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Edited Transcript of ASB.AX earnings conference call or presentation 30-Aug-19 12:30am GMT

Full Year 2019 Austal Ltd Earnings Call

Hernderson, West Perth Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Austal Ltd earnings conference call or presentation Friday, August 30, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Patrick Alexander Singleton

Austal Limited - CEO, MD & Executive Director

* Greg Jason

Austal Limited - Group CFO

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Conference Call Participants

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* Ian Lee;Allianz Global;Fund Manager

* Mitchell Sonogan

Macquarie Research - Analyst

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

* Sam Teeger

Citigroup Inc, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Austal FY '19 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker, David Singleton, CEO of Austal. Thank you. Please go ahead.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [2]

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Good morning, everybody. It's David Singleton here. It's good to see so many of you on the call this morning. This is the fourth results -- full year results announcement that I have done as CEO of this company. And I remain very proud and honored to lead what is not only a unique Australian business, but is also a highly differentiated and world-class business. And I often say, not only world-class, but in many ways, a world-leading business located here in Australia.

It's obviously been very satisfying for me to see the business stabilize, for it to mature and it to develop very strongly over the last few years. But I guess, in saying that, I'm also conscious of all the good work that has gone in the years before, building a world-class aluminum high-speed vessel business starting 30 years ago was an act of real visionary nature, and the start of the expansion into the U.S.A. 20 years ago, 20 years ago this December, was a bold and very well-executed move, which has continued to develop and expand. And today, we are the world's largest high-speed vessel builder. We build what are, in essence, the Ferraris of the ocean, both in the commercial and the military sectors. We are also the only foreign-owned company to prime contract ships for the United States Navy, a matter of which we are particularly proud and gives us particular merit around the world.

We have and we will continue to invest in our business at a time when -- at a time in the world when fuel efficiency and environmental impact is a trend in shipbuilding and where we, in many ways, lead and where the navies of the world are continuing to expand and develop, especially in our region here in Southeast Asia. So the macro conditions remain very strong, and it is in that context that I'm pleased to present the results today.

If you look at your slide pack, we'll go through -- we won't -- certainly won't be going through all of the slides in this pack, we've got an extensive pack as you've seen, but we'll go through the headline, there are 7 or 8 slides. The first one of those is titled Financial Headlines. I'm sure many of you, it was the very first slide that you turn to, it's a very -- it's very satisfying position. This is the best set of results that Austal has recorded in its 30-year history, with revenue of $1.85 billion, up 33% year-on-year from last year; an EBIT of $92.8 million, up 46%; and an NPAT of $61.4 million, up 64% on the same year last year.

I think what's been very satisfying as well this year is the operating cash flow, very, very strong performance this year of $164 million, up $99 million on the equivalent year last year. We'll talk a little bit more about that. But I do remember saying to shareholders about 4 years ago that -- or so 3.5 years ago, I guess, now that we would expect to see strong cash flow over the next period of time. And if you actually look at the business, we've generated about $450 million worth of cash in the last 6 years. So continues to be a strong feature of the business, which has, of course, moved us into a strong net cash position, overall net cash position, of $151 million, quite a dramatic improvement, up $117 million from last year.

That's allowed us to increase dividends. So full year dividends for last year were $0.06 per share and up 20% on the previous year. And all of those results, we'll go into a little bit more detail when Greg Jason comes on the call in a few minutes.

If you turn your page to the next slide title FY 2019 Key Facts. This gives you a little bit of an outline of the business. Revenue, as I said, $1.85 billion for the year on an order book of $4.9 billion that stretches out to about 2024. 58 ships now are either under construction or scheduled for construction, with 12 ships delivered during the year. And the reason I kind of focus on that a little bit is, it gives a sense to the diversity that is now a feature of this business. So we're no longer in a situation where relatively small number of ships define our future. Good spread of ships, both in the United States, in Australia and being built in Asia.

Around about 5,700 employees across those 7 shipyards now in 5 separate countries. And of course, the new shipyard this year or the new country this year has been a new shipyard that we established on the 1st November in Vietnam, in Vung Tau in Vietnam.

We have 6 service centers around the world with that continuing to expand. The United States has recently opened operations center in Singapore to serve Austal ships that are operational in Southeast Asia. And we have in total 25 vessels under sustainment, and you would have heard me in the past talk about the real importance of the sustainment to our business, that now represents of around about 16% of our total revenue, but importantly, is the long tail of revenue that comes out -- particularly in the United States, but also in Australia, that comes out of the ships that have been built and delivered and are in-service with the navies of the Royal Australian Navy and the U.S. Navy.

