Board Report

Message from CEO Fred van Beers

Full-year outlook confirmed, Satisfying margin development, Sound order book, Bright tender funnel.

"It looks like the human tragedy related to the war in Ukraine will continue for a longer period. Whatever the outcome will be, it demonstrates, amongst many other things, the importance of energy independence and security, placing the urgency of energy transition at the top of national agendas across the globe. More than short term revitalizations of oil and gas fields, renewable energy sources are key in this. For the past 20 years, offshore wind as one of the sources for transition, developed from a few countries around the North Sea, the western part of the Baltic Sea and China into many new areas in Europe, the United States of America and Asia.

For the Asia region we have entered into a strategic partnership with GS Entec from Korea to initially convert and in a later stage set-up a monopile factory in Ulsan or elsewhere in that region. It is our intention to grant GS Entec a 10-year mutual exclusive license for the Asian region to use technology developed and applied by Sif, for the purpose of manufacturing monopiles foundations and transition pieces.

For the USA region, discussions with a specific potential partner are ongoing. The recently approved massive federal budget for investment in renewable energy in the USA is an important step to further boost the transition process in the USA. Offshore wind will form an important part of this transition and Sif aims to play a role in that process when a strong partnership with an experienced well established local party can be agreed.

Client demand for climate change adaption solutions is high and increasing which is driving our production increase investment plans. Sifs order book for the period until 2024 is filled with sound projects for amongst others Hollandse Kust Noord, Dogger Bank B, Dogger Bank C and He Dreiht and with some smaller diameter offshore wind projects that partly fill our production lines for pin piles and smaller tubulars. Our capacity for 2023 is fully booked and we aim for a production output of at least 200 Kton. Tendering activity for projects in 2024 remains high including projects for our planned production expansion.

With 89 Kton output in the first half of 2022, we participate in projects resulting in 803 MW renewable energy capacity (576 MW first half 2021). Production was almost equal to the same period last year (88 Kton) and total output for the full year 2022 with 174 Kton is expected to end slightly ahead of 2021s output of 170 Kton. The war in Ukraine resulted in pricing and availability uncertainties around mainly steel and energy. Where increasing energy prices put pressure on our financial results, steel is a pass-through cost. Looking at our main financial and non-financial performance indicators, we expect to generate a slightly higher EBITDA on an adjusted basis compared to 2021. This confirms our guidance at the beginning of the year.

With the replacement of gas pre-heating by electrical pre-heating project well on its way, our ambitions for reduction of our CO2 footprint are on schedule. The combination of increasing product dimensions, relatively inexperienced new employees and production facilities that are reaching the boundaries of what we can handle, we see the injury risk increasing as reflected in our safety KPIs. The lost time incidents (LTI) increased to five compared to one in the first half of 2021, resulting in a lost time incidents frequency (LTIF) of 8.97 (2.63 in first half 2021). Not only have we sharpened our safety policies and instructions, we have also further invested in an open safety culture and continue to invest in safety improving tools and systems.

Higher sickness-leave, tight labor markets and consequential replacement by temporary or less experienced workforce puts pressure on production output, reflected in the forecast production for the full year. Post-closing, we faced a gas explosion in our Roermond-factory. Luckily there were no physical personal injuries but the mental impact on our colleagues was big. Trauma support is provided and one employee was taken to hospital for a two days observation. All gas and electrical circuits and devices were checked following the incident and preventative measures like extra gas detection devices were implemented to avoid a similar situation to happen again. A thorough root cause analyses is being executed and upgraded training and instruction procedures are put in place to manage the human factor related to this event.

Ever increasing product sizes is a trend we have been discussing for the past years; products increase in diameter, length and weight. The handling of these products in our existing facilities has reached its limits. The monopiles for Dogger Bank are the largest we have ever manufactured. Their diameters and weights measure close to nine meter and between one and 1.4 Kton respectively. This reflects what is assumed to be the lower end of the standard going forward. More than 80% of the offshore wind foundations in 2025 and beyond will measure diameters between nine and 11.5 meters. This will require different manufacturing facilities and production methods, but will also require different skillsets of our production colleagues. We have been studying different manufacturing options and resulting business scenarios during the past two years and have projected a preferred set-up for which we are seeking a committed financing solution. We made substantial progress and are well aware that by the start of 2025 this set-up needs to be operational to service our clients, amongst whom our launching customers that intend to commit to 400 Kton launching production capacity subject to timely FID for the expansion plans. In the meantime, we notice that various other main offshore wind supply chain companies have challenges in realizing a decent return on the capital invested as economical depreciation periods are often too short. For our investment case we therefore set the earn back period on three to maximum four years. We have shared our plans with clients and other value chain participants and their feedback has confirmed the robustness of our strategic ambitions for 2025 and beyond. All actions are geared towards an FID as soon as possible, aiming for completion of the expansion in the second half of 2024 to be fully operational by early 2025."

