Austal outlook report - US focus on new navy contracts

Perth-based shipbuilder Austal Ltd has sought skilled labour from overseas to maintain its workforce in the face of the current skills shortage. However, the company remains confident that its growth plans will be met and is focused particularly on the US where the potential to win new contracts from the navy offers good opportunities.

See below for open briefing

Title: Open Briefing®. Austal Ltd. Growth Outlook
Record of interview:
corporatefile.com.au
The funding for Hawaii Superferry has now become unconditional. When will the
cash start to flow and is the company likely to require more than two vessels in the
future?
Chairman John Rothwell
We have already received A$70 million as catch up payments for the first vessel
and future progress payments will flow when they become due. HSF has
frequently said that two vessels will not be sufficient to provide adequate service
between the islands, however we believe more vessel orders are some years off.
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You have been awarded a mandate for the construction of two Littoral Combat
Ships (LCS) for the United States Navy. In terms of work completed, how much
of the initial LCS vessel will be completed at the end of fiscal 2006 and what is the
delivery date of this vessel?
Chairman John Rothwell
The vessel will be 30% complete at 30 June 2006 and it is due for delivery in
October 2007.
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When do you expect the wider Flight 1 LCS acquisition program to be awarded?
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Chairman John Rothwell
We are surmising that the Flight 1 acquisition program may be announced not later
than the submission of the Defense Budget by the President to the US Congress in
February 2006. The current program suggests Flight 1 contracts will be awarded in
October 2007 which would not allow time for performance evaluation of the first
Flight 0 vessels. As a result the Navy has said they would expand Flight 0 to
allow for evaluation of those initial ships.
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The shipyard in Mobile suffered only minor damage as a result of Hurricane
Katrina. What provisions have you taken to counter any future adverse weather
conditions at your Alabama facility?
Chairman John Rothwell
The shipyard and office buildings are designed for the local conditions and can
withstand most hurricane force winds. All of the buildings are designed to flood
with the storm surge. The new facility is 10.5 feet above sea-level and the water
level in Mobile has never risen above 10.5 feet.
In the event of an approaching hurricane, equipment is either loaded onto the
vessel being built or is removed from site. We have check lists to be completed by
each department at certain times prior to hurricane arrival. On average, we lose 2-
3 days of production for each hurricane.
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You have previously stated that you needed 360 employees at Austal USA by
December 2005? What is the target for December 2006 and what confidence do
you have this is achievable?
Chairman John Rothwell
The target for December 2006 is 500 people and we are very confident we can
meet this.
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When do you expect that Flight 0 LCS could be increased from 2 ships per team?
Chairman John Rothwell
If Flight 0 was to be increased from four ships at present, and we believe the signs
are positive, it is likely to occur during the congressional authorisation and
appropriation process which concludes in September 2006.
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Can you please explain how the Award Fee and Incentive Fee work?
Chairman John Rothwell
It is a complicated formula. The Award fee is based on an assessment by the Navy
of completion of key milestones. The Incentive fee is based on our ability to meet
the target ship construction cost. For every dollar we spend over the target cost,
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Austal pays 50 cents until the Incentive fee is exhausted. We anticipate a total net
average margin of around 10%.
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Does the award of the Littoral Combat Ship contract have any implications for
Austal's expressed desire to acquire the Australian Submarine Corporation (ASC)
when it is privatised by the Australian Government?
Chairman John Rothwell
What the LCS contract does do is to establish Austal's credentials as a credible
military supplier for the most powerful Navy in the world.
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What are the attractions of ASC to Austal and what skills and know-how can
Austal bring to the ASC?
Chairman John Rothwell
The privatisation of ASC is in its very early stages. The Government will appoint
a consultant to carry out a Scoping Study which is anticipated to be complete in
the middle of next year after which time the Government will determine how to
proceed.
The attraction of ASC to Austal is that it will provide a greater stability of revenue
and earnings to the company. Austal is currently discussing a team equity
proposal to ensure the ASC business needs are met. If successful in the
acquisition, we would have a team that has a long-term business vision and is
focused on retaining the skill base at ASC ensuring the maximum operability of
the submarines. At least one of the equity partners will have substantial
experience in the construction of warships of similar complexity to the AWDs.
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How would you fund such an acquisition?
Chairman John Rothwell
It is difficult to ascertain the value of ASC at this point in time without a Due
Diligence process. Austal believes that, with at least one additional equity partner,
it will be able to fund its portion of the acquisition from our own resources.
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What do you think the Australian Government will be looking for in terms of a
buyer for what is surely a very strategic asset?
Chairman John Rothwell
I cannot speak for the Government in relation to what it will be looking for in an
Owner of ASC, however we believe the Government is likely to be concerned
about security issues and to ensure that the ownership remains in Australia and the
Owners are approved by Government and Defence.
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Would the acquisition of ASC have any impact on Austal's capacity to deliver on
its existing workbook?
Chairman John Rothwell
The potential future acquisition of ASC would not impact on Austal's capacity to
deliver on current vessels. It would be in our interest to largely retain the
knowledgeable workforce currently at ASC. In relation to the Airwarfare
Destroyers there is an expectation that much of the module ship construction work
will be sub-contracted out around Australia.
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What capacity do you have to take further orders in Australia over the next 6-12
months?
Chairman John Rothwell
Austal has very little opportunity to take further orders for short term delivery,
however we have some capacity in our order book for 2007 deliveries.
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If the likely LCS program will fully utilize the operations in Alabama, what plans
does Austal have in place to participate in the potential Theatre Support vessel
program mooted for commencement in 2008?
Chairman John Rothwell
The Army TSV program has been merged with the Navy/Marines' HSV programs
to form the Joint High Speed Vessel (JHSV) program and will be led by the Navy.
Development funds are being budgeted for 2006 with commencement of
construction to begin in early 2008 of between twelve and twenty 115 metre
vessels. We will grow our capacity and be bidding for these vessels.
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What parts of the business will you be focusing on in terms of future growth?
Chairman John Rothwell
Our main focus on growth will be in the US where we see that we may well be
operating from several bases. Austal's growth in Western Australia will become
more and more focused on military vessels, although commercial vessels will
continue to be extremely important.
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On 29 June 2005, you announced to the ASX an update on the Stena Rederi patent
decision by the Federal Court of Australia. Are you in a position to provide a
further update?
Chairman John Rothwell
We are still of the opinion quoted 29 June 2005 that the decision in the Federal
Court of Australia to grant a patent to Stena had the effect of being much narrower
and challenges by Stena in this regard will be very defendable by our company.
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Where are the threats and opportunities to your growth strategy over the next 2-3
years?
Chairman John Rothwell
In relation to the threats we continue to have concerns about the lack of skilled
labour in Australia. We have recently commenced bringing people from overseas
who come to Australia on long-term work visas and we have a rigorous recruiting
campaign for both apprentices and people suitable for adult training.
In relation to our growth strategy, I reiterate that our priority is on the growth of
our US business, an increased effort in military-type vessels in our Australian
operations and our continuing search for opportunities for other Defence related
business in Australia.
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