If I could turn over the page now to operational highlights. As I said, this is the best set of results that we have seen in Austal, but there are a few things that have really pleased me, I think, with the FY 2019 results. The first thing is that our U.S. operations really remain the powerhouse of the group, and they are absolutely cranking now with a shipbuilding margin of 7.9% and a great deal of focus and confidence and reliability in that business, something for us to be exceptionally proud of.

Last year, they were awarded 6 new additional vessels for the U.S. Navy, 4 Littoral

Combat Ships and 2 Expeditionary Fast Transports. Of particular note is that the LCS vessels are won in what is a significant level of competition in the U.S., so they are price-orientated competition in the U.S., and the U.S. business was successful in both of the competitions for Littoral Combat Ships last year. So that was a great credit to them and is a part of -- the significant part of the improving financial performance of the business.

Our Australian shipbuilding operations and sustainment activities are now making a significant financial contribution to earnings. And we think there is a good rationale for that to continue to improve. There's obviously been quite a shift in our Australasian activities as we've created more capacity in low-cost build environments in Vietnam and -- principally in Vietnam and the Philippines. And it's been very much a transition year for the Australasian business as those new facilities have come online, but I think they will be an increasingly significant part of the operational efficiency and performance of the Australasian business in the future. I think we've very much built the bedrock for future growth, financial performance and growth in the Australasian business.

We're pleased about -- we're obviously very pleased about what has been an excellent translation of earnings into cash. If you look at the earnings over the last 5 or 6 years, there has been a very good translation of profit performance into cash, and that's continued to be the case.

And this year was the publication of our first Environmental, Social and Governance report, 1 year ahead of the requirement by the ASX. It's something that Austal has always been involved in, but perhaps not something that we have been particularly strong at talking about externally. So this has been a good opportunity for us to talk about work that are done across our organization, be it Asia, United States or Australia, on charitable works, on increasing gender participation rates in our business. And I think very, very importantly, we've seen strong safety performance across all of our businesses where we've had the fifth consecutive year of improved safety performance and are now very much at high levels of world-class performance on safety, and that is something for us to be particularly proud of.

I think also, we don't see this as a peak for the business, but very much the new normal for Austal. And I talk about that in terms of the way the business is structured, the way the business is performing and the financial results that it's capable of doing. This is not so much a peak, but where I think the business will continue to grow from. And that's obviously secured by a very significant $4.9 billion order book and the 50 vessels that we have under construction and the 34 vessels that we have under refurbishment, which gives, I think, a much greater level of visibility and reliability of earnings than we have experienced in any time of our -- any time in our history, and has allowed us to give some guidance a few months ago, that we expect that EBIT will grow to no less than $105 million for the FY 2020 year.

As I said before, Austal was in a very healthy cash at bank position, $275 million, that takes us to strong net cash position. The reason that that's important, of course, is that it allows us to self-fund investment in long-term growth opportunities, particularly -- in particular, this includes targeting significant opportunities to invest in growth in our service and sustainment support capabilities in the Pacific Rim and increasingly in increasing the number -- as we increase the number of Austal design built U.S. Navy vessels, which will be in service for years to come.

We're also seeing an increasing number of opportunities to grow the business outside of the United States as well in Australia, and in particular, in the Asian region. And it's good for us to be in such a strong financial position that we can think very seriously about those opportunities.

Okay. I've completed the first part of my task. So I'm going to hand over to Greg Jason now, who's, as you know, is the Chief Financial Officer of Austal, and who'll take you through financial results in a bit more detail.

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Greg Jason, Austal Limited - Group CFO [3]

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Good morning, everybody. The 2019 financial results were outstanding. We've got record results on the metrics of revenue, EBITDA, EBIT and NPAT. I'll just clarify that EPS wasn't a record. The 33% increase in revenue was underpinned by an increasing throughput in every one of our shipyard facilities. They contributed $360 million to the increased revenue. And then we had tailwinds again with FX, average rate of translation for '19 is $0.71 compared to $0.77 for FY '18. 34% more EBITDA, $29 million additional EBIT, giving the 46% growth there, $6.6 million of the $29 million was FX and all the rest of it was underlying throughput and profit generation from the operation and a 64% increase in NPAT. A reason the NPAT's grown by a higher percentage is that, we've got the growth in EBIT, net PBT flowing through, we had a slight reduction in the net interest expense that gave us a boost, and we also had a reduction in the effective rate of tax coming down from 32% in FY '18 to 28% in FY '19. Primary driver within that was that we had the first full year enjoying lower tax rates in U.S.A. after the tax reform that was effective 1 January 2018.

