Electro Optic Systems Holdings Limited (EOS) Earnings Call Transcript & Summary

Good morning, everybody. On behalf of Electro Optic Systems, I'd like you to -- I'd like welcome to - -you to our H1 '21 interim results presentation. I'm in Sydney in lockdown, but Dr. Ben Greene; Michael Lock, our CFO; and Morgan Bryant, our Company Secretary and Legal Counsel, are in Canberra and will be going through the presentation with you this morning. First of all, we have 2 pages of disclaimer, which I'll let you read today at your pleasure. And now I'll hand over to Dr. Ben Greene to start [ with you ]. Ben?

Thank you, Neil. Welcome, everybody, and welcome to our first half results for you. Can we proceed immediately to -- yes. Thank you. So this is the slide summarizing the first half and our posture going into the second. And these key 6 points are summarized here. Obviously, the number one -- the primary asset of the company is its people, and we need to take care of our staff very, very much so. So our primary focus is always on safety of personnel and their sustainability in the high-level function they provide. And during this first half, of course, we still have to take quite strong precaution. Everyone knows that the lockdowns across most of the areas we operate in Australia have impacted from pretty much the end of the first half. But even so, the COVID-19 management program in the first half succeeded in keeping COVID at bay across all of our global operations. The second key point here is revenue and profit as at the first half and as we sit here now are pretty much on track. Despite the usual slow start, which is endemic to our customers, in the first half of calendar year and some constraints on our operations, both revenue and profit are tracking within the range of prior guidance. Third point, which is, I think, quite important to the market in terms of the feedback we get from our shareholders, cash recovery from our contract asset is now flowing. We made a quite distinct announcement in April 2020 that we were going to invest around $120 million, maybe a bit more in contract asset, to keep working through what was a serious COVID lockdown globally. $30 million of that is unwound back to cash. Another $100 million will be converted back to cash through the balance of 2021. And I'll be talking in a bit more detail about that as we get to the sector. SpaceLink has made spectacular progress. We have been in several months of redesign of the satellite and constellation. We've modified the constellation a little bit. Satellites have been upgraded in design. So we have now stronger performance from the constellation at a lower cost than originally forecast. And customer buying at this stage -- and I'll talk again in detail about this when we get to the sector. Customer buying is also running ahead of our program. The tenders for the satellite have been called, and we expect to have a contract in place for those satellites within 30 days. Capital flexibility. This is something that is new for EOS. EOS has essentially avoided debt almost entirely for the last 20 years. We're now cautiously moving back into raising debt. Clearly, equity is a very expensive capital and debt is at interest rates -- available interest rates that are in the market today. So we've got quite strong engagement with what we would call Tier 1 lenders for financing of SpaceLink or a significant proportion of SpaceLink. And we also have recently engaged -- executed agreements for a $35 million working capital facility as the first step in our reengagement with debt to change the equation in terms of capital raises versus debt to fund operations and expansion going forward. And the last point is a point that was made quite strongly at the AGM in May. There is a logjam of contract awards that is unwinding now, and we have quite strong responses and momentum in the global market and in Australia as these contracts move. And they're not so much moving back on the schedule but resume the uptempo that they would have had without COVID. And also, we have significant announcements in Australia in the last few months which I'll talk about illustrating the scale of the opportunity in this sector. So those are, I think, the highlights for EOS. But in summary, results delivering the expected performance and momentum building as we go forward. On the financial headlines, I guess I'm only going to hit 3 points on this slide: revenue, profit and cash. So revenue obviously is up 30%. Profit is -- well, profit is still negative, but it is on track. This is exactly -- pretty much exactly where we would have expected it to be at the half year. Now the second half has some additional headwinds but nothing that's of major concern. The additional headwinds I'm talking about are really the COVID lockdowns which hit us at the end of June. And the cash position of $51 million, I'll talk about in more detail in 2 slides. I'm going to pass on the segment performance because my intention here is to leave a significant amount of time today to talk about -- to answer questions. The net cash flow movements on this slide show cash in the half dropping from $66 million to $51 million. We expect this cash position to strengthen through the second half towards in excess of $90 million at the end of the second half, notwithstanding some significant other expenditures that we're planning to make towards our expansion. So in terms of the reporting cycle, I think the $51 million should represent the nadir or the low point of our cash reporting in terms of the half year results. Company guidance on the next slide, there is an adjustment to guidance given