Austal Limited

Thank you for standing by and welcome to Austel's FY2026 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 Q&A time, simply press star followed by the number one on your telephone keypad. And to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. 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 presentation. Paddy, over to you.

Good morning, everybody, and welcome to the 2026 Full Year Results Poll. I'm Paddy Gregg, the CEO at Austal, and I'm joined by our CFO, Christian Johnson. And we'll be presenting the same format as usual. I'll give the business overview and context while Christian focuses on the financial details, and I'll finish with the outlook, as I say. And as always, We plan to present for no more than 30 minutes, but I don't have any time for questions. And so FY26 has been a year of significant strategic achievements for Austal, both in Australia and the US. In Australia, the execution of the Strategic Shipbuilding Agreement has delivered a record-breaking Australasian order book with $5-plus billion, 12-year build program for the landing craft medium and landing craft heavy. Plus, the general purpose for it is very real, valuable, and compelling future opportunity. Our Australian operations have delivered a record result with EBIT more than doubling to $85 million, demonstrating the strength of our defense and commercial programs. As we announced two weeks ago, the group EBIT result was shaped by an accounting adjustment at Austal USA. and while our request for accelerated contractual relief was not agreed by the US Department of War at this stage, notwithstanding prior constructive engagement, we have proactively commenced the longer formal process to recover value on these contracts. And our position is supported by documented factual and contractual records that give us confidence in that outcome. change of approach to ensure maximum transparency and to actively facilitate Hanwha's due diligence on Austal USA. The receipt of an indicative non-branding and conditional proposal from Hanwha Defence USA to acquire Austal USA was a major development this year. Austal is the time that it merits further evaluation and we've approved Hanwha to undertake some due diligence to strengthen the certainty of a proposal. And we're really pleased to see the revenue and employee numbers in both businesses are growing in line with the audit book as programs come online. And the outlook in Australasia is truly exciting. The combination of a profitable and high-growth Australasia and potential proceeds from the sale of Austral USA and, you know, will be carefully assessed as to whether that outcome provides the best value for shareholders.

It's certainly looking very interesting.

For those of you who are looking at the presentation that we've uploaded, also that advice. So, we've got a couple slides covering key facts to summary overview of the business for anyone who doesn't know Austin. Revenue has grown beyond 2 billion for only the second time in the company's history, a milestone that reflects the accelerating momentum across our operations. As many of you know, we operate hardship yards in four countries by eight service centers, giving us the opportunity to design, build, and service ships and submarine modules. We also operate the United States Navy's Additive Manufacturing Center of Excellence in Bangor. What does that order book look like in ships? So we have about 75 ships under construction with with approximately 64 under sustainment contracts. We can build in steel. We can build in aluminum. We can build ships. We can build submarine modules for both defense and commercial customers. and our major customers include the United States Navy, the United States Coast Guard, Royal Australian Navy, Australian Border Force, and many commercial passenger ferry operators around the world. Importantly, we continue to build the order book in Australia, which now stands at a record high, a testament to the confidence our government partners place in our schools' capabilities. We've ordered for some 42 ships in Australia and delivered to pair six this year. Employee headcount globally is growing to make sure we service these contracts like the submodels in the U.S. with the opening of the manufacturing facility and then the strategic shipbuilding agreement in Australia for the land and crop medium and land and crop heavy contracts. The vast majority of our work is in the defense sector, and that will continue to grow relative to commercial. We'll also see more balance between the US and Australian operations as the Australian shipbuilding revenue will more than double over the next five years. If we look at the FY26 overview, turning to the financial highlights, I'm pleased to report these are presented with no qualifications from our auditors that we had at half year. I talked about the record revenue of over $2 billion is an 11% increase year-on-year. And as I said, it's just the second time that we've surpassed that $2 billion mark. really driven by a successful wrap-up in shipbuilding programs, both in the US and Australasia, including meaningful progress on new defense contracts awarded under the Strategic Shipbuilding Agreement here in Australia. Everett was finalized at a loss of $125 million as part of HostelUSA's year-end closing adjustments, resolving the half-year audit qualification in the process, and I previously advised The FY26 result was largely driven by a one-time accounting adjustment from the U.S. programs relating to contracts like TAT, TAYA, DM, and LCU. The adjustment reflects a conservative and prudent accounting approach to contractual claims, and also is actively advancing its formal recovery process with the U.S. Department of War. This EBIT position was partly counterbalanced by a record EBIT of $85 million in Australasia. up 49% from the prior year. It's important to touch on that figure. Previously, our record EBIT in Australasia was 36 million set last year. So this year, the EBIT is 137% higher than the prior year, on the part of the extraordinary growth trajectory ahead for the Australian business. We had an outstanding year for orders in Australia. The 18 landing craft medium vessels at $1 billion, the eight landing craft heavy vessels at $4 billion, We also signed four evolved cases this year. The signing of multiple cases would be big news, and I think it's just got lost in size and scale of the landing craft, but I certainly see the aluminium program continuing for Australian Border Force. I was also in Japan a few weeks ago with the Commonwealth, commenced the contract discussions with Mitsubishi Heavy Industries on the GAN, the General Practice Credit for Australia, and as you know, that will see the first three vessels built in Japan with eight here in Henderson. And lastly, it's fantastic to host the Deputy Prime Minister following his announcement on the defence precinct and see that coming to life in line with the requirements for Land and Craft Heavy and then moving on into Megami. This is all about creating long-term value for shareholders. The order book is 16 and a half billion secure revenue for years to come, strong significantly in Australia following the signing of the strategic shipbuilding agreement from the board of Land and Craft Medium and Land and Craft Heavy. The self-model production in the U.S. is expanding with MMF3 coming online, and the commercial U.S. has got a solid order book and future potential for growth, particularly in the low-emission space. FAST is always projected to be lower than a half-year due to the value-creating capital investments to increase capability and capacity for future growth. Both the summary and module manufacturing facility in the final assembly sets for large steel ships fully funded and in construction to support future growth. You can see a progress photo of MMF3 in the investor pack and achieving stage one opening in May ahead of schedule was a really fantastic achievement for our team in the U.S. We started using this facility almost immediately with modules being moved in and starting construction in July. And the full facility should be completed by the end of the calendar year and is going to support over 1,000 jobs. and we've already got about 500 people trained and working on some modules today. We put a new slide in the pack this year around the Australasia business, really based on the significant growth that we've seen in the signing of the strategic shipbuilding agreement. We really wanted to highlight the capabilities we have, how strong the performance improvement over recent years has been. And there's a very exciting growth trajectory based on orders that we have placed and the EBIT that's going to come with it. So I really look at years of revenue and EBIT growth coming on those contracts, which is incredibly exciting for the Australian business. With that, I'll hand over to Christian, and he will talk a little bit more in detail about the financial highlights of this year's results.