Importantly, in terms of cash concept, of that 28% effective tax rate, only 10 percentage points were actually cash outflow with all the rest of it being satisfied with credit that we had over in U.S.A. The comment I'll make about '18 is that, all of the FY '18 metrics through the presentation and the annual report have been restated for the AASB 15 accounting standard for revenue from customers.

If I take you to the next page, which is the segment breakdown. U.S.A. shipbuilding was the bedrock of our results for FY '19, again, significantly standout, got over 20% increase in revenue, the shipbuilding going from a bit over $1 billion to $1.25 billion, almost $100 million of EBIT, and we've got an improvement in EBIT margin going up to 7.9%, obviously, the upper end of the guidance range that we have provided a year ago. And as we have released today, we've also talked about the guidance range being increased to 7.5% to 8.5% for the year ahead.

Support business is really impressive, 67% growth in revenue and an increase in EBIT margin at the same time up to 7.3%. You can see total U.S.A. EBIT contribution of AUD 106 million, really substantial in the growth context.

Australasia has also had a really impressive result. And I say that in the context of the turnaround, so there is a $20 million EBIT turnaround from FY '18 to FY '19. We acknowledge the $11.7 million of EBIT at 3% and room for further growth there. But we have more than doubled shipbuilding revenue, $323 million over a 12-month, 2% EBIT margin there and Support business at 7.6%, slight contraction in throughput, reflecting the end of the Armidale Class Patrol Boat remediation program in FY '18. We've seen 3 of the Guardian Class Patrol Boats delivered in '19 and one after year-end, that are now in service, start contributing to the sustainment revenues, that's -- not as much from a revenue point of view, but there is an uptick in margin.

You can see in the disclosures to the annual report that we've got an $11 million provision for professional service costs relating to the investigations that are ongoing in Australia and U.S.A. There was $12 million that was expensed in the year and $11 million left in provision, AUD 8.5 million of that was related to the U.S. business. We've separated that out into the other column because we wanted to be transparent about the underlying strength of operations in U.S.A shipbuilding and Support and then separately disclosed an amount that we've put aside in that U.S. business. You don't see a corresponding number in Australasia simply because the Australia related number is part of corporate rather than the Australasia business unit.

Moving to the next slide, which is cash flow, $165 million, clearly jumps off the page. A simple way to think about this is that we have got exceptional EBITDA translation into cash, plus when you look at the total movement in working capital, and I'm referring to debtors, creditors, work in-progress and progress payments in advance, there's approximately $30 million cash benefit from those movements, and they're combining plus the cash tax to get us to $165 million, which still has an -- for the foreseeable future, we'll continue to have typical cash volatility, can be $60 million to $70 million over 2- to 3-month period. We're in a good place at the end of FY '19.

Typical levels of sustaining capital. We've been in the $10 million to $15 million range for a long time, and we're in that range for '19. The majority of the enhancing capital for FY '19 related to the new shipyards in Vietnam and the expanded shipyards in the Philippines. Excluding a dry dock for the Philippines, there's still about AUD 6 million to come in 2020 to finish off those facilities. And if we are to proceed with a dry dock launch facility in the Philippines that could be, say, AUD 10 million to AUD 12 million additional.

If all of that is spent, including the dry dock, that will take the total investment to just over the USD 30 million mark that was announced. I think it was about 18 months ago when we talked about the Asia expansion. The debt number includes USD 5 million repaid of Go Zone. Dividends reflects $0.05 per share of cash paid within the year net of dividend reinvestment program.

We are sitting with $276 million of cash at bank at 30 June, clearly, benefiting from the operating cash flow and net cash of $151 million, excluding the notional debt associated with Cape Class Patrol Boat 9 and 10.

