30 June 2023

 

 

 

Harland & Wolff Group Holdings plc

("Harland & Wolff" or the "Company")

 

Audited Financial Results for the Financial Year Ended 31 December 2022

 

Harland & Wolff Group Holdings plc (AIM: HARL), the UK quoted company focused on strategic infrastructure projects and physical asset lifecycle management, is pleased to release its audited financial results for the financial year ended 31 December 2022. These financial results are for the twelve-month period ended 31 December 2022 whilst the financial year 2021 comparative is for a seventeen-month period from 1 August 2020 to 31 December 2021.

 

Key highlights:

·      Revenues of £27.96 million (2021: £18.51 million)

·      Loss for the year of £70.35 million (2021: £25.50 million)

·      769 core employees at year end 2022 (2021: 410) and apprentices at 64 (2021: 37)

·      First ever corporate debt facility of $35 million entered into in March 2022 and upsized to $100 million by the end of the year

·      Appledore deferred consideration paid in full

·      Key contract wins:

o  M55 Regeneration Programme £55 million

o  Cory Barges contract £18 million

·      Preferred Bidder status achieved in November 2022 for the £1.60 billion Fleet Solid Support (FSS) Programme; Subcontract with Navantia executed in February 2023 with the Company's share estimated at £750 million (adjusted for inflation)

 

The full annual report has been published today and is now available to view on the Company's website: https://www.harland-wolff.com and will shortly be posted to shareholders who have requested a physical copy.

John Wood, Group Chief Executive Officer, Harland & Wolff Group Holdings plc comments: "The Company has made significant progress in 2022 in its revenue generation and contracted backlog which now sits at approximately £900 million. Having completed the third year of our turnaround strategy at the end of FY 2022, we have started on a strong foot at the beginning of FY 2023 with the award of the subcontract for the FSS Programme. Whilst the FSS subcontract is a game-changing contract win for the Company, it will take several years to deliver and we still have a lot to achieve over the next two years in order to turn this Company into a target £500 million per annum business. We believe this is a wholly achievable goal and our maturing presence across five markets will fuel the growth that we are targeting by the time we end the fifth year (FY 2025) of our turnaround strategy.

 

Chairman's Statement

Our collective achievements during 2022 are a credit to everyone at Harland & Wolff but particularly to the vision and dedication of our outstanding executive leadership team.

 

Building our business involves many parts, but the most pleasing for me to witness are the expanding orderbook and the wealth of talent now joining us. All the effort of recent years is beginning to bear fruit as we win orders across five markets, notably of course the securing of the Royal Navy's Fleet Solid Support (FSS) Programme.

 

As Chairman of this growing enterprise, I am fortunate to have the support of wise and engaged Board colleagues, a strong and forward-thinking executive team, and a high calibre workforce working with dedication to deliver on our vision to redefine our industry and pioneer twenty-first century offshore and maritime engineering with daring ingenuity.

During 2022, the team secured a $70 million Green Term Loan Facility with an affiliate of Riverstone Partners, which was subsequently upsized to $100 million. Securing this facility has been instrumental in meeting the Group's growing capital needs as further investment was made to support the winning and execution of a wider range of fabrication contacts. The two barge fabrication contracts that Belfast secured from the Cory Group have set the fabrication halls in Belfast in motion and are preparing the workforce for the FSS fabrication programme. The award of the M55 Regeneration Programme marked a watershed moment for the Group as our first and formal entry into the defence market. These events are a clear demonstration of the capabilities of the Group and I am delighted that all the hard work put in over the last few years is finally yielding results. We aim to finish 2023 in a much stronger position and with a sizeable orderbook going into 2024.

 

Strong Foundations

Over the last year, our team has secured and delivered on projects at the sites we acquired in 2019 (Belfast), 2020 (Appledore) and 2021 (Methil & Arnish) and taken the key steps necessary to ensure we are prepared for the long-term through investment in the yards, in skills and in building a backlog in the orderbook. Whilst further advancing our original Islandmagee gas storage project, vital to UK gas supply, we have all the while been building Harland & Wolff into a fully functioning four-site fabrication and ship repair business. In addition to filling the Belfast shipyard with increasingly complex dockings, the team is bringing shipbuilding back to Methil with the Cory barge contract split between Belfast and Methil; is fabricating mining infrastructure and exporting in Arnish; and delivering valuable defence projects in Appledore.

