Austal Limited

Thank you for standing by and welcome to the Oslo Limited FY26 half year results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question press the star 1 again. For operator assistance throughout the call please press star 0 and finally I would like to advise all participants that this call is being recorded. I'd now like to welcome Paddy Gregg, Chief Executive Officer to begin the conference. Paddy, over to you.

Good morning, everybody, and welcome to our 2026 Happier Results Call. I'm Paddy Gregg, the CEO, and I'm joined by our CFO, Christian Johnson. We will be presenting in the same format as usual with me giving business overview and context while Christian focuses on the financial details. And as always, we plan to present for no more than 30 minutes till our time for questions. I think it's been a very exciting half for the company. You know, we've seen the strategic shipbuilding agreement provide the backbone for significant contract awards in Australia, with the signing of the Landing Craft Medium contract before Christmas, and then last week, the signing of the Landing Craft Heavy contract. These two contracts total about $5 billion and take the order book to a record $17.7 billion. That translates to about 76 ships in build or scheduled in our shipyards, providing certainty of jobs and revenue for a decade. You'll see revenue and employee numbers are growing in line with the order book as programs come online, and that's translating into earnings too. We announced a revision to guidance a couple of weeks ago that was caused by a forecasting error. Very disappointing, but we are still delivering a very strong financial performance this year despite this. The outlook's fantastic, both in the United States and in Australasia. So I'll talk through where the business is today. Christian will take you through the details of the financials, and I'll finish by updating you on where I see the strategic outlook for the company. So for those of you that are following along in the pack, Austal, at a glance, a couple of slides that cover the key facts for anyone who doesn't know Austal. So we're operating five shipyards in four countries with eight service centers in four countries. Seventy-six ships under construction are scheduled. 64 vessels under sustainment contracts. And importantly, we continue to add to the order book, and it stands at a record high. We've received orders for some 22 ships this year and delivered two. Employee headcount globally is over 4,600 and growing daily, and recruiting people to deliver that record order book. And the vast majority of our work is in the defense sector these days, and defense will continue to grow relative to the commercial sector. But interestingly, we'll start to see more balance between the U.S. and the Australian operations. So if I talk about the financial highlights, and as I said, Christine will go into the details. So jumping straight in, we're building sustainable growth seen through the order book that was predominantly in the U.S. and now followed in Australia with the signing of those land and craft medium and heavy contracts. We also signed two more evolved Cape class vessels before Christmas. And while that used to be big news, I think that was lost due to the size and scale of the landing craft announcement. And for me, this is all about us creating long-term value for shareholders. When I look at the results, I see lots of greens across the key financial measures, demonstrating strong business performance with year-on-year improvement and foundation laid for growth. Encouraging EBIT slightly skewed to the first half. Revenue throwing in line the forecast as new programs move from design phases into construction with a big increase compared to the previous corresponding period. You know, it's really encouraging as the legacy programs start to tell off. And, of course, we saw the delivery of the last LCS last year. And the order book at $17.7 billion secures revenue for years. It's grown in Australia following the strategic shipbuilding agreement and the landing craft medium and heavy. There's growth in submarine module production. The commercial yards have got a really sound order book and future potential for growth, particularly in the low-emission space. And indeed, in Australia, we expect to start general purpose frigate contract discussions this financial year with the Commonwealth of Australia. Both the submarine module manufacturing facility, MMF3, and the final assembly sheds for the large steel ships, FA2, as we call them, are fully funded and in construction and ready to support future growth. I'll put a slide in the pack where you can see the progress on MMF3. And stage one opening is due this financial year, bringing that project online. Of course, cash was projected to be lower than full year due to the capital investment in facilities and increase in capacity and capability. It was a little bit lower than we expected due to a couple of late milestone payments in December. As announced, we settled the request for equitable adjustment on tax. And for me, that really demonstrates the strength of relationship we have with a customer in the U.S. Interestingly, we're becoming victims of our own success, and we have become the lead yard for that program. And we're in discussions with the customer about the implications of that. And Christian will talk about that a bit more in the financial section. And so, you know, looking at the order book slides, we include programs and revenues for those of you who still like to try and build your own financial model. It doesn't include the commercial vessels, but with relatively fewer of these and our ASX announcements, I'm sure you have the information you need to factor those into your forecasting models. For me, it's really pleasing to see those commercial orders have returned following the challenges we saw during COVID and really excited about seeing the Philippines Yard ramping up and testing those low emission technologies. ready to be deployed in the defence world as and when necessary. So I'll hand over to Christian now and he'll talk you through some of the financial highlights.