Moving to the last slide, this shows the trajectory of the net cash, net debt position up to the $151 million mark. The business has generated $450 million of operating cash flow over the 6 years, from FY '14 to FY '19. The leasing arrangement for Cape Class Patrol Boats 9 and 10 results in notional debt sitting on our balance sheet. That was $48 million at 30 June. It was also classed as a current liability because at that date, the lease was due to mature in April and May for each of the 2 ships, respectively, so we announced the last 2 weeks that the Commonwealth of Australia, National Australia Bank and Austal have reached agreement on terms to increase the lease period by an additional 2 years. So that means that those 2 leases will run through to April and May of 2022. The residual buyback guarantees comes down from $42 million in total for the 2 ships at just over $24 million. In 2022, you're going to see that notional debt continue to amortize until it's $24 million at that date. And what was a current liability at 30 June '19 is now noncurrent, again, as we sit here and talk today.

I'm going to hand back to David now to talk about outlook for 2020.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [4]

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So just so that you're all not scared about the 20-odd slides that are left in the pack, I'm going to talk quickly only about the last 2 -- the next 2 slides, which is business priorities and FY 2020 guidance. Greg and I are coming to Perth, Sydney and Melbourne. Perth today, Sydney and Melbourne next week, and we'll obviously be able to talk to you about some of the more strategic stuff.

But really just to close off, I will say that -- and our business priorities for 2020 is to look at the -- work hard at the opportunities that we have in front of us for expanding our footprint in the United States. We think the macro conditions in the U.S. are strong. And there are some interesting and solid programs ahead of us as we get towards the end of the buy program for LCS, but by other substantial programs that Austal could be involved in. And that's certainly been a major focus for the U.S. business all of this year.

Secondly, we haven't yet seen just how powerful our investment in Asia will be. I think it's going to serve us extremely well. It's been very much a transition year up to now, as I said previously, but there are great opportunities for driving down costs and increasing the speed of manufacture through our Asian facilities, which I think will serve us well for the decades to come. We've always been very much a efficiency-based business. We've seen good improvements in shipbuilding efficiency in Australia, and continue to see year-on-year improvements in the United States, which is great credit to the shipbuilding teams in both of those countries.

And I think an important feature is, this year, we are planning to treble our investment in research and development activity to make sure that we stay at the forefront of our industry. There's a lot of change coming forward in the shipbuilding industry. I think that offers us a lot of opportunity, and we have been investing and are now ramping up heavily our investment in that area to make sure that we remain -- are and remain the world leader in what we do.

And if I just go to the last slide, I'm not going to read all of this slide, but just a quick overview. We expect group revenue to be not less than $1.9 billion in the FY 2020 year. We have upgraded our U.S. shipbuilding EBIT margin to 7.5% to 8.5% guidance. It was 7% to 8% last year, and that is a reflection of our increasing confidence in the performance of the U.S. team and the U.S. programs. And we expect Group EBIT this year to be not less than $105 million.

So that completes our presentation this morning, and I'll hand back for any Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today comes from the line of Mitch Sonogan from Macquarie.

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Mitchell Sonogan, Macquarie Research - Analyst [2]

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David and Greg, great result there, guys. Just wondering if you can give a bit more insight into U.S. shipbuilding margins, very strong result. Are there any potential upside capture, anything from a U.S. Navy perspective? Or are they happy to see you keep on improving given the programs maturing?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [3]

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I think we are -- we still remain quite a long way away from the sort of EBIT margins in the United States that would trouble the U.S. Navy. So I don't think there's any short-term risk of that. Remember that our largest program in the U.S. is won in competition, so there is a natural kind of hedge against increasing margins in those sorts of programs. But really, the performance that's been achieved has been eked out because of great efficiency improvements that have come out of the shipbuilding teams over there and the new programs that have been won. So no, I don't see any downward pressure on that from the U.S. Navy.

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Mitchell Sonogan, Macquarie Research - Analyst [4]

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Okay. And can you provide any insight into what percentage of that U.S. ships' revenue came from lower-margin procurement revenue this year? And is that expected to be pretty similar for FY '20?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [5]

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I can't give you that data, Mitch. It's rather more detailed than we'd normally release. But we did indicate, as you rightly say, that there were some elements in the U.S. that were lower margin because of early procurement type activities. And also, the way that we try to trade -- although, the conservative nature that we take to risk in all parts of the business including the United States, and obviously, as we progress through those programs, that risk will hopefully reduce and that will improve the trading conditions.

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Mitchell Sonogan, Macquarie Research - Analyst [6]

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Okay. Great. And maybe just a couple of quick ones, Greg there. Can you just talk through the operating cash flow expectations in FY '20, given the thought there about advance progress payments? And also, at the corporate cost line, what should we expect in there? R&D credits were $6 million FY '19, down from $14 million. Just wondering where that line is expected to sit.

