FY23 Annual Report, March 2024: click here to

Tekmar Group Plc

Company number: 11383143

Year ended: 30 September 2023 Annual Report 2023

Contents

Strategic Report

• Chairman Statement
  7 CEO Review
  10 CFO Review
  17 Vision, Mission & Values
  18 Strategic Review
  20 Market Review
  24 Our Business Model
  25 Our Business Model in Action
  28 Key Performance Indicators
  29 Sustainability Report

Governance

1. Message from the Chairman
2. Corporate Governance Statement

1. Board of Directors

1. Senior Management

1. Risk Management

1. Audit Committee Report

1. Remuneration Committee Report

1. Nomination Committee Report
2. Directors' Report

1. Statement of Directors' Responsibilities

Financial Statements

60 Independent Auditor's Report

1. Consolidated Statement of Comprehensive Income
2. Consolidated Balance Sheet
3. Consolidated Statement of Changes in Equity
4. Consolidated Cash Flow Statement
5. Notes to the Group Financial Statements

1. Parent Company Balance Sheet
2. Parent Company Statement of Changes in Equity
3. Notes to the Parent Company Financial Statements

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Cautionary note and disclaimer

Forward-looking statements. This Annual Report contains certain forward-looking statements with respect to the operations, strategy, performance, financial condition and growth opportunities of the Group. By their nature, these statements involve uncertainty and are based on assumptions and involve risks, uncertainties and other factors that could cause actual results and developments to differ materially from those anticipated. The forward - looking statements reflect knowledge and information available at the date of preparation of this Annual Report and, other than in accordance with its legal and regulatory obligations, the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report should be construed as a pr ofit forecast. Non-GAAP measures and why we use them. Throughout this report we present underlying reports and measures. These underlying measures allow stakeholders to better compare the performance of the Group between current and prior periods by removing the impact of one-off or non-operational items. Exceptional items are explained in the Notes to the accounts and a reconciliation of GAAP to non-GAAP measures is also included within the report

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Highlights

Financial Highlights

• Revenue of £39.9m (FY22: £30.2m) and Adjusted EBITDA loss of £0.3m (FY22: loss of £2.3m) highlights an improved financial performance.
• Gross profit of £9.3m (FY22: £7.0m) with gross profit margin of 23.3% consistent with prior year (FY22: 23.2%)
• On a statutory basis, the Group loss before tax for the Period was £ 9.9m (FY22: loss of £5.2m). This includes a non-cash impairment charge of £4.7m to the value of goodwill in the Group's Offshore Energy division.
• The Group was also impacted by foreign exchange losses for the Period of £0.9m (FY22: gain of £0. 2m), accounted for within operating expenses.
• The Group held £5.2m of cash as at 30 September 2023 with net debt of £1.4m. Net debt included the drawdown of bank facilities from the £3.0m CBILS loan and £4.0m trade loan facility, available until at least July 2024. This cash position excludes the SCF Capital CLN facility. Net debt at 31 January 2024 was £1.2m.

Strategic Highlights

• During the year, the Group successfully completed the formal sales process and strategic review which culminated with the strategic investment and related equity fundraising by SCF Partners and existing shareholders. This exercise completed in April 2023 and raised £5.3m, net of expenses.
• In addition, SCF Partners committed, with conditions, an additional investment of £18.0m which is available through the convertible loan note facility (the "CLN facility"). The use of the CLN facility is targeted to drive growth including through acquisitions, in-line with the ambition of the Board to build a leading offshore wind services company over time.

Operational Highlights

• During the year, Pipeshield secured and delivered a combination of projects valued in excess of £8m for pipeline protection systems in the Middle East.
• The Group was also selected for Dogger Bank C Offshore Wind Farm (in continuation of the previously announced Dogger Bank A & B contracts), which, when completed, will be the largest global Offshore Wind Project to date.
• These contract awards have helped to support a Group orderbook of £19.7m at Jan-24 with a gross margin of 28%. The Board is encouraged by the opportunities for material order intake in the remainder of the current financial year.

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Strategic Report

The Board has established a strategic plan that will see us capitalise on our strong foundations, diversifying further into the offshore wind industry by disciplined investment in new technology and innovation. We will do this through:

1. Leveraging our market advantage
2. Expanding and deepening our value proposition
3. Innovation in applied engineering
4. Disciplined investment
5. Operational excellence
6. Initiatives to return to profitability followed by high quality profitable growth
7. Sustainable shareholder returns

The strategy is supported by our core building blocks

1. Organic Growth: Ambition to double organic revenue growth
2. Business Improvement: Deliver a sustainable mid-to high teens EBITDA margin in the later years of the plan
3. Acquisition Strategy: Bolt-on technologies and services that align with our offshore wind focused growth plan