Thank you, Paddy. It's turning to slide eight. It's my pleasure to present Hostos FI26 first year first half performance. Before I get into the details, the key message is that we've had double digit growth across all key financial performance metrics, revenue, earnings and impact. which represents the results of the focused efforts of our employees across the group to construct and deliver ships, submarine modules, sustain services, and additive manufacturing to our growing customer base. The balance sheet is stable and we have a robust cash balance to support the significant capital investment we have underway as we complete two key infrastructure growth projects in the USA, which have combined spend of more than a billion dollars. The order book is an all-time high of $17.7 billion, which underpins continued growth over many years. Group revenue increased by 34.4%, which was a solid growth across the group, and pleasingly all segments experienced growth, which is an exceptional outcome. USA shipbuilding increased 29%. based on increased revenue from the OPC, TATS, and submarine contracts, which more than offset the completion of the LCS and EPF programs. It should be noted that the company's auditors had a qualification in their opinion relating specifically to the judgment on the TATS and AFDM programs. Whilst the company is in ongoing discussions with its sole customer in the US and is seeking some contractual relief, The company's auditors, Deloitte, included a qualification in their review opinion to reflect the position that, whilst the company considers it has sufficient evidence to support the judgments made in respect of the contractual relief for these programmes, the auditors have concluded that they need additional evidence above what has been provided and so have qualified on this particular judgment on these particular programmes. Further details appear in the notes to the half-year report. USA support revenue increased by 11%, primarily due to additional contribution from the growing additive manufacturing business, which is performing strongly. It was particularly pleasing that Australasia shipbuilding continues its growth with an increase of 83%, which has two key drivers being the appointment of Austal as the Commonwealth of Australia's softened shipbuilder and the work performed on the first two key contracts under this umbrella being the landing craft medium and landing craft heavy contracts for the Australian Army. In addition, the work completed from our Asian shipyards was a strong contributor to this performance. while Australasia's support business improved by 27% due to the increase in servicing work driven by an expansion of the fleet requiring sustainment services. It is pleasing to see ships built by Austal continue to be serviced by Austal across our regional service centres. Moving to EBIT, earnings growth of 41% across the group was extremely pleasing with EBIT of 60 million for the half year. And whilst there are mixed results across key segments, the geographical diversification of the group provides an ability to manage these variances. The standout earnings growth was Australasia shipbuilding at over 600%, which benefited from the work performed on the two landing craft programmes and the commercial shipbuilding activities progressed by our Philippine and Vietnamese yards. Australia's support business had an additional throughput from work from patrol boats and sustainment contracts, and posting earnings growth over 400%. There was a contraction in earnings from U.S. shipbuilding, primarily driven by the margin compression as a result of the wind down of the LCS and EMF programs, the earlier stages of the wind up of the OPC and Tegos programs, and from two onerous contracts that continued to dampen margins. The U.S. support business results were steady in the six months. We continue to see strong contributions from the Advanced Manufacturing Centre of Excellence facility in Danville. Turning to the segment breakdown, we are now at 96% defence weighted across the group, and with the growth in Australasia business, the geographical contributions are nearing a 70-30 split between USA and Australasia. On a segment basis, the shipbuilding segment continues to report tight margins as a result of two owner's contracts we have in the US. However, it should be noted that this segment is profitable, albeit at a level below our expectations. The support segment is a key earnings contributor at an EBIT margin of 17.9% across the group, contributing the majority of earnings of $41.1 million for the half. The group's balance sheet was stable with net assets at over $1.3 billion. The group has a significant cash balance of $371.6 million at the close of 2025, and whilst it reduced in the half, this reflects a significant capital investment underway in the U.S. on growth infrastructure. The trade receivable balance was higher by 43% at $211 million, reflecting the growth in production in the six-month period. Overall cash position decreased by $212 million, with $131 million of this comprising the capital expenditure on the ongoing MMF3 and FA2 projects. The cash flow from operations was negative $63 million, which reflected the two owners' contracts we have in the U.S. and the late receipt of customer payments. As I highlighted earlier, the trade stables is $211 million across the group, and the collection of this could have had significantly impacted this position. This will be a key focus for management in the second half. I will now hand back to Paddy. Thanks, Christian.