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Greg Jason, Austal Limited - Group CFO [7]

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Sure. So I'm expecting pretty strong conversion of EBITDA into cash, again. And the CapEx, of course, is a swing there. We'll have typical levels of sustaining capital, but there's still some open decisions to be made of our investments that get made through 2020, including the dry docks for Asia and any other facilities such the programs we're pursuing.

You asked about corporate costs. So something similar for 2020, plus we are going to increase our investment in R&D for 2020. I'm thinking somewhere around the $5 million to $6 million mark for R&D and that links in strongly with the success the company has had from its own R&D over the years and using some of that success now to invest in further development. Have I touched on each of the things that you asked, Mitch?

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Mitchell Sonogan, Macquarie Research - Analyst [8]

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Yes.

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Operator [9]

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Your next question comes from the line of Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [10]

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Congratulations on a very strong result. In terms of the first...

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [11]

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Thank you.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [12]

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In terms of the first question, just keen for an update on the LCS planning yard protest. Just wanting to know when you will earn more information as to why you missed out. And maybe also, while we're on the subject of Support, can you talk about any other large support contracts you're going to be bidding for over the next 12 months?

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Greg Jason, Austal Limited - Group CFO [13]

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I've not got much to update you on, on the planning yard program other than, I think, it was announced today by the U.S. Navy that they had denied our protest on that particular program, but I think I was very clear with all of you that we consider there's an extremely low possibility of success.

As to why we lost, well, it's a competition, there were a number of competing bids and the U.S. Navy preferred one to ours. Sam, I can't really give you any more than that. We've been winning a lot of programs over the last few years. And from time to time, you lose one, and that was one of them. It was a surprise to us, I have to say. It was a surprise to the U.S., they've put a lot of effort into it, but you can't win everything all the time.

As far as Support goes going forward, we're continuing to expand the Support business. If we look at the United States, they've been winning. Of particular significance is they've been winning dry docking activities as a prime contractor for LCS, that's something that we haven't done before. And so that's an expansion of our capability, and they have now successfully completed, I think, 2 of those dry dockings with particular merit. So hopefully, we'll see more of that going into the future.

I also -- I mentioned the start of operations for the U.S. out of Singapore, and that's a reflection of the fact that the Navy is deploying vessels now more regularly and more substantially into the Asian region. And I think that will be an area of growth into the future.

In addition to that, I will say that it's certainly an area of focus for us. I've talked about it quite a bit in the past that growing that sort of strong underlying revenue from our support business is a key focus for us. The U.S. and the Australian business continues to look very hard for opportunities to grow its position in that market and will continue to do so.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [14]

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Great. And David, maybe if you can please provide us an update on the Fjord Line, how is it tracking? And what month do you expect this to be delivered and to what extent you've got any LDs provided for?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [15]

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Yes. So we've, obviously, been saying for some time now that the new facilities that we have in the Philippines and the fact that this is the first time we've built a ship of anything like this size in that business at a time when we've also got to ramp up our average -- have ramped up our average personnel from about 300-ish to about 700 or 800, represents a significant risk for the business. And that risk, obviously, centers around that large vessels of Fjord line vessel. Certainly, that's been a -- that is a stressful program for us. The guys are working very hard on it. It's due for delivery in -- around about March 2020 so sort of end of Q1, beginning of Q2 2020.

So far, so good, but lots of pressures on that program. You know that we take a conservative view to the way that we look at profit with these programs these days. So we think we are adequately provided for in terms of any risks that we currently see in that program.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [16]

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Right. Okay. Great. And maybe if you can just provide an update as to your interest in the Subic Bay shipyard, and to the extent, you think you might need to raise equity to fund it.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [17]

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I can't really update any more than has been said so far. It's not something I would normally have commented on, Sam, because it's early days, and it's not clear how that will work out. However, there was some leakage of our involvement in the Philippines, and so we felt compelled to comment on that. I don't think you have to worry about capital raising as far as that is concerned. There are -- I have absolutely zero expectation of any capital raising, even if we should proceed with that program.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [18]

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Got it. And then just last question. In terms of that $8.5 million provision, how much would you have used up since balance date? And how long do you expect it will take before you use the whole thing up?

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Greg Jason, Austal Limited - Group CFO [19]

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I don't have the number about what was used between balance date and now, so I'd just give you total group context. It was $12 million that was expensed in FY '19 in total and $11 million was in the provision at the end. There's estimates in there, of course, plenty of judgment and it was a key audit matter for the auditor about setting that provision because there's a lot that we don't know about the investigation. So I can't give you a time line about when that will be consumed.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [20]

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Right. So just to be clear, there was $11 million in the provision at the end, and now you've raised another $8.5 million, is the provision close to $20 million?

