Negative Points

• Group EBIT was a loss of $125 million due to a one-time accounting adjustment in US programs, reflecting unresolved contractual claims with the US Department of War.

• The US Department of War did not agree to accelerated contractual relief, necessitating a longer formal recovery process that adds uncertainty and potential delays.

• US support revenue decreased 16.5% due to changes in the operational deployment profile of the LCS fleet, impacting overall segment performance.

• Significant capital investment of over $320 million in US infrastructure projects has increased property, plant, and equipment, but cash was lower than the half-year due to these value-creating investments.

• The Hanwha proposal is non-binding and conditional, and the outcome of due diligence is uncertain, with potential for the deal not to proceed, which could impact strategic plans.

• The company faces challenges in scaling organizational capability to match the rapid growth in backlog, particularly in recruiting and training an additional 1,000 employees in Australia over the next few years.

Q & A Highlights

Q: Can you 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? A: Patrick Gregg (CEO): Hanwha has been around for a long time, and we have been working very closely with them. 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. In short, Hanwha is well aware of all our contractual positions and have been taken through those in the US prior to submitting their bid.

Q: There's some talk that this is a done deal, but what would be the strategic arguments for saying no and retaining the US business? A: Patrick Gregg (CEO): I think shareholder value is the primary view that the Board would take on any binding offer that Hanwha might make. We will work with them and give them access to all the information they need to make a firm proposal, and we will assess that in the interest of shareholders.

Q: The Australian order book has grown from $0.7 billion to $5.6 billion in a year. Historically, shipbuilders often struggle when backlog growth exceeds organizational growth. What evidence can you point to that suggests the organizational capability has expanded as quickly as the backlog here? A: Patrick Gregg (CEO): We see it as a growth trajectory. We had the ramping down of the Guardian class patrol boats and then see the Landing Craft Medium contract ramping up, which is less complex than the Guardians. The Cape-class program continues with a very mature design. Landing Craft Heavy is a big ship but not hugely complex, as it doesn't come with weapons or combat systems. The programs were paced with the government to ensure steady growth rather than a big step change, so we will need to recruit people over three years rather than needing 1,000 people tomorrow.

Q: As these programs ramp up in Australia, what do you see as the biggest risk to maintaining margins? Is it labor, productivity, procurement, inflation, the terms of the programs, or something else? A: Patrick Gregg (CEO): 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 are big believers in bringing people in at the bottom, training them up, and promoting from within. The government has done a fantastic job with continuous naval shipbuilding, and for the first time, we can offer people a 20-25 year career. We've never had a better employment proposition, which will help us attract and retain people.

Q: How many people are you at now and how many will you need to have in three years? A: Patrick Gregg (CEO): We're just over 909 (likely referring to Australasia), and I think we'll need another 1,000 people over the next three or four years.

Q: Can you provide more color on the OPC program? Any discussions you've been having with the Coast Guard and how you see that being rectified? A: Patrick Gregg (CEO): The Coast Guard is in a slightly different position. They've had challenges with previous shipyards and haven't taken delivery of any OPCs. Our conversations and negotiations with the Coast Guard are really around putting certainty into that program and how we can accelerate the delivery of OPC vessels. It may not be an REA process, but perhaps a contract restructure as we work with them to put certainty into the program.

Q: In terms of the Landing Craft Heavy program, can you talk to the risk profile? Is it any different given that the design is already a proven design from Damen? A: Patrick Gregg (CEO): There's less risk rather than more risk in that program because it is an existing design and the vessel has been built. We've worked very closely with Damen around support for the design, as-built drawings, jigs, and fixtures. As part of that contract, they're happy to support us with people who have been through the design, build, and commissioning. I see reduced risk based on the fact it's a complete design and we have a great working relationship with them.

Q: Your gut feel on how certain the Hanwha sale will proceed? A: Patrick Gregg (CEO): I'll have to speculate, but they are absolutely in due diligence and taking things very seriously. They have assembled an A-team with relevant consultants from each area, which costs money. It feels like there is support in the US from senior people in the Department of War. They are a very credible shipbuilder, not a private equity approach. They know exactly what they're looking at and see our modern facilities with a big order book as a win for shareholders, warfighters, and the US. There's great momentum behind it.

Q: If the Hanwha deal goes ahead, you'll be an Australasian-focused business. If you are successful in participating in the GPF and LOSVs, how do you think about funding the infrastructure required for those contracts? A: Patrick Gregg (CEO): If the sale of the US business did go through and we had access to significant cash funds, investing that in our own shipyard facilities with the very long-dated order book would be incredibly attractive. Having those funds available at a time of significant growth in Australasia would be very helpful. We would need to commence reasonably quickly to build facilities, which would take time and involve hundreds of millions of dollars of investment. We wouldn't want a huge pool of funds sitting idle; we'd deploy it into shipbuilding or consider other growth opportunities and tax-efficient ways to make returns to shareholders.

Q: In the director's report, the Chairman commented that if the Hanwha deal doesn't go ahead, the onerous contracts on the business have to be very carefully managed. What do you mean by carefully managed, and is there a possibility of further deterioration in those amounts? A: Patrick Gregg (CEO): We've provided our best estimate of everything that will see these contracts through to completion as required by accounting standards, so we're not anticipating any further deterioration. "Careful negotiation" refers to the somewhat unusual situation of having contractual challenges at the same time as trying to do due diligence. It's not as straightforward as if everything was rosy on the contracts, which

For the complete transcript of the earnings call, please refer to the full earnings call transcript .