Sif N : Transcript webcast Sif Group FY23 Results - 15.03.2024

Full Year 2023 Results

Friday, 15th March 2024

Transcript produced by Global Lingo

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Full Year 2023 Results

Fred van Beers: A very good morning, everybody, to this call of the Annual Report of Sif. My name is Fred van Beers, CEO of the company, and next to me is Ben Meijer, CFO of the company. Welcome to those here in the room. Appreciate you coming here online on the Teams meeting, and let's go through the results and a bit of an outlook for the coming years.

Ben will start with 2023, and I will take over afterwards again to elaborate on the market and the future outlook.

Ben Meijer: Thank you, Fred. I would like to start with the 2023 safety performance. And before talking about this topic, today, over here in the premises, there are no evacuation drills planned for. It's good for you to know if anything will happen, the signs above the door indicate where we have to go.

So, starting with the overall safety performance, basically the conclusion is, if you look at the overall year 2023, safety performance was not good for Sif with ten lost-time injuries. And what we see is, first of all, the increased dimensions of the monopiles and the transition pieces, especially in the Roermond facility, is leaving less space to manoeuvre, which is increasing the risk of safety-related issues. Secondly, tight labour market, bringing in less experienced staff is also increasing the risk of worsening safety performance.

What is important to notice is that if you look at the year, overall performance was not good, but it was also a mixed year in terms of performance. When we reported in the month of May, we were having seven LTIs. So, beginning of the year's first five months, seven LTIs out of the ten were being reported. Not good. And we organised two safety stand-downs in both Roermond and at the Maasvlakte. Very good days, lot of training, input and ideas from production staff, how to improve the performance and also fixing things, improving the housekeeping. And as of May, we saw that the safety performance has improved. So first five months we had seven LTIs. For the remaining seven months, three LTIs. Still not good, but at least we are happy that the performance has improved, and also the awareness of the people.

Looking at sickness leave, we saw a small decrease from 7.9% in 2022 to 6.9% in 2023. The trend is good, but still, it's too high, and it's an important attention point for us as a management team.

Looking at operational highlights, first of all, on the left side you see pictures for monopiles and transition pieces for Dogger Bank A. And this was a big part of the production volume of a little bit more than 190 kilotons. So, in total, for monopiles and transition pieces for Dogger Bank, we produced roughly 130 kilotons. We also produced transition pieces only for He Dreiht and Noirmoutier, also reflecting a tonnage of 50 kilotons. And then the pictures you do not see over here is the smaller production lines in Roermond, we call it the offshore steel structure lines. Also in 2023, volumes were coming from these production lines. Not reflected in the pictures, but the total together, monopiles transitions pieces and the offshore steel structure lines in total brought us to a little bit more than 190 kilotons.

Right side - on the right side of the picture of the slide, you see a picture of the marshalling project for Siemens. It is decreasing. At the moment, it is zero because of the construction we are doing regarding the expansion of our facilities at the Maasvlakte. So compared to 2022, in 2023 you saw lower marshalling income, but it was still there.

Looking at our order book, in total, our order book per year-end 2023 is 507 kilotons. 415 kilotons is contracted, 92 kilotons is under exclusive negotiations. And basically, the conclusion is if we look for 2024, we are fully booked; 2025 we are almost fully booked; and also the beginning of 2026, we are also booked already.

Looking at the bigger projects in the order book, left side, you see Baltyk. It was already exclusive in April 2023. In February 2024, it was brought into a firm contract reflecting 120 kilotons, 100 monopiles and production in 2025/2026. Hollandse Kust plot number VI, Ecowende, it has been brought to a firm contract in December 2023, reflecting 70 kilotons and 55 TP-less monopiles. And the last one, Empire Wind 1, reflecting 54 monopiles and 54 transition pieces, 100 kilotons production in 2024/2025, and the launching product also for the new factory.

What has disappeared per year-end is Empire Wind 2, which has been terminated just before year-end. And this has been eliminated from the order book.