there is a very small setback in terms of profitability, which is running at about 1% to 1.5% of revenue reduction in profit. And that's simply because we've moved back to our 2020 configuration of production. We've got split shifts running in the plant. So if we have an outbreak in the workplace -- and most people listening to this will know that the principal concern from COVID at the moment from the Delta strain is outbreaks in the home, being communication in the home and in the workplace. And so the workplace precautions are as stringent as they were last year. And that splitting of shifts so that we, at worst, will only lose 1/2 of production is -- has been implemented from -- in July. The impact of that has been quite successful. We've had a number of positive tests within our plants, and we're riding that out. I think we have in isolation roughly 10 people at a time within EOS that are involved in the production process. And we think as long as that situation maintains as it is, we have no reason to believe it won't because of the precautions we're taking and because the balance of risk in the population in Australia is decreasing every week significantly. We see a downgrade, well, of the guidance by effectively 1.5% of revenue from the bottom line of $3 million to $8 million underlying EBIT to $1 million to $4 million. And we -- as we sit here today, that's the guidance we're going to update to. So I'll move now to the sector descriptions. Defence Systems -- the -- Defence Systems has had a very, very rapid expansion of its pipeline because customers have accelerated the requirements for some of the new -- newer products. We have C4 EDGE is growing quickly. The T2000 turret is maturing fast. The counter-drone programs are in full test now. We've been testing subsystems for the last 5 years in the U.S. with the U.S. Army programs. But now we're doing full system tests involving radar, kinetic engagement, directed energy engagement and what we call soft electronic warfare engagement, all included in the suite of command and control that's been spun out of the C4 EDGE program for our application. And most recently, of course, we've got the missile program, which I'll talk to shortly as well. So the highlights in defense. Obviously, most of the revenue growth -- we see that 30% growth in revenue is defense surging back into production. And again, further momentum into the second half. So we're 1/3 of the way through the second half, and that momentum is continuing. Notwithstanding the split shift operation for our plants, that momentum is continuing. And so you can infer from that, that the revenue guidance that we've given is going to be reasonably sustained. The new product area is probably most exciting because this is drawing a lot of small-scale initial contract funding right now. And so we have, on the counter-drone programs, several funded -- and customers don't fund demonstrations unless they're quite interested -- several funded demonstrations at the level of $5 million to $15 million per demonstration running through the balance of this year and early into next year. That product is performing really well. T2000 is performing well in its testing. The current upgrades to our remote working system and remote lethality programs are also doing exceptionally well. So across the, I guess, the development, the technology, production and delivery, all of those elements of EOS are in a rhythm, which reflects the lessons learned in 2020 and coming to terms with COVID, notwithstanding Delta is a little bit more aggressive. The next page is the Sovereign Missile Alliance. This is a program which EOS had anticipated engaging in 2022. However, the Commonwealth of Australia brought forward by about 6 months its requirement to surge forward in what Commonwealth calls its missile enterprise, capital enterprise. And the enterprise concept from Commonwealth is they anticipate spending about $100 billion over 20 years in missiles generally, and there are some other smaller categories. EOS -- it's not well known. EOS is probably the leading company in Australia in terms of: A, the technology for missiles; and B, the relationships with the current missile providers in terms of technology exchanges that would allow us to acquire the technologies we don't already have. And I'll just quickly explain here because this is the right place. EOS has -- if you look into a missile, there's a propulsion unit at the back and there's a warhead at the front. They're, in fact, the easiest parts of missiles to make. The hard parts are all in the middle. They're the guidance and control, seeker systems, the navigation, stabilization and, ultimately, the command and control systems, which include an ecosystem around the missile that allows it to be managed to the target. All of those things that I just mentioned as being the harder parts are strengths of EOS. And so when our own government proceeds towards spending $100 billion in the missile enterprise over 20 years, of course EOS is going to be engaged. Within the company, we determined that this was a matter of scale. Clearly, $100 billion is a lot of money. And EOS, even though we're the largest defense aerospace listed entity in Australia and the largest defense exporter and arguably the largest defense aerospace company that's sovereign in this country with probably the exception of Nova Systems, Nova Systems is comparable in scale to EOS. And so we took the decision that a joint venture between Nova and EOS called Sovereign Missile Alliance was the appropriate corporate vehicle to address this new market. And so you'll be hearing more about Sovereign Missile