So focus on strategic outlook. You know, in summary, our key growth pillars are increasing defence expenditure, and this is going to continue to drive positive momentum in the medium term. We have revenue and earnings growth with the underlying business performing well. And as Christian pointed out, it is especially pleasing to see the Australia business contributing so significantly on the back of the strategic shipbuilding agreement and the associating contracts. And all of that work starting to come online. And then also the commercial business as well. No drag from that business and some very exciting projects that we're building there. And the order book of 17.7 billion has grown significantly to the record high that we have today. And as I said earlier, that gives us certainty of work for the next decade, a position we've just never been in before as a company. And the greater diversity in the contracts will lower the overall risk profile of the business. We're making significant CapEx investments, and those projects are performing very well. That will enable further growth for the company and increase our capacity and capability. We've got additional opportunities to grow on top of what we're talking about today, and the AUKUS agreement, the submarine modules, the technology business, and generally the world becoming a less safe place is a good time to be in defence shipbuilding. We're capitalizing on those defense spend trends, both in the United States and in Australia. And I think that trend will continue. So overall, the business is performing well and executing the strategy we set out five years ago. So with that, thank you. And we're happy to open up for questions.

Thank you, Paddy. And as mentioned, we will now begin the Q&A session. A reminder, if you are listening by phone and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, press the star one again. When called upon to ask your questions, please use your device handset and ensure you are not on mute. And in the interest of time and fairness to all, we do request to please limit to one question and one follow-up today. Again, that is star one to raise your hand. And your first question comes from the line of Pia Donovan of Argonaut. Please go ahead.

I just have one question regarding the margins. Obviously, the margins are slightly lower on a half-on-half basis. Just wondering, do you expect the current margins to be going forward into the second half or will there be an improvement back to those margins levels of last half?

Good question. It was the US shipbuilding business that was slightly lower than we wanted it to be for reasons that we've talked about. But as those programs come along and we get stability in that business, yeah, I absolutely see that returning. The US has been a massive contributor to our earnings for the last few years, and they will absolutely get back into their stride. And it's been fantastic just seeing how well the Australian business has done and the new contracts coming online I think are what's very exciting about earnings growth going forward.

Okay, yes, great. So yeah, you said about the Australian business growing. Do you expect that trend to continue and the US to also continue or remain relatively flat there?

No, I expect them to continue. You know, as these programs really come online and the US gets back into this drive, you know, we'll be up into, you know, the 7 to 10 sort of EBIT range that we've often talked about that is pretty common in defence shipbuilding.

Okay. Thanks, guys.

And your next question comes from the line of Sam Teager of Citi. Your line is open.

Hi, Patty. Hi, Christian. Well done in securing the heavy landing craft. The pipeline now looks very good. I want to ask about cash. So you called out $105 million of milestone payments that didn't come through in the first half. Have they come through now?

Yeah. Yeah, they've come through now. But it wasn't obviously the balance that there's ever... Well, that's why it's about spike in trade receivables. So, you know, that would have had a different earnings profile from the operating segments if they had come through. So, yeah, they've come through.

Okay. And in that cash flow number for the first half, is there tax REA money in there, or does that come in the second half?

Well, tax REA is across the program, so there will be tax REA cash in the first half. of the whole three shifts under that program.

Okay. And then, what are you budgeting for cash at the end of the financial year? And maybe just as part of that, is MMF3 and FA2, are those construction projects, like, how are they proceeding with budget?

So, first question, we don't provide cash flow guidance. Second question, they're both in line with budget. is ahead of schedule. So we had always said that that would open at the beginning of next financial year. Phase one is targeted to be open in the fourth quarter of this financial year. So if that comes to fruition, what we expect, then that's a phenomenal effort by the team in the US to get that large growth infrastructure up and running. If we can then drive some earnings through that for the fourth quarter, that's going to have a boost. to the business, so that's really pleasing. But both are on schedule and time, and both are in cash flow and their budget cash flow around the cost of them. So we have significant cash, and, you know, you can see through our untapped debt lines, we've got, you know, a huge amount of debt capacity if we were to meet that for those programs going forward.

