This announcement contains inside information

30 December 2022

Harland & Wolff Group Holdings plc

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

 Trading update, termination of Saipem contract and update on Debt Financing

Harland & Wolff Group Holdings plc (AIM: HARL), the UK quoted company focused on strategic infrastructure projects and physical asset lifecycle management, announces a trading update in respect of its year end to 31^st December 2022 ("FY 2022"), as well as an update on its debt refinancing programme announced on 9^th November 2022.

Trading update

On 13 July 2022, the Group announced that it had been awarded the M55 Regeneration Programme (M55 Contract) by the Ministry of Defence (MOD) on behalf of the Lithuanian Defence Materiel Agency, with a contract value of £55m and contractual payments spread across FY 2022, FY 2023 and FY 2024. Whilst work on the contract commenced in August, the Company has not been able to undertake certain key workstreams during the fourth quarter of FY 2022 due primarily to a lack of material availability and specialist Original Equipment Manufacturers' parts, which have been impacted by global supply chain issues. As a result, management expects  approximately £20m of revenues from the M55 contract to be deferred into H1 FY 2023. Whilst it is unfortunate that the Company could not advance these workstreams to book revenues in 2022, the overall project is still on track and in line with the  base redelivery schedule for the vessel. In addition to the M55 project, the Appledore facility has been successful in winning other smaller fabrication works which are essential to ensuring that the Company continues to build the skills required for the Fleet Solid Support Programme ("FSS") and keep a multi-skilled workforce readily available.

Ongoing geo-political uncertainties and global inflation have also caused certain other clients within the cruise and ferry market to either defer their contracts into 2023 or reduce the scope of works. As a result, management estimates the loss of revenues on this account for the fourth quarter for FY 2022 to be between £8m and £10m. The Company expects this amount to be deferred to H1 2023 when clients are scheduled to place contracts for dry docking in Belfast with new FY23 budgets.

The Company has also decided, in mutual agreement with Saipem, to terminate the contract for the fabrication of four wind turbine generator jackets for the offshore NNG Project.  The original contract was entered into in April 2021, based on the economic assumptions at that time, and since that date has encountered numerous issues with payments, delays and defective materials, with resultant cost escalations which the Company has determined it will not bear given that it has not been possible to find a mutually acceptable methodology to split these additional costs between the parties. The Company has therefore determined that continuing with the project will be sub-economic from a target margin perspective and would, therefore, not be in the best interests of the Group. Management has determined that the capacity in Methil could be far better utilised on more economically viable projects, which are expected to come to fruition in H1 2023 onwards. Accordingly, the Company and Saipem have commenced the process of negotiating and reaching a mutually acceptable commercial settlement in order to evacuate the materials from Methil and make way for other projects. The estimated revenue for Q4 2022 against this project was c£5m, part of which the Company expects to recover on final settlement during H1 2023.

As an immediate step, the Company will move the fabrication of two barges of the Cory contract into Methil commencing January 2023. This will keep production flowing through Methil's fabrication halls and is also expected to speed up delivery of the barges to the Cory Group, with two sites (Belfast and Methil) working on six barges in tandem.  This will have the added benefit of freeing up the Belfast facility sooner for contracts that Management believes it is well positioned to win in 2023.

The Methil facility was acquired in February 2021 with a view to providing fabrication capacity and capability for a large number of Scotwind related contracts that will commence from 2024 onwards. The renewables market is complex and is not dissimilar to other large projects in that the gestation period from commencement of negotiations to formal contract takes between 18 and 24 months. Whilst negotiations are ongoing with a large number of Scotwind awardees with contract start dates in 2024 and 2025, the Company continues to build its skills and capabilities through the performance of smaller and shorter length contracts. The Company remains firmly of the belief that the Methil facility is ideally suited for large and complex offshore fabrication programmes, and is, accordingly, in discussions with developers who remain committed to local content and reinforcing the local supply chain alongside the Company.   Whilst renewables are the core focus, Methil has many opportunities in component and block manufacturing for the shipbuilding and conversion sector. Given the  large offshore programmes currently underway in Scotland, this facility is ideally suited to benefit from these opportunities. A large number of such fabrication programmes have already been tendered for in 2022 with award decisions to be made in 2023.

Our Arnish facility continues to perform well and win new projects as well as being awarded extensions to existing projects. Given the specialist nature of this fabrication facility, the Company sees strong demand in 2023 and beyond.

The Group previously announced in its interim results on 30 September 2022 that it expected to achieve revenues of between £65m and £75m in FY 2022. As a result of the issues detailed above, which have led to material deferments in December 2022, the revenue out-turn for FY 2022 is expected to be materially below expectations at between £29m and £31m. Despite lower than expected revenues the Company has achieved a 56% increase in turnover in a 12-month period in comparison to the 17-month period ended 31 December 2021 (FY 2021: £18.51 million).

Whilst the out-turn for FY 2022 is disappointing, the Company remains confident that the bulk of the revenues attributable to FY 2022 will be booked during the course of H1 2023. Despite global pressures, the Company's pipeline of opportunities remains strong and contract negotiations continue with a large number of clients across all five of the Company's markets. The Company's current focus is to ensure the right blend of converting smaller and shorter-term opportunities into formal contracts across the Group with a view to generating cash as quickly as possible, whilst larger and more complex projects come to fruition during the course of 2023 and beyond.

Finally, contract negotiations in relation to FSS are continuing to progress between MOD, Navantia, BMT and the Company (Team Resolute). The Company remains excited about this transformational £1.6 billion programme and significant resources are being deployed to take this programme to execution stage as quickly as possible. Further announcements on contract execution will be made in due course.  

Debt refinancing - proposed expansion of facility

On 9 November 2022 the Company announced it had executed a term sheet with Astra Asset Management UK Limited (Astra) for a £70m facility whilst working together to increase this to £100m.  Following the announcement of Team Resolute's Preferred Bidder status for the FSS and a review of the potential contracted order book for 2023 and 2024, the Company and Astra are jointly working to further increase the new facility to between £150m and £200m. As the Company executes larger contracts, it believes that it is crucial to maintain a significant quantum of liquidity with a larger committed facility that can be drawn down as and when needed.

Given the export orientation of the Company's potential order book over the next 2-5 years, the Company and Astra are also formally engaged with UK Export Finance (UKEF) as part of the Company's export growth strategy across its five key markets.  Whilst discussions with UKEF have already commenced, there can be no guarantee of UKEF's formal participation at this stage and such participation will be subject to UKEF's own due diligence processes and formal credit committee approval. The Company is currently working with UKEF to fulfil its due diligence obligations.

On the basis of these discussions, the proposed debt financing is now expected to close in Q1 2023. Financial close is contingent upon completion of due diligence and credit committee approvals of Astra and UKEF respectively. The Company will provide further updates in due course.

John Wood, Group Chief Executive Officer, Harland & Wolff Group Holdings plc comments: "Whilst it is disappointing that we have not met our aspirations for FY 2022 due to timing issues, we have made significant progress over the last twelve months, and I am confident that we will see a robust 2023 with deferred revenue from 2022 which will start getting booked during the course of H1 2023. Despite the external challenges that we face, I believe that we are now at the cusp of a major transformation of the entire Group and the team is working hard to convert bids into contracts. We have now developed a track record of delivering projects for our clients and are at the stage of reaching that critical volume of work that we need for the Group to acquire stability and accelerate  organic growth. 

Key to our development and a successful transformation is having a balanced funding stack in place so we are very focused on concluding the new expanded Astra and UKEF Facility to support our growth aspirations over the months and years ahead."

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.