Alliance, but it is, in simple terms, a 50-50 JV with Nova Systems, who are very welcome partners to us. So we find Nova is an exceptional company to work with. And we'll be addressing this market through a tender process, which will begin in about 60 days. So this is one of the opportunities that I would have been referring to in previous reports when I was talking about an explosion of demand. Briefly to Space Systems. And it's always easy to underestimate Space Systems looking at the pure numbers. Not all of the business of this sector can -- reported in quite this way. For example, there are several contracts Space Systems has originated which are being executed and are reported under the other sectors, which is the proper way to do it. What we're finding with Space Systems is every year that passes now, as these technologies mature, space becomes operationally closer to the other 2 sectors. And probably one of the best examples I can give here is that the space demand awareness and the space asset protection services of Space Systems are fundamental in the value equation for SpaceLink. So SpaceLink satellites can capture a particular tier of customers that will not buy data or communications services from anyone who doesn't have secure constellations. And we -- at this point in time, we are the only company in the world that can secure their own satellites. In terms of the - -securing space aspects in Space Systems, this is a progress year-on-year from activities we've been doing for some time, and not a significant headline here other than within alliance program. So within Five Eyes, which is, I think, well known to all my shareholders -- all our shareholders. The Five Eyes alliance will spend about $1 billion over the next 5 years on space security contracts and programs, and EOS is well placed for a share of that. Not a majority share but a share of that because our technology is uniquely suited to deliver a particular part of that solution. And those programs have been held up through 2020 because they're quite complex, and they require coordination which cannot easily be managed through COVID. They're all recovering their own schedules as well. And of course, in space, we continue to be a hub for the other sectors in EOS. I think shareholders will be pretty familiar -- I'm restating here the capabilities that we have in space. Probably the most important element here is we've unveiled and moved forward in the public area with Guide Star Laser application, our inverse propagation technology which allows us to propagate lasers from ground to space with typically at least 100x the efficiency of the normal process of propagating lasers from the ground to space. And that technology has matured over the last 5 years in EOS. We've made an announcement earlier this year, and we're continuing to commercialize that technology both for communication and for space control and satellite defense purposes. In Communications Systems, the overview here -- this area is surging for EOS. We -- at the moment, we're talking about a $17 million order backlog, which is only from the antenna division of space communications in Brisbane. That business is growing at a terrific rate, but that business is developing antennas which are compatible with our SpaceLink as well as all the current satellite constellations that our defense users are accustomed to using. We announced, I think, last week on Friday that space -- our communications sector had won major contracts to deliver these antenna to NATO navies now. We will fairly soon, on a year-on-year basis, be the largest supplier of antennas to European navies as well, pre-configuring those navies to be customers for SpaceLink as well. What's -- I want to highlight here the risked sales pipeline on this slide, where we're talking about, just for the antenna business, $200 million -- $209 million in total of risked pipeline, but, more interestingly, $269 million a year annually in SpaceLink. And again, we'll talk about that in just a moment. EM Solutions highlights -- again, in the interest of efficiency, this speaks to itself, but the EM solutions business as a cornerstone of our communications business in space is performing exceptionally well. We have record revenues and record profits in that sector. I'll briefly highlight -- and before I move to talk about SpaceLink as a whole, one of the things we're particularly proud of is the way that SpaceLink has been constructed from the human resources point of view. Of course, SpaceLink is part of the communications sector in EOS, which is run by Chief Executive Glen Tindall, who reports to me. Glen has put together an exceptional team in EOS to manage the SpaceLink opportunity. And so what we're looking at here is just a brief summary of over 100 years of C-suite experience in multi-, multibillion-dollar space entities in EOS, and this is representative of the quality of the organization that we've put together in EOS. It is pretty much a who's who of satellite communications in this sector that we've put together to address this opportunity. Look, the key point I want to make about SpaceLink here is that it is something completely new. There's lots of space communications companies, and I guess everyone -- if they've got revenue, they're delivering a service which is of value to the market. What we're doing here is we're breaking through with a -- to deliver a capability and to meet a demand that has been, until this point, not met. There are 3 tiers of communications in space: LEO, MEO and GEO, lower Earth orbit, medium Earth orbit and very high Earth orbits. Our customers have been clamoring for a mid-Earth