Okay, great. Thank you.

And before we move on to the next question, a quick reminder, if you would like to join the queue to please press star 1 now. And your next question comes from the line of Mitchell Sonigan of Macquarie. Please go ahead.

Good morning, Paley and Christian. Thanks for taking the questions. Can you hear me all right? Yes, loud and clear. Yep. Yep. Thanks, guys. And sorry, Paley, I might have missed some of the detail. I've been jumping around a few different calls this morning. Just on the landing craft programs, do you mind just giving a little bit more colour just in terms of timing and how that might ramp, particularly in the heavy? I guess, yeah, with the visibility that you have now, over what timeframe would you expect that to get to more of a, I guess, a steadier, mature run rate in production?

Yeah, good question. So coincidentally, both the landing craft medium and heavy programs will cut metal towards the back end of this calendar year. you know, last quarter of this year. And we are working through the landing craft medium designed and the landing craft heavy design and came slightly more mature as it's an existing vessel that is currently in build. Daman have built one of those before. Yeah, so both of them should come online back end of this year and ramp up to steady state production over about 18 months. And then, you know, as we delivered the Guardian class program and the Cape class program, we really want to establish a drumbeat and build those programs as efficiently as possible.

Yeah, thank you. And I know you just made a comment before about the 79% sort of target shipbuilding margin range over here in the US. Just in terms of the landing craft programs, I know you've had some high-level details you put out with the announcements about the strategic shipbuilding agreement, etc. But yeah, is there just anything at this point in time, high-level, that can divide us just in terms of how we should be thinking about margins on these contracts over time? Is it in that specific range that you target?

Yeah, absolutely. Same sort of range and really driven by government procurement rules and what they find acceptable based on the risk we take in the contracts. So, yeah, both the US and Australia targeting to get into that 7%, 8%, 9% range.

Yep. And just one quick one for Christian. Obviously, you had the earnings guidance update back on the 12th of Feb just with that incentive payment. And I'm not sure if you covered this during the general presentations before, Christian, but, yeah, do you mind just giving us a little bit more colour, I guess, on how that came about and have they been checked to make sure there's no other particular issues like that on other programs? Thanks, guys.

Yeah, thanks, Mitch. That was an inadvertent error. We were going through the half-year closed process for the auditors, and in the US, with one particular program, and it is a no risk contract position. So it's a bit, firstly, it's a little bit different from the run of the mill programs that we have. And it was just going through that closing period and a review of the auditors that, They had inadvertently double counted because of the requirements to then to book the revenue for the earned revenue to the six months to December, but also the forecasted revenue over the programme because it's on risk. We have to consider the revenue for the balance of the full programme. And it was just an inadvertent error. We're putting in additional internal control checks, programme checks and revenue across each of those programmes in the US to ensure that this doesn't happen again.

And you have a follow-up question from Sam Teager at Citi. Your line is open.

Thank you. Just on the $6.7 million of sub-module revenue, what EBIT margin would this be flowing throughout and whatever it is, would that be a good guide as to what we should expect from this going forward?

It's a bit of nuance what the answer is. That 6.7 is related to the MMS3 program that we have. So it's a bit unusual. We have a contract to build a building. And so our delivery mechanism is the construction of that building. We previously put out a lot of guidance around what we expect the earnings and revenue profile for that. So in totality, that's a $450 million contract that will flow through the income statement. There's zero cost related to it, so anything that's revenue recognised through that particular contract will then drop directly to earnings. What's separate to that, though, and we don't separately disclose, is the earnings that we have through construction of submarine modules in the US. That sits in as part of the segment around US shipbuilding, so we don't split programme by programme out, but that's a a very profitable part of the business right now and somewhat offset some of the margin compression we have on the onerous contracts that we have in the US.

Okay, thanks. And this does conclude our Q&A session for today, and I'd like to turn the call back over to Paddy for closing remarks.

And thanks, everybody, for joining us this morning and asking the questions. As always, we are transparent and happy to answer any questions you've got. So thanks for those of you that were able to get on the call today.

This does conclude today's conference call. Thank you all for joining us.

You may now disconnect.