Looking at key ESG-related KPIs, starting with the gross-CO2 emissions, we see a significant reduction over there from 10.5 kilotons in 2022 to 6.7 kilotons in 2023. And this reduction is basically driven by two key factors. First of all, it's the compensation from the Haliade, the wind turbine at our Maasvlakte premises, and also the switch to induction preheating - from gas preheating to induction preheating - which is already starting to be reflected in the numbers.

Contribution to renewable energy has increased from 2.0 GW to 2.6 GW. And this is basically, we look at the foundations we are involved in, we look at the size of the turbines in terms of capacity, which are being installed on these foundations, to calculate basically our contribution to renewable energy. And we see an increasing trend over there.

LTIF, that is basically the number of lost-time incidents reflected to the total number of hours, we see an increasing trend, what we just discussed, and happy indeed with the performance of the safety stand-downs, but it's still a key action item.

Some key other indicators. First of all, the order book we just discussed, well filled for 2024, 2025 and the beginning of 2026. Contribution margin per tonne, it is stable at the moment at a level of around €670. So you see the increasing trend as of 2018. And for 2022/2023, it is stabilised at a level of around €670 per tonne. And the numbers over here are corrected for engineering, marshalling, but also for projects with no production volume involved.

And the last slide is the workforce per year-end. There you see an increase from 587 to 651 comparing year-end 2022 with the year-end 2023. There, the key thing is that basically what we see is less experienced staff coming in because of the challenging labour markets. And as a consequence, you need more training hours. And also because the people are less experienced, once they are in the factory, they are less productive. So also, if you look at our direct labour cost, and you compare 2023 with 2022, you see a volume increase of 14%, but direct labour costs are going up with 25%. So it's increasing more significant compared to the volume increase. And this is basically related to, first of all, you have the wage inflation, which is coming on top, but we also see that efficiency and productivity are at a lower level because of the reasons I was just mentioning.

Overall financial results, starting with production, going up from 170 kilotons to 192 kilotons, an increase of about 14 percentage points. And if we look at adjusted EBITDA, which has been corrected for one-offs in relation to the expansion of our new factories, we see basically that the recurring EBITDA is in line with prior year, a level of €42 million. And if you look at this, it is that the impact from higher volumes, and also the impact from margin from projects without production volume, is being offset by increased labour cost and the loss of marshalling income. So basically, marshalling income is - compared to 2022, it's costing us five - I'll wait for a second.

Welcome to the new people joining.

So basically, the increase of the higher volumes and also - is being offset by the increase in labour cost and also by the loss of marshalling income.

Last graph is showing negative working capital, which is positive, what we discussed before. And you see the continued focus over here on working capital. Regarding every project, we want to be cash flow positive. First get the money in before we do any payments, for example, regarding steel orders. And the part of the advance factory payments is also reflected in this number of the minus €133 million.

Now, I would like to hand over to Fred.

Fred van Beers: Thanks, Ben, for explaining 2023. So, what's ahead of us? I'd like to take you through two things here: the outlook from a market and monopile development perspective, and also, of course, on the progress we make on the expansion with our new factory at Maasvlakte.

So, let us start first with some development on the monopile itself. This picture is probably known to most of you. We showed it at the Capital Market Day as well. And as you can see on the left side, the diameter is basically determined by the water depth, the soil conditions in the region and the size of the turbine. And I think what's worthwhile mentioning is that over the last months, we've seen basically all three OEMs active in Europe, reducing their ambitions on developing new turbines.

GE announced that it stops the development of the 18 MW. Vestas for a long time, already, has said, 'We focus on the 15 MW and develop on that one.' And also Siemens, who has - is building a test turbine, that is, we think, in the range of 20 MW. That test will take at least till the end of this year. But already Siemens has announced that not before 2030, this machine will be offered to the market because they also want to focus first on getting good returns on their existing platform. And I think these are very encouraging and good signs that actually show that throughout the whole supply chain, there is a sense of reality that says, let's first industrialise and optimise based on the existing platforms, make sure that we earn a decent amount of money before we start investing again in new platforms.

