REG - Harland & Wolff - Business Update and Outlook

Harland & Wolff groupAnnouncement

01/03/2023 07:01

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RNS Number : 4074R  Harland & Wolff Group Holdings PLC  01 March 2023

This announcement contains inside information

 

1 March 2023

 

Harland & Wolff Group Holdings plc

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

 

Business update and outlook

 

Harland & Wolff Group Holdings plc (AIM: HARL), the UK-quoted company
focused on strategic infrastructure projects and physical asset lifecycle
management, is pleased to provide a business update and management outlook for
financial year 2023 ("FY23") and financial year 2024 ("FY24").

 

Highlights

·      Backlog of confirmed contracted revenues ("Backlog") totalling
circa £900m, extending over a seven-year period, of which circa £750m is
represented by the previously announced FSS contract

·      In addition, the Company has a weighted pipeline of new business
in excess of £3.6bn of revenues over the next five years; at the current win
ratio of 34%, this equates to a projected Backlog of c£1.24bn

·      Updated outlook for FY23 and FY24

o  Target revenues of £100m - £115m in FY23

o  Target revenues of £200m - £230m in FY24

·      Cashflow breakeven expected in FY24

·      Target Group blended gross margin of between 24% and 27% over the
medium term

·      Upsizing of debt facility with Riverstone Credit Partners LLC to
a committed $100m (previously $75m) whilst the Company closes its proposed
£200m refinancing in early Q2 2023

 

Group Projections

The Company issued a Business Update on 16 August 2022 in which it stated that
the aspirations for FY23 and FY24 were revenues of £100m-£115m and
£200-£230m respectively. At that time, the Company had confirmed a Backlog
of circa £40m for FY23 and had identified further opportunities amounting to
approximately £1.2bn over the next five years across the Company's five key
markets.

 

The Company has since made significant progress in increasing its Backlog
following the FSS Programme contract win and the recent announcement of
additional smaller contract wins. The Company is pleased to report that its
Backlog now amounts to circa £900m over a seven-year period, providing
significant revenue visibility. In addition, the Company has a weighted
pipeline of new business in excess of £3.6bn in revenues, which on a current
win ratio of 34% represents a total of £1.24bn of possible revenues over the
next five years, in addition to the Company's existing Backlog of £900m
(total current and projected Backlog: £2.14bn), in order to help deliver its
medium-term targets.

 

FY23

The year has started well, with an uptick in the level of enquiries flowing
through and all four yards are busy on a range of different contracts across
the Company's target markets. Despite well-documented delays experienced
across the supply-chain and the recently announced termination of the Saipem
contract, the Company continues to maintain its target of delivering between
£100m-£115m of revenue in FY23.

 

For FY23, the Company already has a Backlog of circa £75m comprising defence
contracts of £45m, commercial fabrication of £15m, cruise & ferry work
of £10m and smaller renewables programmes of £5m, as well as a number of
advanced opportunities which leave the management team confident in meeting
these expectations.

 

FY24

The Backlog for FY24 currently sits at circa £75m, of which £25-30m
represents FSS-related revenue with the balance from other defence contracts
of £20m, cruise & ferry contracts of £10m, commercial fabrication of
£10m and renewables of £10m. With the momentum in the business, the Company
is confident of growing revenues to between £200m-£230m in FY24.

 

Cashflow and profitability

Management continually evaluates the projects in the Company's pipeline and
contract mix with a view to striking an optimum balance between cashflow and
margins.

 

The profitability of the Company remains contingent upon a number of
macroeconomics factors, including the rate of inflation, and also the mix of
work within the Company's portfolio across its five core sectors. The Company
continues to target a Group blended gross margin of between 24% and 27% over
the medium term and recent contract wins confirm that this target remains
achievable, even against a challenging backdrop.

 

Management expects gross margins to be between 20% and 23% in FY23 given the
business mix and as new charge-out rates based on higher wage costs gradually
work their way into new and existing contracts through the year. The Company
is also actively negotiating with its energy suppliers on energy costs and the
new, improved rates agreed will also gradually feed into the various contracts
across all the yards through the year.