 

Our Future

As vessel dockings increase in complexity and major fabrication projects are secured across all markets in the medium term, we are well placed to continue moving the business forward, and significantly ramping up our revenue generation. With our strategy of serving five markets across six services encompassing the complete lifecycle of an asset, I am confident that we will achieve formidable growth in the medium-term and sustain a vibrant business in the long run. Proud of our history, we are also nimble proponents of change. I am particularly keen to see us further extend our environmental, social and governance (ESG) efforts. Sterling work is being done to ensure diversity and inclusion across the business, and you will see in this year's report for the first time, that we report on TCFD. Among other initiatives where we are already having an impact for good, we are proud of our apprenticeship programme which continues to grow, providing solid high-quality career paths for people in parts of our country that are in the vanguard for levelling-up.

 

Post the balance sheet date, we secured the manufacture subcontract for the FSS which will see a £77 million investment into technology in our Belfast yard, making it the most state of -the -art shipyard in the UK, also bringing a ramp up of 1,200 shipyard jobs across Belfast and Appledore. This contract award is a game -changer for the company and will allow us to rekindle and modernise worldclass shipbuilding skills and trades that were otherwise dying out. FSS has enabled us to build a legacy that will provide secure and sustainable high-quality employment for decades to come.

 

I would like to place on record my thanks to the hard-working and dedicated team who helped to secure this contract and to our close partners, Navantia and BMT. It is thanks to all of you that we have been able to bring complex shipbuilding back to Belfast.

 

Board of Directors

During the year, we welcomed Katya Zotova to the Board. Katya brings over 25 years of experience in strategy and business development, investment banking and private equity, and has already contributed greatly to the ongoing success of Harland & Wolff. Further development of our Board will take place alongside the very significant commercial expansion that is already underway. Committed to serving all our stakeholders, we are clear in our vision and firm in our purpose. Buoyed always by your unstinting support, we are confident of building a brilliant future.

 

Malcolm Groat

Chairman

 

 

 

 

Chief Executive Officer's Statement

Harland & Wolff has continued to grow at a pace, having secured major contract wins such as the Fleet Solid Support (FSS) Programme and M55 regeneration programme, it is now well on its journey to revitalising shipbuilding and fabrication skills at all it sites.

 

Looking over 2022, I am proud of how the Group has successfully navigated the impacts of the COVID-19 pandemic, a war in Ukraine, rapid inflation increases, and supply chain delays. Inevitably, some of these challenges will persist through 2023, but we continue to deliver on projects won, be awarded new contracted works and build our backlog in order to secure a financially strong performing business for our shareholders.

 

Harland & Wolff has continued to progress in 2022. We have taken ourselves from a one-project non-revenue generating company in 2019 to a Group that has one of the largest fabrication footprints in the UK, from zero revenues in December 2019 to £27.96 million by the end of 2022, and from securing contracts worth just thousands in 2021 to securing the FSS manufacture contract worth an expected c£750 million over a seven-year period (adjusted for inflation).

 

Our revenues for the period ended 31 December 2022 stood at £27.96 million representing a material increase over the £18.51 million achieved over a 17-month period to 31 December 2021. By any standards, we still have much to achieve. Given the contracted revenue flow already generated in 2023 for FY3 and FY24, we can reasonably expect FY23 revenues to be in the region of c£100-£115 million, consistent with market guidance. Our contracted revenues for FY24 have already exceeded £70 million at the date of this report. We are seeing significant traction in contract fruition going into Q3'23 and beyond, giving us confidence of achieving further growth as I have outlined in March of this year.