And that also means that we see that the forecast to the right-hand side is basically showing two things here. First of all, we see that the demand for monopiles will be pushed a little bit more forward, since things are not accelerating as quick as some ambitions want you to believe. But other side is also that the demand for 9-11.5 metre monopiles will remain extremely high and even will last longer than we initially thought when we announced the expansion of our factory. And that's good news in a way because that means that we believe that the sweetspot for what we are building today at Maasvlakte will not be three to four years, which is basically the sort of horizon we took in our FID, but will be longer.

You can see maybe for those of you very - with a lot of attention to the graph, there is in 2025 a big peak in bigger than 11.5 metres. That's what we took from the information we received. However, the reality shows, with some deeper investigation, that these are actually monopiles that are just above 11.5 metre, and from what we know lately is they are being redesigned below 11.5 metres. So also there we see that initially announced diameters are being reduced now to optimise in line with what the supply chain can offer.

Then looking at the ambitions, this is an updated graph that we've shown already many times as well. And I think the biggest news here is that we are seeing a slower ramp-down - ramp-up of ambitions, but also a push forward of ambitions. Yes, ambitions have increased, actually, if you look at power - the European power pack announcement, end of last year, beginning this year, whereby the EU wants to increase the ambitions for 2030 from 62 GW to 111 GW installed offshore wind. We, on the other hand, see that the reality of life is that this is not realistic and that we see a push forward towards - from 2030 to 2035.

What remains a fact though is that the majority of demand is in EU and UK also for the years to come. And that means that our focus area is and will remain the EU as a first priority, as a second priority and a third priority. And if the US or other areas are needed, we will look into it, but first UK and EU.

Then when you look at the updated graph on the supply-demand, then you can see an interesting development here. First of all, we do see that - and they're all listed on the right-hand side, that in the meantime, there are actually three Chinese companies that we take into account in our analysis of competition. Besides Dajin, it's CNOOD. So, "C" from China that now has booked an order too - for Inch Cape together with Dajin, that combination. And we have still the Titan investment case that we are watching in Cuxhaven, that, in - according to our information, is slowly building up and has ordered rollers and is looking at expansion at Cuxhaven. There's not a lot, or actually nothing in the press on this, but we do try to keep track of what's happening there.

We consider, as before, not only the Chinese but also the European developments 100% successful. And although we, for example, know that Bladt, nowadays CS Wind, has suffered some issues, we also have reasons to believe that they will succeed in setting up their Lindo facility. Like Haizea, like Navantia-Windar, like SeAH in the UK, we probably all see now and then the pictures on LinkedIn of what's being built at Teesside in the UK. And that's a very impressive big plant that will be successful in building monopiles. But if we add that all up and consider them all successful within the announced timeline, then still from 2027 onwards there is a massive gap showing. The gap is actually increasing if you simply plot ambitions and compare them with the capacity theoretically available in those years.

So, two things on a recap. The wave is increasing that is also being pushed forward again a few years. And even with all us and others successful in ramping up their capacity, it's still by far not enough to deal with this ambition. Meaning that we have more reasons to believe that this gap will lead to a further delay. Demand will go down and will be pushed forward from 2030 to 2035.

So, what's the operational situation today? If you look at it from a supply chain perspective, then we can announce, like before, that all the steel we need and all the flanges we need are secured in long-term capacity frame agreements. You may have seen the announcement this week from Orsted that they have captured capacity from Dillinger on their future green steel production. Well, we can tell you that we have a similar deal with that. Under our capacity frame agreement, we will be able to get also, if we want, the whole capacity in green steel or grey steel, depending on how the market develops. But we are also very happy with the relation with Dillinger with the capacity frame agreement and the fact that we can basically choose between green and grey, whereby we firmly believe that green steel should be and will be adapted as soon as possible.

From 2028 onwards, the first electric arc furnace will be delivering steel, and we plan to be part of that.

The ramp-up, as I said already, is slowing down, but again, we consider everybody successful. We constantly focus on this investment line, and we constantly make sure that we are prepared for the ramp-up whenever it comes. Because we feel it is extremely important that we took this FID last year, despite all the turmoil in the market. So that makes us ready to facilitate whenever the ramp-up comes. Although we are completely relaxed at this moment on our order book situation and our near-term order book supplies that we are actually delivering on the business plan that we communicated last year.