Strategic Report Contents

• Chairman's Statement
  7 CEO Review
  10 CFO Review
  17 Vision, Mission & Values
  18 Strategic Review
  20 Market Review
  24 Our Business Model
  25 Our Business Model in Action
  28 Key Performance Indicators
  29 Sustainability Report

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Chairman's Statement

2023 was a pivotal year for Tekmar. We have stabilised the business and welcomed SCF Partners (SCF) to the Board as a highly respected strategic partner with a shared ambition to transform Tekmar as a leading, global offshore wind services company. The underlying business is in much better shape than it was two years ago and the business is now on the path to deliver sustained and improving profitability. The hard work of my colleagues means we are more in control of our business. This is particularly important at the current time with uncertainty in energy markets but sets us up well for significant success ahead. Aligned with this, is the benefit we have as a balanced business, addressing the needs of the broad offshore energy market as it transitions to meet the evolving commitments to lower carbon intensity and net zero targets.

Instability in the offshore wind market has been a feature of 2023. The pressures created by fiscal and regulatory uncertainty, particularly in the UK and US, have been well trailed by the media but this has been exacerbated by supply chain constraints, inflationary pressure, permitting delays and grid connection and infrastructure shortage. We have been encouraged more recently to see Governments adjust their subsidy regimes to enable developers to proceed on a viable basis. Alongside this, projected demand for offshore wind over the longer -term remains strong with fixed seabed foundations expected to continue as the dominant technology through until mid-2030's with floating foundations with dynamic cabling solutions increasing market share from mid-2030's onwards. As installations become more complex the attractiveness of our integrated offering becomes stronger. With the backing of SCF, we can, over time, transform the scale and breadth of our platform, to offer more strategic and commercial value to our infrastructure partners, the developers and tier one contractors.

As the offshore wind industry continues to develop, we are being disciplined in maintaining project margins, with the strong technology capability of Tekmar's services and products underpinned by our consultancy expertise. Alongside this, we value the ballast provided by our other energy division, anchored by Pipeshield, a leading provider of specialised subsea pipeline protection systems to oil and gas majors and offshore contractors.

We have made substantial progress over the last two years. There has been uncertainty along the way for our employees, industry partners and shareholders. This is now behind us and we are continuing to build a stronger business. We are doing this from a good position in terms or our competitive standing in the market and we look forward with real confidence given the scale of the opportunity ahead for Tekmar. On behalf of the Board, I would like to thank all our staff for their hard work and focus on improving the Group's performance. I am pleased they can see the fruits of these efforts coming through and look forward to our strengthened Group delivering on its full potential.

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Chief Executiv e Officer's Review

Overall, the business made further progress in FY23 in improving operational and financial performance and delivered results in-line with market expectations. Importantly, we have stabilised the business, with near breakeven Adjusted EBITDA a significant improvement on FY22 and FY21 and the net current assets position strengthened. We are confident we have established a clear and sustainable path to improving profitability, with the Group expected to be profitable at the Adjusted EBITDA level in FY24. The primary objective for the management team in FY24 is on driving consistent operational performance to deliver improved profitability and cash generation for the Group. We are doing this in a maturing market environment for offshore wind which we anticipate should support incremental market improvement in the current year. Our balanced portfolio across energy markets gives us valuable diversification as we work with developers and industry partners on de-risking the delivery of critical energy infrastructure projects and supporting the energy transition journey.

Review of near -term priorities

Return to sustained profitability

A key feature of these results is the business mix reflected in the Group reporting an Adjusted EBITDA loss of £0.3m for the year. Marine Civils delivered Adjusted EBITDA of £3.5m on revenue of £18.3m. This represents a very strong performance for this division which has become an increasingly important part of the Group since the acquisition of Pipeshield in 2019. Marine Civils consistently generates profit and provides diversification for the Group, which has been particularly valuable given the headwinds and uncertainty in the offshore wind market over the last couple of years. Our expectation is for Marine Civils to deliver positive EBITDA in FY24 , albeit we see it as unlikely that it will meet or exceed the contribution in the current financial year.

The Offshore Energy division by contrast generated an Adjusted EBITDA loss for the year of £2.1m, with a broadly similar loss across H123 and H223. This reflects market delays and uncertainties in offshore wind projects and masks the underlying improvements we have made in this part of the business, particularly in strengthening the commercial and operating model of our Tekmar Energy business. Supply chain cost escalation also impacted project margins for two material contracts, weakening H2 profitability in particular. Further detail on these legacy contracts is set out in the CFO Review. We are comfortable any residual exposure for these contracts has been appropriately addressed such that our expectation is for gross margin percentage for this division to recover to the mid to high 20s in FY24. This, together with the anticipated incremental volume growth in offshore wind projects supports our confidence that Offshore Energy will deliver positive EBITDA in 2024.