 

We have seen very healthy growth to our business since 2021 and key achievements include:

1.     Contracted backlog increase from £110 million to £900 million (based on management estimates)

2.     Largest single contract size increased from £55 million to £750 million

3.     The workforce has grown to 769 personnel

4.     Debt facility moving from $35 million to $100 million, with negotiations ongoing to complete a £200 million refinancing facility with UK Export Finance guarantees and a syndicate of private lenders and commercial banks, expected to complete in early autumn 2023

5.     Uncontracted weighted pipeline of opportunities increased from £1.36 billion to over £2.50 billion over a five-year period

6.     Securing our first export contract

7.     Securing our first defence contract

8.     Securing our first large commercial fabrication contract

 

We are confident of the above trends continuing and we continue to pursue opportunities aggressively yet with the pragmatism of picking and choosing carefully the projects on which we bid. To that extent, we have introduced a new Client Relationship Management (CRM) system that is used across the group to track opportunities and convert them to executed contracts.

 

We have worked tirelessly at converting our pipeline of opportunities into contracts. Our goal is to become a £500 million per annum turnover company within five years and aspire to maintain a blended gross margin of 24%-27%. This clock started ticking in 2020/21 and we are now in our third year of this turnaround strategy. I have firm belief that we can achieve this ambition given our growing backlog as well as pipeline of opportunities. We are deeply involved in two "sunrise markets" - defence and renewables. Whilst contracts in both these markets admittedly have long gestation periods to fruition, once contracted, they lend themselves to multi-year stable revenues that provide a solid baseline from where to grow. The cruise & ferry market is set to be buoyant from 2024 onwards given the level of inquiries and bid submissions that are leaving our door. We welcomed our first major cruise repair contract in the summer of 2022 - the Queen Victoria. With the successful redelivery of this vessel to the client, we have now grown to become a credible shipyard for cruise clients.

 

We were delighted to be awarded Preferred Bidder status for the prestigious three-ship Fleet Solid Support (FSS) Programme in November 2022. The relationship with the Ministry of Defence and Navantia was crystallised in February 2023 with the formal execution of the Sub-contract with Navantia. Following its execution, we have now embarked upon a £77 million regeneration programme in Belfast in preparation for fabrication of the first ship commencing in 2025. The FSS Programme will not only provide a baseload revenue line for the next seven years but will also enable us to make Belfast one of the most modern, efficient and cost-effective shipyards in the UK and Europe. Notwithstanding the increased levels of productivity and optionality that this regeneration programme will provide to the Group, it will significantly enhance our social value outcomes across some of the most deprived communities in the UK. We have embarked on an aggressive apprenticeship programme and are reskilling / upskilling our workforce who will embrace the latest shipbuilding technologies along with utilising decades of experience that they already carry. The world is changing and we are changing too; embracing new technologies, introducing a flexible work culture and creating stimulating opportunities for the next generation of Harland & Wolff employees are things that will enable us to grow and thrive in an increasingly competitive and volatile global environment. We are delighted to be partnering with Navantia and BMT on the FSS Programme and look forward to a mutually fruitful relationship in the years to come.

 

There is a substantial opportunity within our five markets, our biggest operational inhibitor is an appropriately skilled workforce to secure and execute on the growth opportunity. To address this the Group has a fast-growing apprenticeship scheme. We employed our first intake of 37 apprentices in 2021 and to see this increase to 64 in 2022. We will continue to increase our total number of apprentices to over 100 during the next academic year. We are building for the future and taking this path is critical to ensure enough skills are available as we continue to grow the business.

 

One of the keys to achieving our growth objectives is ensuring that we have enough working capital and a calibrated capital investment programme to meet the growing needs of the facilities. Whilst we have undertaken several equity raises over the past few years, our growing reputation, sizeable contract wins and a track record of delivery have all enabled us to explore other options of financing the business. Our first ever corporate debt facility for $35 million was entered into in March 2022 and was upsized to $100 million at the end of year. We will continue to seek larger levels of financing at lower cost as we continue to win new contracts and stabilise the business.

 

Our Islandmagee gas storage project has been effectively future proofed with a pre-FEED study conducted for the storage of hydrogen making it of strategic importance. The Group continues to work on the judicial review after having been awarded the marine licence and expect to receive the outcome of this in the second half of 2023. Having sought legal opinion, we have been advised that the application has limited chance of success. We will continue to explore several funding options for this project with ongoing engagement from interested parties. Alongside exploring the development of the project the Group has also received interest to sell the project in its entirety. The Board will review the options available to the Group with a view to securing a commercial solution that is in the best interests of shareholders.