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Greg Jason, Austal Limited - Group CFO [21]

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No. There was -- so some simple points. It was 0 at 30 June '18 because the investigations weren't even afoot at that date. By 30 June '19, we have expensed $12 million, of which $11 million is still in provision and $1 million had gone in cash and $8.5 million is simply U.S.A. share of the $12 million in total.

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Operator [22]

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Your next question comes from the line of Russell Gill from JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [23]

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Couple of questions. Greg, just on the operating cash flow. I think you called out comfort that -- given the working capital movements, the numbers was a bit, in your view, about $30 million overstated for this period. Is that right in terms of the working capital movements?

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Greg Jason, Austal Limited - Group CFO [24]

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I wouldn't use the word overstated. We've -- I used to talk about $50 million was a typical -- AUD 50 million as typical volatility not month-to-month, but say over a 3-month kind of cycle. And with the growth of the business, we're now seeing that being more like $75 million. And so I provide the same volatility comment to what I said earlier on, I think, it was Mitchell's comment or question, where I said, something resembling EBITDA plus or minus. So is it possible that we have a downswing on working capital in 2020? Yes, that's possible. And I'll link that into the $30 million comment I made in the question that you just said there.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [25]

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Okay. Makes sense. And then just on, I guess, the use of your capital and the balance sheet you got at the moment, you did make comments -- you made comments, obviously, that the partner or the press partner you're joining with -- potentially joining with in the Philippines will probably put a lot of capital. But you do have a comment in the presentation about potential CapEx spend required as the LCS program transitions to FFG(X). Could you just talk through what those potential capital commitments could be?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [26]

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So we haven't given any guidance yet, Russell, on what it could be because we're still working through it. But FFG, if it is awarded as currently anticipated, would be a very substantial increase in the volume of production in the United States, and so it'd be reasonable to expect that there would be some significant investment in expanding capacity in that country as well. But all of that's contingent on winning a major program in the United States and is some considerable period away. We're not expecting an award of that contract -- sorry, we're not expecting an announcement of that contract until possibly as late as September of next year. And then, of course, it would be some considerable period of time after that, that we would be investing in new facilities. And potentially, the investment would take place over a few years. So it's not even sure that we need to fund that externally, either but that will be a matter for them.

So I think we're probably 18 months or more away from any significant investment in the U.S. I think the point though is that it is reasonable for us to be prudent about the way we think about cash in our balance sheet with a program of that magnitude that's in the offing.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [27]

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And then just on the sustainment, the planning yard work. The GAO announced that your purchase was rejected, and they didn't even accept the appeal of General Dynamics. Given, I guess, Huntington won the deal and they're not really involved with the LCS program, can you just talk through the competitive advantage in sustainment work you have and running? And the fact that you're actually building LCS ships, is that a clear -- a genuine competitive advantage? Or does it come down to footprint or margin just from a competitive advantage point in winning the larger sustainment work going forward?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [28]

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I think there are probably 2 features of that. Obviously the knowledge and capability that Austal in the U.S. has around the LCS program gives it a significant advantage in the support programs that it's carrying out on that vessel. The second thing is, I think, our operations in the U.S. are seen as productive, efficient and cost effective. And I think I'm right in saying that the recent dry dockings that were carried out by Austal USA were completed either on time in one case and ahead of time in another case, and that's the first time that, that kind of performance has been achieved, and that's a great credit to the team in the U.S. to be able to -- and for the first time, carry out those dry dockings and do so, so efficiently. And I think that's what wins work for LCS in the United States.