Thank you, Paddy. It's my pleasure to present Austal's FY26 performance highlights. As Paddy mentioned, FY26 has been a significant year for the group, marked by strong revenue growth, substantial strategic progress, and outstanding performance across our Australasian operations. Before I move into the details, the key message is that Austal delivered double-digit revenue growth of 11.3%, with revenue exceeding $2 billion. While ongoing discussions with our key US customers regarding contract alignment and recovery of additional scope have impacted reporting agreements for the PAs, the underlying operational performance of our business, particularly within Australasia, has been exceptionally strong. Delivery performance remains at the core of Austin's success and reflects the dedication and expertise of our employees across the group. Their commitment enables the delivery of ships, submarine modules, sustainment activities, and additive manufacturing solutions to an expanding customer base around the world. Our balance sheet remains robust and continues to support significant investment in US shipbuilding infrastructure. Importantly, we have maintained a strong cash position, providing the financial flexibility to execute on a substantial backlog and capture future growth opportunities. Turning to slide eight. Group revenue increased 11.3% over $2 billion, reflecting strong growth across the majority of our business segments and continued execution of our strategic priorities. U.S. shipbuilding revenue increased 3.9%, driven by higher activity on the OPC, TATS, and submarine programs, more than offsetting the completion of the LCF and EPF programs. US support revenue decreased 16.5%, reflecting changes in the operational deployment profile of the LCS fleet. Despite the lower revenue contribution, the business remained focused on supporting customer requirements and maintaining strong operational performance. Australasia Shipbuilding delivered another outstanding year, with revenue increasing almost 80%. This goal was driven by Australia's appointment as Western Australia's strategic sovereign shipbuilder, progress on the landing craft medium and landing craft heavy programs, completion of the Guardian class program, ongoing work on the Cape program, and strong contributions from our shipbuilding operations in the Philippines and Vietnam. Australasia's support continued its positive growth trajectory, increasing revenue by 7.3%, supported BANX, banning sustained footprint, and increased servicing requirements across a growing fleet space. Turning to EBIT performance, FY26 reflects both the strength of our operating businesses and the impact of unresolved contract matters within the U.S. shipbuilding segment. The standard performance with our Australasian operations with Australasia shipbuilding increasing EBIT by more than 130% and Australasia supports increasing EBIT by over 140% year on year. Australasia shipbuilding benefited from strong execution on the landing craft programs and increased activity across commercial shipbuilding operations in the Philippines and Vietnam. Australasia support delivered substantial earnings growth through improved operational efficiency, disciplined project execution, and increased sustainability across both patrol boat and commercial fleet contracts. The year-on-year performance across Australasia was particularly encouraging, with EBIT margins improving by 288 basis points in shipbuilding to 12.4% and 818 basis points in support to 14.7%. demonstrating both scale benefits and strong operational execution. In U.S. shipbuilding, revenue growth continued during the year. However, the delayed finalizing contract restructuring arrangements impacted reported earnings for the segment. For U.S. support, business delivered another solid result, generating EBIT of 22.2 million and maintaining a healthy margin of 9.2%. Looking at the geographical mix of the group, the continued growth of Australasia is evident, with the region now contributing 32% of group revenue, highlighting the increasing diversification and strength of the overall business. The group's balance sheet reflects the strategic investment made to support long-term growth, particularly within our US operations. During the year, property plant equipment increased by approximately $270 million. as we expanded our shipbuilding infrastructure and capability. Importantly, Austal finished the year with a strong balance, cash balance of 312 million, providing significant liquidity and positioning the group to continue executing its capital investment program while supporting future operational growth. FY26 represented a significant year of investment with more than 320 million deployed into U.S. infrastructure projects, that will underpin future capacity and capability. Pleasingly, the group generated positive operating cash flow of $62 million, demonstrating the underlying cash-generating strength of the business. I'll now hand back to Paddy.