 

Typically, large defence, energy and renewables contracts attract lower
initial gross margins with higher upfront overheads relative to other markets.
Therefore, upon review of the structure of the Backlog and pipeline, the
Company believes a slightly more conservative view of the annualised cash
break-even threshold is prudent at this stage and believes that annualised
cashflow break-even will be achieved in FY24.

 

Group financing

The Company is also pleased to announce that it has amended its debt facility
with Riverstone Credit Partners LLC, upsizing the loan to $100 million
(previously $75m). This upsized facility is fully committed and will be used
to accommodate the Company's near-term working capital requirements whilst the
Company concludes its £200m refinancing with UK Export Finance and Astra
Asset Management. The Company has agreed further terms with Riverstone in
which the interest payable will be accrued and paid on maturity thereby
reducing the Company's cash outflow on a monthly basis.

 

This £200m refinancing is now expected to close in early Q2 2023, subject to
credit committee approvals and finalisation of the credit agreement and other
ancillary documentation.

 

As part of the £77m FSS Recapitalisation Plan over the next 24 months,
alongside other capital expenditure requirements in the medium term, the
Company is evaluating a number of different financing mechanisms, including
long-term asset financing, in order to achieve a balanced capital structure
for the Company's further development.

 

Market Outlook

The Board considers there to be a continuing improvement in market conditions
across the five markets in which the Company is engaged. Higher charge-out
rates are working their way through the contracts (new and existing) to
reflect the inflationary environment and preserve a blended gross margins
target range of between 24% and 27% in the medium term. Further detail of the
Company's five markets is set out below:

 

Cruise & Ferry

 

Cruise

Enquiries have increased significantly following on from the successful dry
docking of the Queen Victoria cruise vessel in 2022, the largest ever cruise
ship in the UK, for standard dry-docking works and hull painting. Currently,
the Company has over twenty-four cruise docking enquiries that will be
negotiated over the next 12-24 months..

 

Whilst there is no certainty that these negotiations will convert into
contracted revenues, the level of engagement and ongoing negotiations provides
significant comfort on the prospects for Belfast. Certain of the opportunities
involve multi-year and multi-ship group deals. This has the potential to
provide greater contractual visibility as well as being more efficient for
management.

 

Ferry

The ferry market remains buoyant, with the Company securing repeat business
from long-standing clients on a regular basis. In addition, there are now
enquiries coming in from operators on the cross-Channel route, a new market
segment for the Company, which shows promise.

 

Defence

Following entry into the FSS contract and work having commenced on the £77m
FSS Recapitalisation Plan, the Company is in the process of developing its
defence pipeline. There are a number of export opportunities that are in
advanced stages of negotiation and the Company has already secured a
collection of small value sub-contracts from prime contractors which provide
the basis for a more substantial workflow from this area in the future.

 

To date, the Company has focused on fabrication and repair and maintenance
services. The Company is now actively seeking through-life support
opportunities (multi-year repairs and maintenance contracts of between five
and ten years) and has identified over £300m of multi-year contracts that
will have invitations to tender over the next 24-36 months. This is a new
sector for the Company and provides the opportunity to secure additional
long-term and multi-year contracted revenue flow.

 

The Company is currently evaluating design options and potential partners for
the T32 project, as well as three other types of Royal Navy vessels. There are
a large number of customs and Border Force vessels needed in a relatively
short span of time and the Company's distributed ship-build capabilities
across all four yards plays into its strengths of offering expedited delivery
if required.

The former HMS Atherstone that was acquired at the time of executing the M55
contract is undergoing the process of final removal works of parts and spares
to aid the M55 Programme. The current progress development on the M55
Programme has spurred international interest to refurbish the former HMS
Atherstone and reinstate its mine hunting capabilities; however, the Company
retains the optionality of converting this vessel to something that can be
monetised in the commercial market.