 

Whilst a lot has been achieved, there remains a tremendous volume of work that still requires to be undertaken to deliver on our strategic plan. With this in mind, we will be looking to strengthen our senior leadership team over the course of 2023 to ensure we have the appropriate experience and talent in place to achieve our vision. Our workforce is the bedrock of our success, and we will look to keep upskilling them and growing these numbers as we move forward.

 

I wish to thank the Ministry of Defence and the National Shipbuilding Office for their unstinting support and guidance through the year. I also wish to thank all our clients and the ever-growing supply chain for the confidence that they have shown in us over the last year. I look forward to working closely with them in the coming months and years. Finally, I wish to place my thanks to all our shareholders and wider stakeholder group for the support that they have provided to Harland & Wolff.

 

Our aim is to capitalise on this massive growth opportunity and to build a large and sustainable business that delivers value for all of our stakeholders and I look forward to reporting on our successes over the course of 2023 and beyond.

 

John Wood

Group Chief Executive Officer

 

 

 

Chief Financial Officer's Statement

I am pleased to write to shareholders and stakeholders to share my views on the year gone past and the outlook for the future.

 

Having emerged from the COVID-19 pandemic that ravaged the global economy, we were struck by two new challenges, once again, that had global ramifications; rapid inflation caused predominantly by a very stretched supply chain and the onset of the Russia-Ukraine war. High inflation rates across the world persisted throughout 2022 and has continued into 2023. Whilst we believe that it has now peaked, it remains unclear how long it will take to unwind. The rate of inflation has caught everybody by surprise and there are very limited tools to counter it. Consistent hikes in the base rates by central banks around the world have caused an increase in the cost of capital. For a high growth company like Harland & Wolff, that has growing capital needs, this has proven to be a difficult path to go down, as evidenced by higher financing costs recorded at the year-end. The Russia-Ukraine conflict continues to weigh on the global economy. Whilst energy prices peaked in Q3/Q4 last year but mitigated to some extent with the onset of summer, a combination of energy supply volatility and transitioning into renewables and green energy could well see energy prices on the upswing post-summer. Whilst we have been able to contain our energy costs through a series of fixed price contracts over winter, our energy consumption is a function of the volume of work going through our yards. For the months in which we receive or conduct a large volume of additional works the Group has to buy energy on the spot market leaving us exposed to prevailing energy prices that sit outside of our hedged position. We are in a business that competes globally, therefore, whilst increased costs are shared with clients, we need to be mindful of the quantum of such pass-through. Whilst we aim to maintain a blended gross margin of between 24%- 27% in the medium term, we expect to see a drop in these margins in the short term before they recover, as evidenced from the gross margins achieved in FY 2022. The mitigating measure for a loss in the gross margin rate is to drive larger volumes of work through the yard and we continue to do so in 2023 and for 2024.

 

For the 12-month period to 31 December 2022, we generated revenues of £27.96 million (2021: £18.51 million), a significant increase over the previous period given that the previous reporting period was a 17-month period. Gross profits were £5.75 million (2021: £5.22 million) and we achieved a gross margin of 20.57% (2021: 28.21%). For the financial year 2022, we expected to see a drop in the gross margins on account of wage and energy inflation as well as a change in the nature of contracts within our portfolio, i.e., expanding our portfolio from predominantly cruise and ferry to commercial fabrication (Cory) and defence (M55). It has also taken time for incremental costs to flow into contracts which allow for cost escalation. Looking ahead, we have put in place a number of cost mitigation measures such as group bulk procurement for consumables, energy hedges, steel price exposure to clients' account and inflation indexation clauses on multi-year contracts. As these measures feed into the system, we expect margin improvements in FY 2023 and future years.