orbit capability for almost a decade. It's been quite difficult to manage the technology, but now we have technology that can deliver this which is literally space qualified and proven and can be integrated into satellites that can meet this requirement immediately. There are no other providers meeting this market. And so we're overcoming LEO limitations as well as GEO limitations. Most people involved in investing in space will be familiar with SpaceX, Elon Musk's company, which is providing effectively a low Earth orbit, thousands of satellites, providing a mesh communication around the world in lower Earth orbit. This is a very valuable commercial service. It's not particularly useful for our customers. So de-conflicting in the marketplace our offering from other people's offering is relatively easy because the buyers know what they want. So the next slide is the update on SpaceLink, and -- but the key point here is the first bullet, where we talk about the next 6 months, we've got fantastic interest in SpaceLink. And to use a very old expression, interest in $3 will get you a cup of coffee. So we've got a couple of hundred MOUs that have been signed. I want to explain briefly here how this business works. When you have a great idea, lots of people will subscribe at no cost and no commitment. That's the MOU stage, which we've just completed. Obviously, we're quite picky about who we sign MOUs with. If they're not entities that are fully funded, they have a program requirement and we can see the alignment of our offering with their business requirements and their business models, if we don't see all that, we don't even start the engagement. So we have a couple of hundred MOUs signed. The next step starts in 30 days. So we will sign within 30 days a contract for, give or take, $0.5 billion, a bit more, to deliver the SpaceLink Constellation Block 1, which is the first capability in space. The -- I want to be clear there's no impediment -- as I sit here, there's no impediment to us signing that contract. We could sign it today. It's just got a few weeks of tidying-up negotiation to finish, but we're -- obviously, if I'm saying within 30 days, it's obvious to anyone with experience on $0.5 billion contracts that we must be getting pretty close. We've conducted international tenders months ago. We've down-selected. We've been in negotiation with key parties for some time. So I want to dispel immediately and preempt maybe 1 or 2 questions later, we can sign this contract without diluting any capital within your shareholder register, and there's no reason on why we couldn't sign that contract today. Once that contract is signed and we're committed to the constellation -- I should say SpaceLink is committed to the constellation, the MOUs go into a different process. Because once you've committed to put the satellites up, it is then a service which is coming. I think everyone who's in the commercial arena will know how that works. So the MOUs convert to contracts which have specific fee scales and so on. Obviously, we've had preliminary engagement with probably our 20 leading customers already about what those fee scales would look like because that feeds into the whole satellite pricing and value analysis that we'd do before we would sign contracts. So we've got -- we're just about at the point where we finished the first phase of SpaceLink, and we're pivoting into a really critical and interesting and exciting phase. And if you read through the other bullets that follow below the first bullet, or over the next 6 months, it will be a really very interesting 6-months period. We've made all of the key steps in market acceptance and commitment that we expected to get from here, including being selected for the ISS as -- on a contract basis to demonstrate ISS commercial communications capability. I've probably preempted a little this slide, but the unrisked sales pipeline of USD 1.2 billion there, that's a snapshot of a proportion of the MOU set that we've signed. And as I said, that moves now. Within 30 days, we'll pivot into contract negotiations with those because now we signed the contracts, so the satellites -- we have our launch dates. They'll all be locked in. They're locked in for early 2024. And again, those who follow the company closely will know that we'll meet all of our statutory requirements, licensing requirements under the very broad spectrum licenses that we hold today. Everything in this area is going exceptionally well. Moving quickly now for the strategic outlook and the focus areas. Lost some -- oh, here it is. It's coming up now. So we're in the last stages now of converting back the $120 million of contract asset back to cash. First 25% has been converted, and we're in the process now of converting the balance of that contract asset investment back to cash. What's happened in the last, I guess, 2 months since the 30th of June this year, we've now agreed a set of amendments to the delivery contract that's in question here that we're talking about. There's been an increase in scope, an increase in value and a reset of the delivery schedule to effectively erase from history the fact that on the customer side and on the EOS delivery side, there was some hiatus due to COVID-19 in 2020. So that full contract has been reset on a proper go-forward footing. It's slightly enhanced in scale. And under that domain, we will, within this quarter, be submitting the next tranches of invoices. So we're comfortable -- very comfortable with the position of that contract. It's basically funding. I think I've talked enough about that on the previous slide, but we -- we're on track in terms of