Thanks, Christian. And so, a strategic argument from me before we open for questions. to return the business to profitability. We've got some contractual positions we need to work through in the US, but as Christian's outlined, all other areas in the United States are performing really well, and both the US and Australia are supported by a really robust order book and outlook. And the Australian business has never been better positioned. Long-term order books Landmark Strategic Agreement that will provide decades of stability, growth, and value creation. Increasing defense expenditure in Oslo's farming markets being driven by heightened global security demand is generating powerful and sustained tailwind for Oslo's core defense client base. And Oslo is really well positioned to capitalize on these dynamics through its diversified Program Base, strong order book, and ongoing investment in capability. The impressive order book at $16.5 billion continues to grow with the signing of the Strategic Shipbuilding Agreement and subsequent Land and Craft Medium and Land and Craft Heavy contracts. This delivers greater contract diversity and deepening the operational base of our business. When I think about revenue and earnings, the Australasia business performance is ahead of expectations with continued growth expected into the medium and long-term outlook, based on that order book for government contracts. Our USA focus is absolutely on return to profitability and shipbuilding contracts, and we're actively seeking to resolve those contractual matters. But it's previously announced the OSL Board and its advisors have carefully assessed the HANWR conditional non-binding indicative proposal to acquire OSL USA and have determined that it absolutely merits very good evaluation. And we've approved HANWR to undertake due diligence, which is very proactively happening at the minute as we work with them. And we're making significant and targeted capital investment in facilities to drive growth in both the US and Australia. including contractually covered investment in the common user facility here in Henderson for Norman Craft Heading, alongside government investment in the broader Henderson defense precinct. And as I said, fantastic to have the deputy prime minister here last week making those announcements. So, on our way forward, we possess the order book, the capability and momentum to significantly grow revenue on earnings for years to come. Another very exciting time for us all. So thank you for listening and we will now open up for questions.

Thank you, Paddy. And as mentioned, we will now begin the Q&A session. For those listening by phone and would like to ask a question, please press star followed by one on your telephone keypad to raise your hand and join the queue. And to withdraw your question, simply press one again. When called upon, please use your handset, ensure your line is unmuted, and be ready to ask your questions. And today, we kindly ask that you limit your questions to one and one follow-up per person. Again, that is star one to raise your hand and join the queue. And your first question is from the line of Sam Teager at City. Please go ahead.

Hi, Paddy. Hi, Christian. Good morning.

Morning, Sam. Morning.

Can you please walk us through the timing of Hanwha's approach and the FY26 onerous contract provisions? Specifically, when was Hanwha first made aware of the issues that led to the write-downs and were these matters reflected in the information available to Hanwha when it submitted its initial proposal? Thank you.