We see - we still see that we - not only us, in monopile land, but also in installation vessels land, there is still a shortage of vessels. So, we constantly keep an eye on that as well, together with the OEM developments, since they postponed not only their turbine size, but we also are keen to see if they are able to deliver on their order book. We know that GE has some issues on delivering on the order book for Dogger Bank and Vineyard Wind, and we closely monitor also the developments at Vestas and Siemens, which seem to be more on track in delivering the order books. But that also, of course, determines how quickly this whole supply chain can ramp up.

Then on the tender side, we don't see decreases. Yes, we see delays, but we don't see decreases in the number of tenders or cancellation of tenders or what have you. So we're quite busy still on tenders. We are still in the circumstance that we can apply a very explicit tender strategy in dealing with tenders that fit us better than other tenders. We are well on track on that. We all know that the US re-auction that took place in New York has been successful. Empire Wind has been re-granted the project again, and it's full-fledged ahead now in the delivery. I think yesterday there was another announcement on another permit granted to Empire, now, 100% Equinor, which, in our view, makes dealing with Empire a little bit easier. It's 100% Equinor, and we have a very strong relation with Equinor, so can act quite quickly, and that looks really good.

The UK will be the next exciting one, the CfD 6. What will happen there? The high strike price, an all-time high pot of money. But let's see now how that boils down in the real - in the actual auction on the difference between actual energy price, the strike price, and to what extent the £800 million will be consumed by just a few projects already. So let's see how that works out. And then, as said before, the EU has announced its power pack plan, which actually is, I think, a very good sign of the EU trying to protect the European supply chain by creating a true level playing field and better transparency in the long-term pipeline of projects.

Then on personnel and facilities, as you all know, this is the biggest concern we have: can we find enough skilled or trained workers or people that we can train? And that, although it remains stretched, we are a lot more positive on the inflow of people for our new factory. We're well on track, I would say. It could even be that we have maybe a little bit too many candidates at the moment than too little in order to fill the production lines. And although we're not 100% sure yet, we are a lot more confident that we can fill the factory with the right type of people with the right level of diversity. We're very happy with the fact that already, it may sound low, but that five female workers have joined our production work, and that's a good start. And in general, I think we see that the diversity level in the company is increasing to a more balanced, sort of, comparison between the various - the genders, so to say.

Priority is and remains high on safety culture. We are now at 170 days without LTI. Ben already explained that it is a lot less in the last half of 2023, and also this year is without lost time injuries. Still, as said, the 170 days. So that starts looking good and more and more healthy for us and everybody, I would say. Sick leave is a concern, but we're working on that. The flu doesn't help us at the moment.

And we are working hard on various ESG items like the Code of Conduct, human rights policy, whistle-blower, etc., to bring that in shape. Next year, we need to report on CSRD requirements, and that the preparation for that is full-fledged going on, I would say.

What's the outlook for 2024? First of all, on the CAPEX, expansion plan will be completed by the end of this year. We're fully on schedule on that one - I come back to that a little bit later on - and we are ready to start full-fledged operations in January and the start-up in end of July with the first production line. Of course, it will be an extremely exciting year. That's also what we released in our press release on the guidance of the EBITDA: we now have to connect or will connect the two factories. I hope most of you will come along and visit our site shortly because then you will see that the connection is being made, that we are fully - full-fledged going on with the installation of equipment.

And then the second half of this year will be a bit of a slowdown in the production because we are connecting the factory, still need to finalise Dogger Bank C and have to ramp up Empire Wind 1, and that's - it's all in control, but it will be exciting.

ESRS criteria for 2024, I said it already, but on the climate change fact we are further reducing emissions. The Haliade-X is running quite smoothly, knock wood, but it's quite - it's really looking good at the moment. So we will have a lot of contribution of green power from that one this year.

We're working on the employee conditions because we want to remain or become an employer of choice, and that requires quite some action in order to fulfil not only the reporting requirements but also to actually be the employer of choice.