The planning yard would have been a new style of work for us, something that we haven't got a lot of experience in. So I don't think we haven't kind of lost that in the sense of it's mainstream work for us. It would have been a new sector in terms of the technical environment in which you have to work for that kind of activity. So I think we're still winning a lot of LCS work and EPF work in the United States, and I think we'll continue to do so.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [29]

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And you're comfortable just going alone? You don't feel you need to go back to the pairing strategy on sustainments?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [30]

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No. We don't. I mean, when we were paired up previously, that was at a time when we were ramping up our shipbuilding activities and didn't have the same level of focus on sustainment as we do today. We've built a real capability in sustainment and invested in it very significantly over the last few years, and it's performing really well, as you can see from the margin.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [31]

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Sure. And just on that U.S. shipbuilding margin, the recent LCSs, have been won through a competitive tender process. I guess your competitor is a fairway behind schedule on manufacturing. Just in terms of the margin you're reporting today and the tenders that you're winning at the moment, is it done at a better margin, the stuff you're winning at the moment? Or is it done at about the same margin? Just trying to get an understanding of the profile of your margin over the next couple of years?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [32]

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Well, I think, what we've said consistently about margin in the U.S. is that the new vessels that we have won, the 6 new vessels that we've won in the last 2-or-so years have been won at a significantly higher margin than the block-buy vessels that we won some years ago. So as we transition from those vessels, the original block-buy vessels to the newer vessels, that will have an upward pressure on margins. And we're beginning to see that come through. And that I expect will, I think, grow over the next couple of years.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [33]

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And then just finally, in the U.S., if we -- I know it's a fairway out. But if we fast forward through to FY '21 or even to FY '22, if the FFG(X) doesn't get awarded until September '20, and there's nothing in the budget for next little while for LCSs coming through. The U.S. government has already awarded more LCSs than they thought there originally. Can you just give us a feel for whether there will be a potential, I guess, not just flatlining, but maybe a dip in your revenue profile in the U.S. in that FY '22, FY '23 year? And secondly, do you think it's a chance that more LCSs may actually be awarded, if there's any sort of delays to the FFG(X) timing of the program?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [34]

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I think all those things are possibilities, Russell. I wouldn't like to predict what 2022, 2023 is going to be like sitting here today. We don't really know how this is going to work through. What I will say, and we've been consistent in saying over a period of time is that Austal USA is making its own luck. By being a highly efficient shipyard, by building the ships on time, by building the ships -- by delivering ships quickly and efficiently, they have gained for themselves a very strong reputation in the United States. And the U.S. thinks very long and hard about maintaining the strength of the industrial base. And I think the U.S. business has created for itself a position where it is seen as an important part of the industrial base in the U.S., and that's an important part of national security for the U.S.

So I think that, that's the underlying strength that we have and that will continue to support business over the next few years. How that quite -- how that works out in terms of program -- individual programs and all the rest of it, we'll see over the next few years.

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Operator [35]

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Your next question comes from the line of [Ann Pryor] from (inaudible).

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Unidentified Shareholder, [36]

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First of all, congratulations. David, it's a fantastic result, and I've been a shareholder since 2006, believe it or not, and I have seen this coming. And I think that it's a very well-deserved result by you and all of your team and the people who've gone before you.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [37]

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Well, you raised a very good point because this isn't a result about me or about Greg. This is a result that is built on the shoulders of a lot of things that have happened in the past. And people made very bold decisions to go to the United States, people made very bold decisions to get into this -- get into the military market in the U.S. where no one else has succeeded before. And it's a -- you're absolutely right. It's a combination of events over a long period of time. Our job -- the job of Greg and I is simply to try and continue to put in place things that maybe other people will get -- see the benefit of in the future.

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Unidentified Shareholder, [38]

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Well, when I first bought, you were building a luxury yacht for Greg Norman, which perhaps we won't go there.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [39]

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No. We won't go there. That was one of the bad days.

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Unidentified Shareholder, [40]

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Look, can I just come on to the FFG program. You've already answered some of my questions. But I noticed that the U.S. Navy is looking at some kind of fixed price incentive for the detailed design and construction of the lead ship. Is there any sort of insight as to why they've changed tech? Is this a budgetary requirement?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [41]

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No. It's not substantially different to what we saw with LCS in that the block-buy for LCS was a target cost incentive program. And what that means is we've defined a cost, and then there's a gain-share/pain-share agreement with the U.S. Navy, if the costs go up or down against that target. That's what we've been operating on for LCS for some years. The reason, I think, that the U.S. Navy has adopted this style is that this is not -- FFG is not intended to be a brand-new ship but a development of an existing platform. And so the FFG program that we're putting up is essentially a developed version of a current LCS trimaran about which we have an enormous amount of knowledge and understanding, much, much higher than we had all those years ago when we started the LCS program. We're much further ahead in terms of our understanding of the ship and its costs and how to build it than we ever were a decade-or-so ago.

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Unidentified Shareholder, [42]

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So your comments then implies, say, Austal was to be a successful contender, that the LCS program would sort of transition into the FFG. Is that what I'm hearing?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [43]

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Yes. That's right.

