridge in Mobile, Alabama is likely to influence, in particular, the expansion plans for Mobile?

Yes. That's a great question. We're working very closely with the Alabama Department of Transport around some land. They need some land that we have already bought. We might do a bit of a land sale for them. And, yes, there'll be a bit of disruption in car parking and things like that as that construction commences. But the site we're proposing to make our capital investments on is outside of the envelope of that bridge. So we're working closely with Department of Transport in Alabama to deconflict activities. So I think it will all work itself out. And we've got a team working on that for the last couple of years.

That's great. And sorry, just a final question. Is there any update that the company can provide with regards to the partnership with Spectainer for the collapsible shipping containers?

Not much of an update. We have worked with them. We have not done much with them recently, but we'd be certainly very happy to work with them if they get to market with a viable design. We've got a very capable build team and our operations in Vietnam would be well suited to build that if the economics of the whole proposal work out.

Your next question comes from Craig Hooper at Themistocles Advisory Group.

Craig Hooper here. Could you walk us through, as granular level as you can, the losses on the TAPS program? I recognize it's a loss leader, right? But what's the total loss you've currently put on the books? And then what's the total loss you're expecting at the end of this program? And then once you do that, if you can discuss maybe any CapEx for submarine focused factory work in Alabama. Do you anticipate doing any of that?

Sure. I'll let Christian talk about the tax provision and then I'll talk about submarine investment.

Craig, from the tax program, there's a note in the half year report, I'll refer you to note 10, that gives the position at June '23 and at the December '23 and the movement in that provision. Now when you think back in June '23, we took a forward owner's loss provision on tax. So that's bringing forward future losses related to the balance of that program onto the balance sheet and then recognized in the income statement. And then within that note, it shows the movement in provision from June to December has gone from AUD 121.9 million down to AUD 67.2 million. Larger driver of that reduction has been based on the utilization of that provision. So when you think under accounting rules, because you're bringing forward a future loss as you unwind or utilize that loss, that gets booked back to the provision. So within the 6 months, we've utilized [ AUD 40 million ] that we previously booked in FY '23, and we've utilized that through the 6 months. The change has happened, there have been a change in estimate of provision of [ AUD 14 million ]. That's the balance of the expectation of the recognition of recoverability of the REA that Paddy mentioned earlier on, we are discussing with newest navy around the recoverability of that request for equitable adjustment and balanced by a growth in the costs for that program to the balance of the end of that period. So there's -- it's quite a complex area because we're moving from a provision at one point in time and comparing it to 6 months later. We've obviously undertaken work in that 6 months, which has driven that utilization. But then we've also had a recognition of an REA and the net benefit of that is AUD 14 million. But then we take it across the whole company. We mentioned we took a prudent provision for the AFDM program and effectively that sheltered or offset any benefit that we had from the reduction in the tax provision. So that's all detailed in note 10. So if you can look -- refer you to that note and maybe walk through that, if there's any further questions then we can deal with that offline.

And in terms of root causes, Craig, I wouldn't necessarily describe it as a loss leader, but I can understand why you've put it in those terms. It was our first steel ship. We had some challenges with the original technical package and we're working through that with navy. And we did some efficiency challenges as we commissioned our steel production line that we're working through at the minute. And you also asked about submarine modules and CapEx and facilities. Yes, that's a pretty exciting opportunity, as I see it. Thinking about AUKUS, the fact that Australia is going to be buying these submarines to the United States build and the fact that Austal is on that program, I think is -- nothing has been formally said, but I don't think there's any coincidence to that. So -- well, I think we currently have 5 modules on contract or in production on site in our existing facilities and we're doing a lot of work with our customer electric boat to decide what is the right model for the future, how much work is going to come, is it the right thing to do to build a purpose-built facility to maximize the efficiency of the build of those modules and maintain the appropriate security as we do it. And I guess the unknown question at the minute is just how big can that opportunity be. There's certainly a need, as you well know, and have written about, to increase the throughput of submarines in the U.S., and that grows with the desire to support and partner with Australia. So I just think it's a great opportunity for Austal and the 2 countries to provide the capability that both navies need. And if investment is required and justified, we're absolutely happy to work with electric boat to do that.

That concludes our question-and-answer session for today. I would now like to hand back for closing remarks.

Thank you. And I'd like to thank you all for dialing in today and thank you for the intelligent questions that we always enjoy and hopefully help you understand the results a bit better. It's a very complex business and there's always issues that we're dealing with. But I think the 2 summary levels for me, despite the issues and the complexities of shipbuilding around the world, we're maintaining our guidance, and we're right in the middle of it, as we disclosed earlier. And then that order book is just the most exciting future we've ever had. It started in the U.S. We're now seeing it in Australia and having that real strong relationship with both the United States Navy, Coast Guard and the Australian Navy and indeed Border Force. I think we're really well placed for a very exciting 20 years, which is something I've never been able to say before. So thank you for your time today, everybody, and we'll talk to you soon.

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