And we're working hard on the circularity and biodiversity with research projects and our deal with Dillinger on the green steel that will help us a lot. But also, for example, on green transport between the locations, we're working on projects to see if we can work with inland waterway owners to running on hybrid or green fuel. And we are building now a plan to start actually the build of a full-fledged shore power installation at Maasvlakte for the installation vessels of 12 MW.

Financially, order book healthy. Ben didn't mention it, but we are coming closer to a deal on exclusive tonnage in our order book. I can't mention the name, but we are making very good progress there and are pretty confident that we will turn that exclusive part into a firm order. And there is a few other projects in the pipeline that are at a stage of reaching exclusivity or even order phase.

Besides the fact that we shortly will announce also some additional capacity agreement on the offshore steel structures because also the offshore steel structures for the smaller diameter lines starts looking good for the coming ten years - we start seeing an order pipeline that could well fill us up for the coming ten years on the small diameters - which is a very strong signal also to our Roermond facility that, on one side, we will continue producing transition pieces and top sections in wind, and on the other side, we'll revamp, to some extent, the small diameters offshore steel structure lines. And that business is for 90% also relating to wind. So, structural steel and pin piles for substations and for some gas stations that are in the market and pin piles for jacket foundation projects.

So very, very encouraging development on that side, meaning that for this year we say hey, this is a damn difficult year. We need to bring these things together. We need to do that in a controlled way. We have to make sure that the new factory can have its time to ramp up decently in a controlled way. Meaning that our output will go down to 165 kilotons, all well within contracts and what have you. Meaning that the EBITDA will follow in relation to the tonnage, more or less. But then we will be ready and will go full-fledged for what we have guided for now for quite a while, €135 million in 2025, and €160 million from 2026 onwards.

Expansion plan, where are we? This slide is a slide that we've shown before as well. There are six elements that are important on this schedule. And as you can see, they're all green. So the construction of the manufacturing plant is on schedule, is within budget. We have the order book as we would like to see it at a sufficient volume and the right price to make sure that we can achieve our payback, as we have guided for. Key supplier contracts in shape and signed. The standards of safety are starting to look better, but are at an even higher standard in the new factory. That's looking good. Also in the building process. So far, we haven't had any LTI or serious medical treatment. The funding is coming in as planned for. So Ben is sleeping well on this. And as said before, we have no budgetary issues. It's boring, but it looks good.

Is that - does that mean we stop thinking about the future? No, we don't. First of all, I think on the Total Solutions concept, we are working hard on this, together with Ballast Nedam, in this setup for decom, to look at future business of decommissioning. And one of the aspects we are now investigating, for example, is will these wind farms extend the lifecycle? Will they be used to do other, to bring in other green energy sources, like solar, etc., when the turbine goes off? Or will it actually be decommissioned and will there be a replacement with bigger turbines and bigger foundations?

What we do know is a few things. There will be wind farms decommissioned shortly. That will increase in the coming five years. To what extent, again, is what we're looking at. And the other thing we know is that scrap is the gold of the future. Scrap - steel scrap, is a very important source to make green steel. In a traditional blast furnace setup, it's about 10-15% inflow of scrap. In an electric arc furnace, green steel production, it's about 50%. And as steel is already a well, sort of - steel circularity is a well-established business, there is an enormous demand for more scrap. And that makes us - does make us believe that getting the wholemonopile out of the soil is, not only from an environmental perspective, the right thing to do, but also from an economical perspective, is the right thing to do to create inflow of steel into the, in our case, Dillinger production process.

Then we continue to keep an eye on the geographical expansion. We are progressing slowly but gradually and consistently on the cooperation with GS Entec on the licence. GS Entec is progressing, and we are bringing in the support. And they are already investing in their Korean factory in welding equipment, rolling equipment to start producing hopefully soon the first Korean wind farm - or foundations for a wind farm.

And we continuously monitor the US market. We don't believe it will be at short notice that we will do anything there or that something will happen. We believe this whole supply chain development in the US is delaying easily another five years. Well, given also the fact that we get the strong message that people do want to wait, who wins the elections, although short-term, that will not have a lot of effect. Longer term, it could have an effect. And we also see that the price of steel, the fact that still the states are very much oriented on their own supply chain and a very difficult, I would say, labour market related to unionisation does make it quite expensive and difficult to build a sound business case in the US at this moment.