Thanks, Sam. Hanwha have been around for quite a long time. We've had discussions with them probably some years ago that were public around an overall company transaction. But getting to your point, you know, we have been working very closely with them and, you know, we have shared information with them and part of that announcement about us cleansing the market on all contractual positions and their intentions was just trying to be as transparent as possible. So, yeah, in short, I'm well aware of all our contractual positions and have been taking through those in the US.

Right, but just checking they were across everything prior to them putting in the bid.

Correct.

Thank you.

And your next question comes from the line of Mitch Sonegan of Macquarie. Please go ahead.

Good morning, Pat and Christian. Thanks for taking the questions. I did make this over in the US first. Just on the owner's contracts, I think everyone's pretty aware of the issues across the TAS program and the REA process that went through there. But can I just provide a little bit more colour on the OPC? Maybe any discussions that you've been having with the Coast Guard and maybe comparison versus involvement with the Department of War?

Just any colour you can give on that program and how you see that being rectified would be great. Thank you.

Yeah, sure. So Coast Guard is a slightly different position. You know, they've had some challenges with previous shipyards and, you know, they've been in contract for OPCs for many years and not taking delivery of any. So our conversations and negotiations with Coast Guard are really around putting certainty into that program and how do we accelerate the delivery of OPC vessels. maybe not an REA protest, but maybe a sort of contract restructure as we work with them to put some certainty into that program and try and accelerate the delivery of vessels for them.

Yeah, thank you.

And just looking at the oscillation segment, obviously if a bid formalizes, then that's clearly going to be the key focus of growth. Just in terms of the landing craft heavy, it's obviously the most material part of the order book. Can you talk to maybe the risk profile of that program? Is it any different given that the design's actually already a proven design from Damon?

Just trying to understand how that plays out and how investors should think about the risk profile of that going forward. Thanks, guys.

Thanks, Mitch. Yeah, great question. You know, I think there's less risk rather than more risk in that program because it is an existing design and the vessel has been built. And... We've worked very closely with Diamond around support for that design, as-built drawings, jigs and fixtures, things that we would normally have to go and develop have already been developed. And as part of that contract, they're happy to support us with people as well. So people who have actually been through the design, the build, the commissioning, at the relevant points in that program, we will be able to second them into hospital. So, Diamond, great company. We've worked with them a lot over the years, built some of their designs. There's a really good relationship there and I see reduced risk based on the fact it's a complete design and we've got a great working relationship with them.

And your next question comes from the line of David Frazier of MST. Please go ahead.

Morning, James. Can you hear me okay?

Yeah, starting soon, David.

Morning, Kelly. Morning, Christian. Look, just something we've touched on anyway a couple of times. Your gut feel on, I guess, how certain this deal will proceed?

Yeah, good question. I'll have to speculate, but let me talk you through what I know. So I haven't been interested for a very long time and I'm not on the way. and they are absolutely in due diligence and taking things very seriously. They have assembled an A team with relevant consultants from each area. So, you know, they're throwing resources at this and that costs money. It feels like there is support in the US from senior people in the Department of War based you know, what we're reading and the fact that this is public. They're a very credible shipbuilder. You know, so they're very different to our private equity approach. They know exactly what they're looking at. And, you know, they see our very modern facilities with a big order book and perhaps some of the efficiencies they can bring as a win for also shareholders or a win for war fighters in the US or a win for the United States. and we take them very seriously as we've opened up for due diligence and we've all gone public on this. So there's great momentum behind it and a desire to do the right deal for everybody.

Okay.

I'm on the basis that I think this deal will go ahead. So you're going to be an Australasian-focused business. Clearly you've got a great order book. the infrastructure effectively is going to be funded by the feds for the medium and heavies. Looking a little bit further out, if you are successful in participating in the GPS and the LOSVs, how do you think about how you could potentially fund the infrastructure required to get those contracts and those programs running?

Yeah, it is really interesting and that's a good line of thinking. You know, if the sale of the US business did go through and we had access to significant cash funds, investing that in our own shipyard and own facilities would be very long-dated or maybe something that's incredibly attractive to us. So, yeah, having those funds available at a time whenever there's significant growth in Australangia

would be very helpful indeed. I'm on that too, but this is part of the previous question. Given that you talk about assigning of the GPS, and I think it's 2029, you've got a lot of cash potentially sitting on your balance sheet for a long time. How are you going to think about that? Give it back and... Well, we'd have to...

commence reasonably quickly to build the facilities. That would take some time. We're talking about hundreds of millions of dollars of investment to create the shipyard of the future that's ready for the GAMI. So I don't think there'd be a huge pool of funds that's just doing nothing. We'd want to try and deploy that as soon as possible if we were able to in shipbuilding. but not facilities. You know, we do what we normally do. We consider other opportunities for growth. We consider what capacity needs and then we consider consult for a tax efficient way to make returns to shareholders.