Improving the profitability of our Offshore Energy business is an important marker in demonstrating we are on track to deliver the trajectory of sustained profit improvement we are driving for the Group. When we then overlay the positive medium to long term fundamentals of the offshore wind industry, and our balanced portfolio, we believe Tekmar is well positioned to deliver sustainable profit growth for shareholders through the medium to long term.

Building a better quality pipeline and order book

Consistent with our profit improvement focus, we are focused on commercial discipline as we convert the enquiry book into firm orders. New contracts are being secured at more favourable gross margins at the outset and include more favourable cost escalation protection and milestone payments to de-risk the projects for Tekmar.

Our current order book of £19.7m as at 31 January 2024, reflects this disciplined approach, with a gross margin of 26%. We are seeing the effects of legacy contracts on margin diminishing in the order book, with 86% of the January 2024 order book value represented by better forecasted margins on live projects at a blended 30% margin. There is more we can do here but we are more in control of our business than we were two years ago.

Our pipeline and enquiry book is healthy across the Group and we are in discussions with developers and Tier 1 contractors on a number of significant projects. The main risk to delivering on our expectations for FY24 is the market environment where delays with decisions, extended negotiations and project starts continues to be a feature.

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On the offshore wind side, we secured an important contract win with an established Tier 1 contractor announced in January 2024. This contract award positions us well for future phases of this project, as and when they come to fruition. We were also selected to deliver our flagship cable protection systems (CPS) for the 1 GW Hai Long Offshore Wind Farm, situated in Taiwan, highlighting our presence in APAC. We see APAC as a key near -term growth market for our offshore wind division.

Our Marine Civils division continues to win significant and profitable contracts balancing our offshore wind opportunity. This includes building a strong capability in the Middle East in particular, where we secured £15m of order intake for FY23, including our grouting services, which we see as an attractive near-term growth opportunity, where in FY23, Tekmar won contracts worth over £1.5m.

Customer engagement.

With the strategic investment by SCF and related fundraise placing Tekmar on a stronger financial standing, there is encouraging alignment with our customers about the leadership role a stronger Tekmar can play in the industry

• an industry which requires the delivery of larger projects requiring more complex engineering solutions that we are well set up to deliver. As part of this, an increased focus of the Group is on embedding the Group's engineering consultancy capability through the lifecycle of projects and on building more strategic partnerships with our clients. It is worth highlighting that SCF's diligence at the time they were appraising their investment highlighted the strength of Tekmar's standing in the industry and the scope to deepen and expand the services and technology we offer customers and partners. We have a significant opportunity ahead of us to grow with our customers and help them support energy transition and to manage the related risk of developing and managing major infrastructure projects.

As previously reported, we are continuing to support our industry partners to assess and address some issues relating to legacy Offshore Wind Systems installed at offshore wind farms. As we have previously highlighted, the precise cause of the issues are not clear and could be as a result of a number of factors, such as the absence of a second layer of rock to stabilise the cables. We remain committed to working with relevant installers and operators, including directly with customers who have highlighted any issues, to investigate the root cause and assist with identifying potential remedial solutions. Whilst this consumes company resource and senior management attention, it is consistent with our responsible approach to supporting the industry to resolve these legacy issues.

Strengthening the Business

During FY23, we continued to implement our programme of organisational efficiency and targeted cost reductions. Across the Group there is a continued focus on improvement and simplification, including full integration of Group support functions. We also consolidated our early stage design and engineering resources creating a more efficient base to grow our engineering consulting offering which is a key focus for the current year. We streamlined the cost base removing annualised cost of £0.8m, which has helped offset against staff inflation costs and investment for growth in FY24. In addition, as part of our discipline to maintain a tight control on costs, we are targeting additional cost saving benefits in the current year in the region of £500,000 from supp ly chain initiatives.

We continue to look for opportunities to further strengthen the business through more efficient resource allocation.

Targeted investment and capex

We are also adopting a measured approach to capex and investment in the core business, aligning our resources to opportunities which provide the greatest near-term benefits. We expect capex for the current financial year to be in the region of £2m, with approximately half of that covered by investment in strategic initiatives including product development for our core Teklink cable protection system and investment in our grouting services in support of near-term revenue growth with Pipeshield including in the Middle East. We have identified a number of other strategic investment opportunities, with funding of these initiatives subject to phasing as cashflow builds to support the required investment.

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M&A to strengthen and broaden the portfolio

With the path to profitability established, we considering M&A opportunities to complement organic growth, including opportunities to build scale and strengthen the technology and services we offer to our customers. The ambition is to build a leading global offshore wind services company over time, and consistent with this, we are alert to the potential value in acquiring capability that can transition to servicing the needs of the offshore wind industry over time. Building a stronger platform should, in turn, create a business which the stock market can value more highly.