Results for HY 2022

Contribution

The production in the first half of 2022 was mainly composed of activities for Hollandse Kust Zuid, Dogger Bank A, Hollandse Kust Noord and Dogger Bank B. Total production for the first half of 2022 ended at 89 Kton (88 Kton in HY1 2021). We manufactured 74 monopiles and 55 transition pieces in the first half of 2022, compared to 102 and 3 respectively in 2021. Realised contribution, adjusted for contribution from marshalling and other, of 612 per ton was in line with the first half of 2021 when it was 614 per ton. Results in the first half of 2022 saw lower margins on subcontracted work being offset by incremental marshalling and logistics related work.

Steel is a pass-through cost for Sif. Therefore, contribution, compared to for example revenues, is a better performance indicator for comparison year-on-year.

Gross profit, (adjusted) EBITDA, net profit

Gross profit per ton was affected by higher energy costs, increased sickness-leave and lower efficiency as a consequence of the tight labour market and challenge to find experienced workforce. EBITDA was reported at 19.1 million (HY 2021: 20.2 million). Adjusted with 2 million for non-recurring expenses relating to the strategic plans to expand manufacturing facilities, this resulted in adjusted EBITDA of 21.1 million (237 per ton) compared to 20.6 million (234 per ton) for the first half of 2021. Depreciation in the first half of 2022 was higher compared to the same period in 2021 due to depreciation of investments for marshalling activities and of leased transportation equipment. Net profit consequently was 2.5 million lower compared to the same period in 2021.

At the end of the first half of 2022 Sif employed 220 FTE temporary workers (194 FTE end of June 2021) and 368 FTE permanent staff (388 FTE end of June 2021). High absence of permanent staff due to sickness and difficulties to replace departing staff, resulted in more temporary workers in the first half of 2022.

Net debt and solvency

On balance sheet date, Sif had no external debt (excluding lease liabilities). This is in line with 30 June 2021. The cash position amounted to 57.6 million (61.7 million at the end of the first half of 2021). The leverage ratio at the end of June 2022 was 0. For covenant purposes, net debt is stated on an IFRS16 excluded basis. The leverage covenant as of end of 2021 is fixed at 2.5 until the current credit facility reaches maturity on March 31, 2024. Solvency covenant going forward is >35%. With 51% solvency at the end of June 2022, Sif complies with its covenants.

Operating working capital

The demand for operating working capital defined as current operating assets minus current operating liabilities was -/- 42.0 million (-/- 56.9 million at the end of June 2021).

Current operating assets include inventories, contract assets, trade receivables and prepayments. Current operating liabilities include trade payables and contract liabilities.

Wind park Maasvlakte 2 at Rotterdam

Order book tons and Outlook

Todays order book for the remainder of 2022 includes an estimated 2022 full year production of 174 Kton. This implies an expected production of 85 Kton for the second half of 2022 where we will mainly manufacture for the Dogger Bank B project. We have secured sourcing of steel and energy as far as we could. A new framework agreement with steel supplier Dillinger Htte is being negotiated and certification of steel from alternative suppliers is in progress for a back-up scenario against the background of uncertain and volatile steel markets. We expect a level of adjusted EBITDA for the full year 2022 that is slightly higher compared to adjusted EBITDA of 39.4 million in 2021.

The order book for 2023 and beyond has 263 Kton contracted work and 19 Kton under exclusive negotiations. This does not yet include 400 Kton production from launching customers with whom we are in exclusive negotiations and which are subject to timely realization of the expansion plan.

The number of tenders in process for monopiles with diameters larger than 9 meters is massive which underpins the overheated market demand. The upscaled ambitions for production of sustainable energy by various European countries, the USA and Asia, imply the total offshore wind supply chain will face high growth rates for the years to come with the biggest challenge to manage the fast growth from a human resources, suppliers and investment perspective. A clear and long term transparent governmental tender pipeline and tender award process is key to assure political ambitions are met to some reasonable extent especially for the period till 2030. Despite all investment initiatives from existing suppliers and new entrants the risk of undersupply of foundations for offshore wind farms remains realistic.

artist impression of expanded facilities

Statement by the Management Board

The Management Board of Sif Holding NV (Sif) hereby declares that, to the best of its knowledge, the unaudited interim condensed financial statements for the period ending 30 June 2022, which have been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of Sif and its consolidated companies included in the consolidation as a whole, and that the report by the Management Board included in this interim report 2022 gives a fair view of the information required in accordance with Section 25d, subsections 8 and 9 of Book 5 of the Dutch Financial Supervision Act (Wet op het financieel toezicht).

Roermond, 25 August 2022
Fred van Beers (CEO)
Ben Meijer (CFO)

Other information

Glossary and Explanation of non-IFRS financial measures