schedule with SpaceLink. We're probably well ahead of where we expected to be in terms of business models, the costs and the return on investment that we can expect from Block 1 and constellations. Converting defense pipeline to order book, I'd say that the second half of 2020 and the, I guess, the first half of '21 were a bit disappointing in terms of the pipeline conversion because of various program delays that our customers have faced all around the world, but -- and including in Australia. I think most of our Australian programs are running about 6 months behind schedule and award. But most of the contracts that we have been discussing with customers for -- to close contracts on, most of those in dollar value, so most of that billion dollars of contract award is still expected to close in this calendar year. And the fourth thing, which is a key focus, which is, in some sense, stressing the resources of EOS and is still driving our expansion is this massive growth in demand. I mean it sounds like a ridiculous number, but we talk about the $100 billion of missile outlays. And by the way, EOS does not expect to be even a majority shareholder in terms of that market share of $100 billion over that 20 years. But we have a very, very strong value proposition for a significant slice of that market. And there are opportunities like that erupting. Whether it's in counter drones, whether it's in missiles, whether it's in our space asset defense programs, we continue to see rising demand and particularly rising demand in sectors which we are specialized. And I think I can talk to that, in fact, on the next slide. If we go quickly to the next slide. And just by way of example, on the 26th of August, so 4 days ago, the Commonwealth announced, through Minister for Defence Industry, it was surprised, and I'm quoting her director here, "They just announced 4 priority areas for the Commonwealth of Australia to focus government expenditure and defense spending and program priorities. And these are robotics, autonomous systems, artificial intelligence; precision-guided munitions and hypersonic weapons, et cetera; space; and information warfare and cyber capabilities." EOS is a very significant Australian entity in all those priority sectors. And in fact, we're dominant in some of them. We don't have to go into which ones we're particularly dominant in, but we've got exquisite technologies in all of those areas and some of them quite dominant technologies. So this is just a snapshot, very recent, taken from last week of the emphasis on the technologies that we're invested in. And I want to remind everyone who's listening here that we have well over $1 billion worth of IP outlays which we've aggregated under EOS which are all falling under these priority areas. And so most of that is yet unexploited. And so when you see EOS engaged in a missile enterprise, what I can tell you is that's based on our access to more advanced technology for the high-tech elements of that missile than most companies in most countries would have access to. And if you look at just the Australian defense capability investment, there's a significant compound annual growth rate of 8%. And our share of the individual -- of -- on a year-by-year basis, we expect our share to grow as well because the emphasis is changing from the old technology platforms to the new technology platforms. So there's an underlying 8% compound annual growth rate, but there's also a change -- a change in emphasis on more high-technology capability through space, remote weapons systems, command and control systems, counter-drone capabilities and so on, hypersonic weapons. So those are the areas that are growing fastest within that overall growth as well. Moving to the last slide just to discuss briefly the -- I guess, the outlook. This is what drives the outlook of EOS. We still see -- oops. We still see $3 billion of fully risked pipeline. So that's $3 billion worth of business we expect to be competitive for. And that's weighted against -- that's fully rated with probability of win from existing customers. This is not taking industry surveys from those companies that go out and do market surveys of what the global market might be for X, Y or Z. This is our own direct report from our customers that say we have $16.8 billion worth of business. Then we -- internally in EOS, we rate our chances against winning that $16.8 billion with probabilities based on our own capabilities and our own resources. And we believe about $3 billion of that is still, on probability-weighted basis, accruable to EOS. So that's still a significant growth pipeline in the next few years. We continue to commit to meet that growth. So we're obviously still funding growth, investing in growth areas. And SpaceLink is a perfect example. SpaceLink is not just a highly profitable business in its own right. It's basically is a fundamental enabler to 2 or 3 other space areas which are comparable in value to SpaceLink itself. And it's well known in the industry. The 200 companies that have signed MOUs with us generally refer to SpaceLink as essential space infrastructure, as important in space as roads are on the Earth's surface. And that infrastructure can be used by EOS. Other parts of EOS are deploying space capabilities that can use that communications infrastructure themselves and use it in ways that are nuanced to leverage the very best performance out of it. So we continue to invest quite strongly in these growth opportunities at the same time as obviously wanting to deliver profitability going forward and maintain guidance. I think I'm exactly on time to stop for questions there, Neil.

