TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH AUSTAL LTD (ASX:ASB) CEO, BOB BROWNING
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me for the first time from ship-builder Austal Ltd (ASX:ASB), is CEO Bob Browning. Bob welcome to FNN. You’ve just released your full year results to June 30 with net profit down 82 per cent to $9.2 million on revenue of $500 million, can you explain the result?
Bob Browning: Sure, and it’s important to realise that the impact in our income statement was really some accounting treatments, non-cash write-downs. Our underlying business would have produced about $38.5 million this year which was ahead of analyst expectations but we had the Hawaii Super Ferry write-down and a derivative instrument that we put in place on a multi-ship program that has locked in a big upside for that program going forward from a commercial basis.
Clive Tompkins: Given the substantial hit you took to your bottom-line on the Hawaii Super Ferry contract, are you going to change the way you get paid for similar deals?
Bob Browning: Sure, yeah the Hawaii Super Ferry contract really was quite unusual. We were actually helping that company get started and put $30 million of mezzanine debt into the business which then allowed us to contract to build two large catamaran ferries for them. And strategically was important because it allowed us to build our workforce up in Mobile, Alabama which then allowed us to win the Joint High Speed Vessel program which is a very close derivative to that whole forum. So while it was unfortunate that Hawaii Super Ferry filed for Chapter 11, it was an unusual thing that we normally wouldn’t do, but it did position us for a much more lucrative contract with the Navy.
Clive Tompkins: Austal has built a global dominance producing and selling car and passenger fast ferries, but has also been producing a fair number of military vessels, where do you get the bulk of your work from these days?
Bob Browning: Right now it comes primarily from the commercial side of the industry in large catamaran ferries down to passenger ferries. If we fast forward upwards of two years I would expects about two thirds of our income from multi-ship U.S. Navy awards going forward.
Clive Tompkins: And is this a conscious decision, or have you just followed the work flow?
Bob Browning: It really was a conscious decision. We were actually prevented form operating or selling in the United States through some protectionist legislation called the Jones Act, and so the establishment of our facility in Mobile Alabama was designed to allow us to produce ships for that market. We then saw an opportunity with a vessel we produced for a customer in the Canary Islands that we thought an adaptation of that would fit the Navy’s Littoral Combat Ship program and were successful in winning that contract.
Clive Tompkins: The global financial crisis has seen a lot of companies back-peddling, how has Austal been affected?
Bob Browning: It clearly had an impact on our Australian operations with the commercial sales, while the pipeline was quite full, it was taking longer for customers to get the financing that they needed and get to the decision point to actually buy a vessel. So the first half of our fiscal year we had a real trough in the order book. We’re seeing that coming good now, we’ve had three large orders here in calendar year 2009, and clearly the strongest part of our business, the U.S. Navy business, coming forward will take a lot of that volatility out of our business.
Clive Tompkins: So how many months work do you have?
Bob Browning: In the Australian operations we have an order book that will take us out to 2011. In the Navy, because these are multi-ship programs, we’re going to be building vessels just for these two programs for the next eight or nine years.
Clive Tompkins: And what other metrics does a ship-builder monitor in terms of performance?
Bob Browning: If there’s one thing the ship-building industry has its metrics. We measure everything from our cost performance indices, how are we doing against the planned cost for the ship. Schedule performance indices, are we going to deliver the ship on time. Our EBIT margins obviously are very important, do we have the workforce lined up to handle the order book that’s in place, it’s a constant balancing act.
Clive Tompkins: What about margins, are they coming under pressure as government finances are being strained?
Bob Browning: Not so much because of government finances, in fact that’s actually been a more stable piece of our business. The margins of late have come under a bit of pressure because of the first-in-class Littoral Combat Ship that we built. It was a cost plus contract where we earned a fee, but as the cost of the vessel goes up the EBIT margins get squeezed a bit. That’s unique to that one vessel, the vessel’s we build going forward are on a fixed fee contract and are much more predictable in terms of the earnings.
Clive Tompkins: Turning to your work with the U.S. Navy, you’ve just received funding to purchase equipment another two Joint High Speed Vessels. Without actually receiving the contract to build at this stage, how significant is this?
Bob Browning: It’s very significant. It’s a 10 ship program, and so the Navy allowing us to go out and buy the water jets and diesel engines and reduction gears, the big equipment for vessels two and three, is a very clear signal they intend to award those contracts. And so when you add that program up with Littoral Combat Ship program we could be sitting here a year from now and we’ll have $1.5 billion of ships in the order book.
Clive Tompkins: And is this normal to be awarded funding in advance of receiving a contract?
Bob Browning: It’s somewhat unusual. The Navy saw an opportunity to save some money in the cost of this equipment by ordering a bit sooner, more importantly for us it’s a clear signal you know the Navy is not going to order this kind of equipment if they aren’t going to award the rest of the ship. And so we see it as a very significant event in terms of the surety of the next two vessels coming to us.
Clive Tompkins: And have you done work with other Navies?
Bob Browning: We have. We built 14 Armidale Class Patrol Boats for the Royal Australian Navy. We finished the delivery of the last of those vessels up last fiscal year. We have built patrol boats for the likes of Yemen and Kuwait. We are currently building coast guard vessels for the Maltese Coast Guard, and we’ll deliver six patrol boats to the Trinidad Navy as well later this year. So Austal is creating a global awareness in terms of patrol boats in the international market.
Clive Tompkins: And onto your competition. Who are your main competitors?
Bob Browning: Our competition depends upon the type of vessel we’re building, as you can imagine. With the U.S. Navy the only competitor we have there is with Littoral Combat Ship program in which Lockheed Martin is a team that’s building a very different style of vessel. While it’s a competitor we expect the Navy to split that contract and we’ll build probably 25 to 27 of our version of the LCS and Lockheed will build 25 to 27 of their version. When you get to commercial car passenger ferries probably our most significant competitor would be Damen out of the Scandinavian area and Incat in Tasmania actually. So it really varies depending on the whole form that we’re building.
Clive Tompkins: How difficult is it for other ship builders to enter your key markets?
Bob Browning: I think we’ve got a strong barrier to entry into our business, particularly in the United States, there’s no other builder of aluminium vessels in the U.S. of our size. We are the largest in terms of market share for large catamaran fast ferries in the world. And it’s a unique skill building with aluminium. We think it’s going to continue to be a strength for us because the operating costs on these vessels are far less, being a lighter material it takes less power to move them at the same speed.
Clive Tompkins: Last question. Bob where do you see Austral in 12 to 18 months?
Bob Browning: It will be a rapidly growing business. As I mentioned earlier we will have $1.5 billion worth of ships in the order book within a year. But that number is going to continue to grow because the Navy is accelerating their acquisition schedule, it appears to us, in vessels. And so that’s going to translate to a much more stable order book, and we believe the market then will be able to see out beyond 12 months which then translates hopefully to a re-rating of the stock. So we‘re feeling very, very good that this is a big inflection point for the company into the future.
Clive Tompkins: Bob Browning thanks for introducing Austal.
Bob Browning: My pleasure.