Commercial

 

The Company is now able to leverage off the successful delivery of a number of
large projects in the commercial tanker market to develop its market position.
As a result of establishing its credentials, the Company is gaining traction
from international customers for large commercial vessels - including LNG -
with a view to maximising the utilisation of the larger of the two docks in
Belfast ("building dock").

 

Another segment pertains to work vessels where the Company has completed its
first in-house design for a 26m vessel with the optionality of various
propulsion systems; diesel-mechanical, diesel-electric and full electric and
this design basis has been used to tender for a dredger vessel for a UK based
client. Given the flexibility of the design and the optionality on equipment
and propulsion, the Company will be marketing its bespoke design to a larger
commercial market; aquaculture, survey, dredging, freight and general work
boat. The Company will also be looking at licensing this design globally as it
continues to build its repository of designs and Intellectual Property (IP).

The Company's two Scottish yards are now both actively involved in aspects of
shipbuilding, supported by the larger teams in Belfast and Appledore.
Management will bid for the next parcel of ferries that will be put out to
tender for Calmac shortly, positioning itself to deliver the project in
Scotland and provide a substantial boost to the local economy.

 

In Arnish, work continues at pace for the ongoing mining-based project, which
when completed and installed, will demonstrate the Company's capabilities not
only in the marine fabrication market but also in the land-based large
structural steel market.

 

Following on from the successful delivery of the super duplex structures to an
ongoing nuclear power plant project, the Company continues to be in discussion
with the developer for additional work. There is a significant opportunity
within the nuclear decommissioning market which the Company is evaluating with
its joint venture partners.

 

The Company is also making a detailed evaluation of ramping up its aluminium
fabrication capabilities should it be successful in winning projects in that
market. This could be achieved through repurposing of a portion of the
Appledore facility, as well as ringfencing a section at the Company's Methil
facility. The Company is currently seeing substantial demand for aluminium
vessels across the defence and renewables markets and will pursue
opportunities in this area.

 

Renewables

 

The Company is selectively tendering for opportunities in this fast-growing
market in order to increase the win ratio and to reduce overall bid costs. The
Company remains actively involved in discussions with project developers post
the Scotwind announcement last year and hopes to see contracts coming to
fruition in the next 18-24 months. Whilst large fabrication contracts continue
to be the focus from a longer-term perspective, the Company is actively
engaged in the secondary steel and sub-contracting markets for ongoing
projects to maintain a balanced risk profile in the yards and ensure
continuity of work. This mix of projects also helps to ensure that the Company
is partnering with the right clients from a longer-term perspective.

 

Energy

 

The energy markets are slowly but surely showing signs of increasing activity.
Currently, the Company has eight enquiries at various stages in the
contractual lifecycle and comprise of, inter alia, subsea structures, platform
repairs and repairs and refurbishments of FPSOs, one of which has been in
Belfast previously.

 

 

John Wood, Group CEO of Harland & Wolff comments:

 

"It is gratifying to see the levels of activity that are already present in
all of our yards, with the knowledge that this is only going to increase
steadily - and materially - from this point.

 

The Harland and Wolff machine is really starting to hum and our ability to
operate flexibly across multiple facilities will become increasingly important
as an industry differentiator as our workload expands. We look forward to the
future with increasing confidence."

 

 

 

 Harland & Wolff Group Holdings plc                                        +44 (0)20 3900 2122

 John Wood, Chief Executive Officer                                        investor@harland-wolff.com (mailto:investor@harland-wolff.com)

 Seena Shah, Head of Marketing & Communications                            media@harland-wolff.com (mailto:media@harland-wolff.com)

 Cenkos Securities plc (Nominated Adviser & Broker)                        +44 (0)20 7397 8900

 Stephen Keys / Callum Davidson / Dan Hodkinson (Corporate Finance)

 Michael Johnson (Sales)

 Liberum Capital Limited (Joint Broker)                                    +44 (0)20 3100 2000

 Nicholas How / Edward Mansfield / Lucas Bamber / Antonia Brown

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.

 

 

 

 

 

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