Thank you, Ben, for that presentation. [Operator Instructions] And we've got a question in Owen Humphries with Canaccord.

Can you guys hear me now? I think I've got it.

[ Got you ]. Okay. Just we're talking of a few questions, but obviously an exciting 6 months coming up for you guys. But just [ covering ] the second half just around the margin profile, obviously you're expecting a revenue pickup in the second half of, call it, $100 million in the first half to $140 million, call it, in the second half and the margins to go from neutral in the first half to 16% in the second half. Can you just talk me through the drivers of that uplift, both in revenue and the margins? It sounds like the Defence Systems, but could you just maybe divulge that if possible?

Yes. Most of -- do you hear me? Yes, most of that is in Defence Systems. And it's really -- it really comes down to scale. So the scale of operations is back to a profitable level. As I said in my commentary, notwithstanding we're working split shifts, we still have scale, which moves us. And we're very sensitive to volume above breakeven in the plants, as most companies are. And so as the scale moves up, profitability goes up significantly. So that would be the single largest factor, I think. Sorry, I can't hear you.

They -- I had to ask to be unmuted. Okay, good one. It makes sense. Now just talking about Titanis for a second. So it -- is it -- just with COVID lockdowns, just talk me through how many funded developments have been completed to date, how many are expected to be completed in the second half and basically just understand how much this COVID and Delta lockdowns will slow down the pipeline for that opportunity.

Okay. So the -- in reverse order, so the COVID lockdowns are hurting us a bit on Titanis in ways that you -- a bit unexpected, I guess, if you're not -- if you can't see the internal operations of the company. Our test facility is in Western New South Wales, not far from the South Australian border. The human resources that we use for Titanis are spread across Melbourne, Sydney, Canberra, [ Queensland ]. And so we've got staff in lockdown in 3 different places. And yes, we -- because some of the demonstrations are for allied governments, we do get lockdown relief by government directive for some of those processes but not all of them. It's really not that well coordinated yet. So we probably had to slip by a month all our test programs at the EOS test facility in the Outback. The funded demonstrations, I think you asked me what's the progress in terms of current contracts. So the contracts we -- the key contracts we have now are what I'll call leading contracts. So customers funding between -- I think it's between $7 million -- about $7 million and $15 million for demonstrations. And in some cases, the demonstration costs we're quoting are higher than that. These are expensive systems, of course. And sometimes you have to fly them a long way to meet the requirement. Those are also about a month behind schedule because the prequalification process through our own facilities has slowed. But having said that, there is no current prospect of any competitor surging into those markets and into the arms of those customers. So the Titanis program, yes, it's slipped, but no, its prospects haven't dimmed.

Okay. Ben, thanks for that question. So Sam Teeger from Citi says, "Can you provide some color around the final ratification process regarding the amendment to the major overseas contract? Does that happen at a committee meeting? And when is it scheduled for?"

So the -- we're dealing with one of the largest defense buyers on the planet. And as you'd expect, that -- and this is a $0.5 billion program. And in any country, even in Australia that -- well, Australia is a smaller defense buyer, I guess, immaterial in this country. So there is a process. And the process is run for some, I guess, some months. So the amendments include technical changes to the product going forward to bring it up to the current configuration, remembering that this contract was signed in 2018 and EOS is moving the technology fairly quickly. So the pause, if you like, caused by COVID shipment delays has allowed us to make upgrades for some customers. And this customer in particular wanted to be upgraded to the same standard for the second -- for ongoing deliveries. So there's been a process running some months for testing in that country of those improvements and changes. There's been a whole detailed set of alignments of our delivery schedule along with the delivery schedules of the other contract that's independent of us who have to deliver the same capability. And again, in parallel with that, there's the fielding schedule with the COVID restraints on the customer's own forces. And so all of that's being completed. And all of the -- from end user through contract managers and all legal authorities in-country have signed off on it. So it's -- literally in Australia, we'd say it's moved up to the minister's desk, and it's scheduled for ratification this month. Sorry, early next month. Early next month.