Then, and last but not least, we are scaling up our capabilities, whether it's on promoting the TP-less design with our Skybox, that will go through its final test this year in the end, so to have full one-to-one certification this year. And we are pushing and working hard on the fact that, do we need these bigger diameters, yes or no? And for example, we are facilitating a lot the process of alternative installation techniques, because we do see that the traditional installation technique of hammering a monopile in the ground in the traditional way is creating big challenges in respect to noise, noise and noise mitigation. 160 dB are being achieved now with these bigger diameters, or more than 160 dB. And that is something that could stop also the development of bigger monopiles. So we are very much involved also in alternative installation techniques from drilling, so, vibration and what have you.

And I think that's it from my side also in this moment. And I think here we are to open the floor for questions. We have a few of these things here. So who can I invite to ask questions, if any?

Questions and Answers

Maarten Verbeek (The Idea): Firstly, within your results, you have a €7 million termination fee concerning EW 2. First of all, did you already receive the cash for that? Secondly, is that the full compensation you expect in this matter?

Ben Meijer: Two comments. First of all, your remark about the €7 million termination fee is not correct. What we have disclosed is, basically, we have said €7 million of contribution margin is related to projects with no volumes associated. And that is part of the termination fee, which is unconditional. It's a relatively small part of the overall termination package, but is, for example, also including GS Entec. So your conclusion, indeed, that the €7 million is fully related to the termination of Empire 2 is not correct.

Then your second question, Maarten, about the cash in, this is more accounting-wise, the impact. But from a liquidity point of view, the money has not come in yet.

Maarten Verbeek: Okay, thanks for that. And as a follow-up on this matter, you mentioned that you're still negotiating with the owners of EW 2, and a final agreement should be made this year. That part, that fee you most likely will get, is that included into your EBITDA guidance for this year?

Ben Meijer: Yes, part of what we are expecting is indeed included in the EBITDA guidance.

Maarten Verbeek: Could you give a rough figure? Is that - is that a handful or two handfuls, or?

Fred van Beers: No, that's not possible because of two reasons. First of all, because of a confidentiality agreement we have. And also, secondly, if we give this indication, it's also information our competitors would be very interested in, so we cannot disclose that number.

Maarten Verbeek: Okay. Then you have reiterated your guidance for 2025 and 2026. 2024, okay, that's fine. 2025 you are almost booked, but then for 2026, you have hardly anything. So you must be very confident that you will fill your order book and can produce up to - in 2026. You just mentioned that you're on the eve of signing a new contract, but that is going to be not enough, just signing one contract. So you must be very confident that you will fill your production in 2026 and beyond.

Fred van Beers: Yeah, as I said, I try to say at least two things. One is that we are at the edge of signing the one that is exclusive to a firm, that's for 2026. And we have - as I said, as well, we have a few other projects that are at the - at the doorstep of becoming exclusive or even firm for the same period. And by - that's one. And then we quickly start moving into 2027 with Ijmuiden Ver, the North Sea Cluster in Germany, etc., that are projects that are well-positioned, so to say, for Sif.

Maarten Verbeek: So you're not depending for those new contracts at this moment on the outcome of the CfD 6 in the UK?

Fred van Beers: No.

Maarten Verbeek: Okay. And then lastly, and this is definitely one for Ben. In your balance sheet, you now have €72 million stated current liabilities, non-current. What is it exactly?

Ben Meijer: That is basically, if you look at the advance factory payments, it was - in total it was €100 million. €30 million is converted per year-end to perpetual. The remaining part is €70 million. That's basically related to the advance factory payments.

Tijs Hollestelle (ING): Tijs Hollestelle, ING. I think I also had that question on the remarks at the beginning on the trade working capital. So that's indeed the difference. So part of it is included in the trade working capital, and the other part is on another, let's say, more debt position -

Ben Meijer: Correct.

Tijs Hollestelle: - in the balance sheet. And the preference shares, the preference equity is also part of reported equity.

Ben Meijer: Correct.

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