 

Operating losses stood at £58.06 million (2021: £22.37 million), and a substantial proportion of this was related to the recruitment of personnel across the board in preparation for bidding on large value contracts across the five markets. A large number of personnel were hired in preparation for key contracts such as the M55 Regeneration Programme, Cory barges and for FSS. Delays to the formal execution of contracts in order to commence work on these programmes have caused the workforce to be "benched" in 2022 and this should reverse itself out in 2023. Having said that, it is imperative that we keep growing our team and build key skills in-house. Whilst this strategy has an adverse short-term impact of skewing operating costs, over the longer term, we believe it will lead to significant cost savings by avoiding the excessive use of external consultants, who are typically more expensive than an inhouse skilled workforce. We expect to keep building this core base of skilled personnel in 2023 whilst we prepare for the FSS programme and other large contracts that we expect to win in the short term. Inevitably, we will go through the "benching" process in FY 2023 as well which we believe should correct itself in FY 2024.

 

I am delighted to report that we signed our first significant corporate debt deal with Riverstone Credit Partners, a New York based private credit fund. From an initial committed amount of $35 million, we have upsized the facility to $100 million during FY 2022. This deal has put us firmly in the corporate debt market. In order to bring down the cost of capital, we expect to refinance Riverstone out of the Company in 2023. As part of the refinancing process, we are engaged with UK Export Finance (UKEF) and other high street lenders with a view to achieving two objectives; bringing down the overall cost of capital and further upsizing our facility to £200 million. As part of this process, we were subject to a highly detailed five-month due diligence process conducted by Grant Thornton on behalf of UK Export Finance. The Independent Business Review Report (IBR) was formally published by Grant Thornton at the end of May and validated our strategy of operating in five markets and six services as well as confirming the substantial addressable markets and weighted pipeline that we have been building since 2020. The report also highlights criticality of human and capital resources to take this business to a £500 million p.a. company. We recognise the challenge and are gearing up on both fronts in a methodical manner.

 

We are now at an advanced stage in our negotiations with UKEF and our lending consortium and expect the refinancing to be completed in early autumn 2023. This is a five-year deal and it is important that we get the economics right. Our current cashflows allow us to take the time and get the best possible deal for the Company and its shareholders. We will be making announcements on this deal as it matures and comes to fruition.

 

As we become more mature as an organisation and pick up higher levels of debt, one of the important metrics that we will be reporting on is the net debt level at periodic intervals. Accordingly, our net debt as at the end of FY 2022 stood at £82.51 million (2021: £14.05 million). This highlights the fact that we are under-capitalised and would need to balance our capital stack in due course.

 

Total loss for the year stood at £70.35 million (2021: £25.50 million) which was reflective of increased borrowing costs and an increase in the size of our core workforce from 410 to 769. We also incurred additional legal, professional and consulting fees of £4.50 million (2021: £1.95 million) which further reinforces our position of acquiring in-house skills. We absorbed further costs of £6.38 million as a result of incurring non-capital development costs and increased labour costs to provide the Company with the ability to ramp up as quickly as possible for extensions to existing contracts and in anticipation of new contracts.

 

Looking ahead, FY 2023 and FY 2024 are years of growth and consolidation. We will continue to make investments across the Group especially in preparation for the FSS Programme. A £77 million capital expenditure has been approved for the refurbishment of Belfast, which is expected to convert Belfast into one of the most modern and productive yards in Europe. We will also be making investments in our other sites to improve productivity and cross-yard optionality with a view to driving economies of scale and increasing margins. The impacts of these investments may not be felt immediately within the financial year but will reap long term rewards. The goal is set; £500 million per annum by the time we get to the end of our 5-year turnaround strategy. We are now in our third year of our five-year strategy.

 

Finally, I would like to thank all our shareholders, internal and external stakeholders for their unstinting support. We are on a journey and with each passing month, we are making progress on all fronts.

 

Arun Raman

Group Chief Financial Officer

 

 

  

For further information, please visit  www.harland-wolff.com  or contact:

 

Harland & Wolff Group Holdings plc John Wood, Chief Executive Officer Seena Shah, Head of Marketing & Communications	+44 (0)20 3900 2122 [email protected]    [email protected]
Cenkos Securities plc (Nominated Adviser & Broker) Stephen Keys / Callum Davidson / Dan Hodkinson (Corporate Finance) Michael Johnson (Sales)	+44 (0)20 7397 8900
Liberum Capital Limited (Joint Broker) Nicholas How / Edward Mansfield / Lucas Bamber / Antonia Brown	+44 (0)20 3100 2000