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Operator [44]

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Your next question comes from the line of Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [45]

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Just a quick follow-up. The effective tax rate was a bit lower than expected at 28%, down from, I think, 32% in FY '18. How should we think about the effective tax rate for FY '20?

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Greg Jason, Austal Limited - Group CFO [46]

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You should think about something similar, where there is opportunity is that we have got some carryforward tax losses and R&D credits in Australia that are unrecognized, that you can see those in the accounts in the disclosure notes. And when we get Australia, not Australasia, but Australia, which includes the shipbuilding and support activities in Australia, plus any relevant corporate activities, such as overheads to a point of taxable income, then we will recognize some losses and credits to that point. That has the potential, therefore, to give us good news through income tax expense, possibly in 2020 depending on the execution of these programs in Australasia, and that would suppress the rate to a lower level.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [47]

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Understand. And just in terms of unallocated, step-up to $25 million, quite a bit from the year before. How should we think about that item for FY '20?

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Greg Jason, Austal Limited - Group CFO [48]

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So unallocated -- there's number of items in there that you can take as the regular or abnormal nonrecurrence, we have better expressions such as the write-down of the charter vessel, clearly, FX gains and losses, we don't predict whether that's going to be positive or negative. But there is $3 million -- just over $3 million embedded in 2019. That's the balance of the investigation provision that we made and talked about for an earlier question. So if you ignore that and consider the R&D comment that I made, I don't mean R&D credits, but I mean R&D investments, then you see some step-up into 2020.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [49]

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Step-up from $25 million?

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Greg Jason, Austal Limited - Group CFO [50]

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Yes.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [51]

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More than $30 million?

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Greg Jason, Austal Limited - Group CFO [52]

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Yes. One second. Mid-30s is where I expect it to be. But I think we'll have to have a look at the best way to disclose that to accurately depict what it is because it's not just -- it's not overhead. We're talking about making investments through bidding and R&D in the business, and we want that to be transparent in terms of much has been short-term cost so other overheads.

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Operator [53]

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The next question comes from the line of Ian Lee from Allianz Global.

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Ian Lee;Allianz Global;Fund Manager, [54]

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David, great results. Just want to ask you about the margins in the Australasia division. Obviously, it's ramping up quite nicely. Just want to understand what the expectations in terms of full margin would be for the ships business? And what that trajectory would be in the coming years?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [55]

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Yes. Look, I think, we're being consistent in saying that there's no reason why the Australasian margins shouldn't be similar to the kind of levels that we see in the United States, and that certainly would be our ambition. We've gone through a period of quite intensive change over the last couple of years from a Australasian business that was, frankly, almost entirely focused on Australia to one that's more diversified now with much bigger facilities in the Philippines and with the new Vietnam facilities. And we've yet to see the impact of that in our business. So I think what we've done is we've created the ability for us to really drive down the cost of shipbuilding and increase the velocity of manufacture that we can get through those assets.

So look, I'd like to think that this is the beginning of a period where we can drive much better performance through the non-U.S. business than we've seen over the last 5 or 6 years. And as I said, I don't think that would be unreasonable for us to see margins similar to United States, and certainly, that would be our aspiration.

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Ian Lee;Allianz Global;Fund Manager, [56]

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Do you have a time frame for that?

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [57]

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No. I don't. And the reason I say that is simply because we are very much in that position of -- these are brand-new facilities, and our focus at the moment is to get them up and running and make sure we're getting the quality and safety levels that we need out of those facilities. And then we'll start, I think, to see the performance come through. So it's -- we've been talking about risk in that business for some period of time. I think we're still in that zone, where there are risks around and that makes predicting performance uncertain at least for the next 12 months or so.

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Operator [58]

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There are no further questions at this time. I will now hand back to David for any closing remarks.

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David Patrick Alexander Singleton, Austal Limited - CEO, MD & Executive Director [59]

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Just to thank you for hanging on to this presentation. We very much appreciate the support that we've seen from shareholders and from the broking and research community as well. When we come around Perth, Sydney, Melbourne over the next few days, we'll talk a little bit more broadly about some of the more strategic aspects of the business going forward because I think that's very interesting.

But thank you very much for your support. For anybody from Austal who is listening in today, thank you for all of your efforts. It's been a tremendous period, I think, both out of the United States and out of Australasia. And it's that, that has driven the result today, nothing else.

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Operator [60]

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Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating. You may now all disconnect.