Great. Thanks, guys. Your next question is from the line of Patrick Moore of KNP Super. Your line is open.

Good morning. In the director's report on page three, you make the comment, or make the comment by the chairman, that if the deal doesn't go ahead, that with the owner's contract on the business, you have to be very carefully managed, you have to carefully manage the negotiations. First of all, what does it mean by carefully managed? And secondly, is there a possibility of a further deterioration in those amounts? Thank you.

Yeah, I'll take the second question first. You know, we provided our best estimate of everything that will see these contracts through to completion, as we're required to by the accounting standards, so we're not anticipating any further deterioration. And I think careful negotiation in so much as, you know, it's a somewhat unusual situation that, you know, we have some contractual challenges at the same time as Anwar is trying to do the due diligence, so it's I think what Richard means is it's not quite as straightforward as if everything's rosy on the contracts. It would be much easier to evaluate positions. So, you know, I think that's what he means in his remarks.

Okay. Thank you. And is there any other contracts which may be subject to the same set of problems?

Not to our knowledge. You know, we'd have to declare those if we saw any problems. Thank you for that. Thank you very much. Thanks.

And a reminder before we get to the next few questions, if you would like to join the queue, to press star 1 on your telephone keypad to raise your hand and join the queue. And you have a follow-up question from Sam Teager at Citi. Please go ahead.

Hi again. There's some talk that Hanwha is a done deal, but what would be the strategic arguments for saying no and retaining the US business?

I think it would be shareholder value is the primary view that the board would take on any bonding offer that I might make. So we'll work with them and give them access to all the information they need to make a firm proposal and we'll assess that in the interest of shareholders.

Okay, that's clear. And then this Australian order book has grown from $0.7 billion to $5.6 billion in a year, and historic shipbuilders often struggle when backlog growth exceeds organisational growth. What evidence can you point to that suggests the organisational capability has expanded as quickly as the backlog here?

Yeah, good question. So we see it as a... growth trajectory really. So we had the ramping down of the Guardian-class patrol bus and then we see the landing craft medium contract ramping up. The landing craft medium is probably less complex than the Guardians that the team were building. So I don't anticipate a huge challenge there. The K-class boats continue. We've built a lot of those and we know them very well. It's a very mature design. and that's what gives us time as the Landcraft Heavy runs up. But again, Landcraft Heavy is a big ship, but not necessarily hugely complex. It doesn't come with weapons systems or combat systems that are the trickier bits of these ships to build and commission. So we see it progressing over the next four or five years and the way the programs were and worked with the government around steady growth rather than a big step growth. So we will need to recruit people over three years rather than we need 1,000 people tomorrow. So we try to be as sensible as possible whenever we work with the customer to align these programs in terms of programs coming off and programs coming on to make sure that there's a steady growth of people and capability in the business.

Right, and then as these programs ramp up in Australia, what do you see is the biggest risk to maintaining margins? Is it labour, productivity, procurement, inflation, the terms of the programs or something else?

Yeah, probably a little bit of all of that, but certainly getting the people and making sure they are all trained up will be a challenge. We will do it the same way we have always done it, in so much as we're big believers in bringing people in at the bottom, training them up, whether that's graduates, apprentices, you know, then we know that they're specifically trained in shipbuilding. They come with our culture from day one, and then promoting from within gives people an opportunity to advance their careers. And I think the other key feature is, you know, the government have done a fantastic job with continuous naval shipbuilding. and for the first time we can kind of offer people a career. Whereas in the past we've been successful in winning work every year or two to make sure that there is continuity of employment. You know, we can genuinely look back today and say we've seen 20 to 25 years of continuous work in front of us. So, bringing people in with that employment proposition is, you know, we've never had a better employment proposition. So, that's why I think we'll be able to attract the people retain them, train them and give them some really exciting work opportunities.

So how many people are you at now and how many will you be at or you need to have in three years?

Yeah, we're just over 900 now and I think we'll need another thousand people over the next three or four years.

Okay, excellent. Thank you.

And this concludes our Q&A session for today. I would like to send the call back over to Paddy for closing remarks.

I'd just like to thank everybody for their participation today. We've uploaded all the material online so you can have access to it. Thanks for listening and thanks for the questions.

This concludes today's conference call. Thank you all for joining us. You may now disconnect.