RNS REACH

9 October 2023

Harland & Wolff Group Holdings plc

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

Maritime Operations Commencement & Isles of Scilly

Harland & Wolff Group Holdings plc (AIM: HARL), the UK quoted company focused on strategic infrastructure projects and physical asset lifecycle management, provides an update on its proposed strategy regarding the ferry build and operate programme to service the Isles of Scilly, as well as an update on its maritime operations.

Update on Maritime Operations

As part of the Group's strategy, the Company aims to establish its own marine operations business when it has a critical mass of maritime operation activity. To date, it has been contracting with various organisations to assist with its docking and undocking operations, as well as towing vessels and barges between its yards and for the transportation of materials between its sites. As the Company progresses towards cutting first steel on the FSS Programme in 2025, the demand for such marine operations will only increase as the Company commences moving blocks and major component parts around the different sites.

The Directors believe that sub-contracting of marine operations beyond a certain level is inefficient from not only a physical efficiency perspective but also a financial one. The Company is now in the position where significant savings can be made by commencing its own marine operations division. To this end, and as a matter of priority, a tug has been identified to acquire. This tug will have a bollard pull of around seventy-five tonnes and will be utilised internally by the Company in addition to being operated on the spot market when internal demand is low. The spot market for tug hire is highly lucrative, given that demand for tugs far exceeds their supply. The Company expects this tug to be in operation by the end of 2023. For the avoidance of doubt, this tug is in addition to the two green tugs that were announced earlier this year.

Isles of Scilly - Proposed Ferry Build & Operate Programme

The Directors believe that the Isles of Scilly to Penzance route is significantly underserved by its current operation. The route typically sees a surge of demand in the summer from tourists wishing to take day trips to the island. Furthermore, the ability to move freight across the route is limited by current capacity. Noting also the limited accommodation on the islands, the directors believe that fast transit on and off the islands is essential. Further, the long-term ability to move freight across this route is limited by current capacity. By replacing old for new vessels on a broadly "like for like" basis, the same problems relating to the lack of connectivity and poor freight service will continue to persist.

Given the existing state of operations and proposed new plans, both of which are inadequate for the islands' needs, its tourism sector and movement of freight, the Company has identified an opportunity to provide necessary improvements within the Isles of Scilly ferry market through the build and operation of two ferries on the Penzance to Scilly ferry route as well as one inter-island vessel. The Company has been considering the opportunity to build and operate ferries its own right, having spent three years working on and developing its own specific design and costing model for these vessels. The Company sees a significant opportunity to provide upgraded services on this route to all islanders and tourists.

Future plans that are currently being proposed to service this route indicate that the new vessels will be built outside the UK and will not utilise any levelling up funding that is available. Instead, commercial debt will be taken with the potential for a steep fare increase to service and repay this loan. Instead, the Company sees an opportunity to utilise levelling up funding of approximately £48m that is available to build and operate ferries on this route and, accordingly, a detailed analysis of the market has been undertaken including on-island initial consultations, the outcome of which demonstrates that there is a place in the market for a second operator.   

The route is currently unregulated and is available for anyone to operate, although a monopoly continues to exist. The Company has had initial discussions with several ports including St Mary's and has received positive feedback that fair and equal access will be provided to any operators wishing to dock in the ports.

Fast Ferry

Having conducted detailed analysis on the met ocean data and other information, the Company proposes to introduce a new fast ferry service between either Penzance or Newlyn to cover the summer season between May and September, commencing in 2024.  This route is around thirty-eight nautical miles depending on the departure port. The Company currently has four vessels that are under evaluation with speeds of up to forty knots depending on weather conditions. The Company's offering will be to undertake three round trips per day providing the day trip market with the ability to spend the entire day on the islands rather than struggling with a window of only a few hours that currently exists. The vessel of choice would be capable of taking at least 250 passengers. The Company believes that it could provide this improved service at a cheaper price than what is currently charged, with the advantage of a significantly shorter journey time and greater timetable optionality.