Yes, early September, correct. And what's the probability the next batch of cash collection falls in September versus Q4 -- Q3 versus Q4 for cash collection?

I guess 50-50. We -- now that the contract amendments are agreed, we're in the process right now of amending all our invoices for slightly larger value and to be able to submit those under the new contract. And the expectation is they will be submitted in September. Because it's a letter of credit process, that normally would obligate the, I guess, 30 to 60 days delay in country for -- if we were not operating under an LC. So again, our letter of credit is confirmed by an Australian bank, so we actually get paid in Australia on submission documents. So look, that's a hard question. But let's say 50-50 will get -- the invoices will definitely go in September, whether we -- whether the process through the bank will be fast enough to fall within the quarter, I'm not sure. We'd be highly confident we'll be reporting it in our 4C even if it was a post 30 September event.

Okay. And the adjustment to profit was a $3 million reduction, how much of that relates to inefficiencies at the ACT plant versus other locations?

Almost all of it.

Okay. I have a question from [ Ron Miminorf ]. From the 2020 half yearly reports, it said -- EOS said that you were shortly sitting over $250 million of potential space sensor procurements globally. Where are we with this contract, locked or deferred?

Space sensor contracts, okay, that would be finalized programs. So space sensors, we have a very, very short list of customers we're allowed to sell to. Those programs -- the key program there was deferred for 12 months. It's now coming back on -- well, maybe more like 15 months. We -- the discussion with the customer is that's -- that was not awarded to any one. Of course, if it was deferred. That contract is being brought forward in Q4 of this year to be progressed. And it's really a matter of -- look, it's an Australian program. That program, if you look at what's happening with Australian defense expenditure, it's escalating really, really quickly. There have been some controversial programs from Australian defense, which have made defense more cautious and more prudent and a bit more circumspect about how quickly they move forward on programs of that scale. Of course, we're not talking about a $30 billion submarine program here, but the -- I guess, this -- the additional diligence required for the processes has delayed a lot of programs, and this is one on them.

Okay. Thank you, Ben. A question from [ Andrew Nestor ] and a similar question from [ Shawn Ratley ] about SpaceLink. Can we get an update on the likely equity share for EOS in SpaceLink? Do you think that you'll get 50% with no capital funding required at the -- from ASX shareholders? Is that still the case?

That is still the case. As I sit here now, that's still the case. One of the things that the company will have to come in terms with over the next 30 days is that current indications we have from SpaceLink is its value is being appreciated more and more each month. We've just come out of a face-to-face, which is quite a rare face-to-face customer engagements in Colorado at a very special space meeting for the space defense community in the last 2 weeks. And it's quite clear that the market demand and the market appreciation for the offering of the services and the capability for SpaceLink is growing very quickly. And therefore, the implied value of the asset, the SpaceLink asset to EOS, is growing quite quickly. And there's no question at the moment that we can get it funded. We now have, I think, almost, I don't want speak till I see it, but once we have the contract signed and on foot, I think we will have the luxury of being able to choose what we do in the EOS shareholders' best interest. I mean there are a whole range of options, including, as we've said in this document I'd put out today, we've got quite advanced discussions with debt facilities available. Yes, we're engaged with the investment community in EOS about providing all the funds directly in the SpaceLink one way or another. And right now, the team here at EOS is just assessing which is going to be the most to deliver the biggest bang for the buck for the ASX shareholders.

And then you said that $800 million capital requirement is SpaceLink and, let's say, 40% debt, so does that mean that SpaceLink is raising $480 million in equity? That's from [ Tony Pritchard ].

In a nutshell, yes. But whether we need to do that, I mean all in one go or not, well, I can tell you, we don't have to do it all in one go. And the best example I'll give you is that if we only needed $100 million to get moving, then in 6 months from now, we will have enough customers signed up to deliver almost a breakeven position for SpaceLink, and therefore, it will be risk-free. Well there's no such thing as risk-free, I guess, but it will be heavily derisked and its valuation will go up. So raising equity capital in tranches and raising the minimum equity that's prudent to do is obviously what we're going to do.

Great. Thank you. So [ Shawn Ratley ] again, does Phase 2 of the Middle East contract have the same payment terms that have been problematic on Phase 1?