We benefit significantly in this M&A context from having SCF as a strategic partner, where we can leverage their complementary industry knowledge and investment expertise to help source and execute value-enhancing acquisitions. We also benefit from SCF's committed £18m funding through the Convertible Loan Notes, which are targeted to be deployed primarily for value-enhancing M&A and strategic growth. Having this committed funding in place puts Tekmar at a distinct advantage, particularly given the current financing environment for M&A

Market Environment

The current instability in offshore wind investment has been a theme that has been well trailed in the media. Looking beyond the media headlines, 2023 was actually a record year for offshore wind investment, with market analysts highlighting Final Investment Decisions ("FID") on projects totalling 12.3 GW during the year globally (excluding China and cancelled projects). This followed only 0.8 GW of FID in 2022, the lowest level since 2012 and highlighting the volume constraints in the market. (Source: TGS - 4C Offshore, 3 January 2024).

The rebound in FID approval for 2023 is clearly a positive for Tekmar. With the lead -time typically 12-months between a project receiving FID approval and the contractors and suppliers being awarded contracts, this should support the return to volume growth for Tekmar over the next 12-18 months. The headline data does require some caution, however, given the prevailing environment for ongoing delays to project starts and contract awards post-FID and the residual risk of subsequent cancellations post-FID. Overall, we see the market moving in the right direction in 2024 with a more balanced approach to developers and contractors in managing project risk leading to incremental but sustained improvement in demand. Longer -term, we see demand for offshore wind remaining strong with fixed seabed foundations continuing as the dominant technology through until mid -2030's.

Following a period of underinvestment, the Oil & Gas industry is entering a new capex cycle, with market conditions expected to remain supportive of an upturn in global spend over the medium term. Tekmar is well positioned to take advantage of this forecast growth.

Current trading and outlook

The Board anticipates the Group should return to profitability at the Adjusted EBITDA level for the current financial year. The absolute level of profitability will be determined by conversion of the material opportunities in our pipeline and by the timing of project awards and starts. Whilst timing remains the key risk to our financial performance in the current environment, we also remain focused on managing the delivery of existing contracts to budget and on maintaining a tight control of costs and cash across the business. Our near-term plans and targeted investments support the opportunity we have to grow organically across our core markets.

We are alert to the opportunities to complement organic growth through M&A that can increase our scale and strengthen our services offering across our end-markets, all consistent with building a leading, global offshore wind services platform over time. We are fully committed to delivering on the opportunity ahead for Tekmar to build a platform for sustainable growth and creating significant value for shareholders.

Alasdair MacDonald

CEO

• Marc h 202 4

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CFO Review

Following my appointment to the role of CFO in April 2023, having held the role on an interim basis since December 2022, I am pleased to present the Financial Review for the Group for the year ended 30 September 2023.

A summary of the Group's financial performance is as follows:

	Audited	Audited
	1 2 M ended	12M ended
	Sep -23	Sep-22
	£ m	£m
Revenue	39 .9	30.2
Gross Profit	9 .3	7.0
Adjusted EBITDA(1)	(0 .3 )	(2.3)
(LBT)	(9 .9)	(5.2)
EPS	(1 0 .7p)	(9.0p)
Adjusted EPS(2)	(4 .5p)	(8.1p)

1. Adjusted EBITDA is a key metric used by the Directors. 'Earnings before interest, tax, depreciation and amortisation' are adjusted for material items of a one-off nature and significant items which allow comparable business performance. Details of the adjustments can be found in the adjusted EBITDA section below. Adjusted EBITDA might not be comparable to other companies.
2. Adjusted EPS is a key metric used by the Directors and measures earnings are adjusted for material items of a one-off nature and significant items which allow comparable business performance. Earnings for EPS calculation are adjusted for share-based payments, £508k (£nil FY22), amortisation on acquired intangibles £168k (£605k FY22), Impairment of goodwill £4,745k (£nil FY22).

On a statutory basis, the Group loss before tax was £9.9m (FY22: £5.2m loss).

Overview

The Group delivered revenue of £39.9m for the 12-month reporting period, a 32% increase from prior year and continued growth per half year with £22.2m in revenue delivered in the second half from the £17.7m reported for the first half. The adjusted EBITDA loss of (£0.3m) was largely in line with our expectations of being around break-even at this level of trading profitability. This is a much-improved position from the previous two reporting years where adjusted EBITDA losses of (£2.3m) and (£2.0m) were reported for the twelve-month period to September 2022 and the eighteen-month period to September 2021 respectively. FY23 continued to be a transition year for the Group as expected, particularly whilst some lower margin backlog projects continued to be worked through and business improvement measures continued. The cost base has been carefully managed with further efficiencies achieved through wider group integration.

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