Freight Service

The Directors believe that the current freight service is inadequate as it does not deliver year-round capacity into St Mary's or the outer islands in a cost effective or time efficient manner. The Company proposes to collaborate with local south-west organisations to offer an end-to-end freight service, with a view to offering a superior service to that which is currently available. This proposal would involve the introduction of additional vessels of different sizes and specifications to ensure that a minimum capacity of 550 tonnes of cargo per week is made available with the ability to upscale this should demand increase.  Should the demand be less than expected, vessels could be deployed on the spot market on other routes given that they have the ability to be general purpose commercial cargo and work vessels. In line with this strategy, the Company had entered into Heads of Terms (HoT) with Kraken Marine Services Limited ("KMS" or the "Seller") for the acquisition of the entire business including the assets of the Seller. Subject to completion of this acquisition, KMS' assets will be used immediately to move component parts, steel and equipment between the yards. Additionally, the Company will help grow the existing freight and marine business of the Seller with external contracts across the south-west region and the Isles of Scilly. Further details will be made available upon completion of the acquisition. 

New Vessels and Levelling up Funding (LUF)

Given the nature of the route, the Company does not believe that it is financially viable to operate the type of new build vessels currently envisaged without utilising levelling up funding or increasing fares substantially. Further the Company believes that the foreign built vessels being proposed are not sustainable because the volumes in the market will not be available for those size of vessels. The Company believes that given the seasonal nature of this route on the one hand, and the stable demand of the islands on the other, a responsible service provider should be offering optionality and dynamic operations depending on the time of the year. Future plans by other parties competing this route have severe deficiencies in this respect.   

Having undertaken discussions with certain stakeholders, the Directors firmly believe that levelling up funding could be made available to the Company in connection with its proposals.  Through receipt of levelling up funding, the Company would not own the vessels; rather it would be responsible for managing them on behalf of a Special Purpose Vehicle. For the avoidance of doubt, the Company would need to tender for the operation and management of these vessels and there is no guarantee that the Company will be awarded this piece of work and be involved within this element of the overall project. The Company remains in competition with others for the award of this work and is currently working on its submission to the local council.

In summary, from an operational perspective, the Company's plans will be significantly different from the future replacement programme that is currently being currently proposed. It will include multiple sailings per day on smaller vessels carrying both freight and passengers. Vessels will depart everyday both from the mainland and St Mary's during peak periods. In addition, the vessels will not only be embedded with current technologies but will also have the optionality to upgrade to new technologies in the future. These vessels will be future proofed from a design perspective to be able to adapt to any future shoreside infrastructure upgrades.

Should the company be successful in its manufacturing bid, these vessels will be built and maintained in the UK, growing the UK economy and facilitating the development of the country's next generation of ship builders.

Air link to the islands

For the avoidance of doubt, this is not a business that the Company has any desire to be involved in. The Company is aware that other operators have expressed interest and wish to understand the Company's future plans with a view to building synergies between the sea and air routes. The Company will enter into discussions about future partnership programmes with air route operators as soon as it as more certainty on its bid for the ferry replacement programme.   

John Wood, Group Chief Executive Officer, Harland & Wolff commented:

"As part of our continued growth and the route to the £500m turnover strategy, we are excited about launching our marine operations to reduce internal costs and to provide a better service at an affordable cost externally. Whilst there is no guarantee that we will win the bid to build and operate the new vessels, we are excited about the revenue generating capacity of the fast ferry and freight services offering. The team that we already have in the Company has extensive knowledge of marine operations and this is a natural extension of our business. We will provide further updates on ownership and chartering details in due course as the project develops."

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

About Harland & Wolff

Harland & Wolff is a multisite fabrication company, operating in the maritime and offshore industry through five markets: commercial, cruise and ferry, defence, energy and renewables and six services: technical services, fabrication and construction, decommissioning, repair and maintenance, in-service support and conversion. 

Its Belfast yard is one of Europe's largest heavy engineering facilities, with deep water access, two of Europe's largest drydocks, ample quayside and vast fabrication halls. As a result of the acquisition of Harland & Wolff (Appledore) in August 2020, the company has been able to capitalise on opportunities at both ends of the ship-repair and shipbuilding markets where there will be significant demand. 

In February 2021, the company acquired the assets of two Scottish-based yards along the east and west coasts. Now known as Harland & Wolff (Methil) and Harland & Wolff (Arnish), these facilities will focus on fabrication work within the renewables, energy and defence sectors. 

In addition to Harland & Wolff, it owns the Islandmagee gas storage project, which is expected to provide 25% of the UK's natural gas storage capacity and to benefit the Northern Irish economy as a whole when completed.