[RoyalIHC] Royal IHC reports net loss of 80 million euros for 2018

[Dredging360.com]

ROYAL IHC ANNUAL FIGURES 2018

For Royal IHC (IHC) 2018 proved to be a difficult year. Due to cost overruns in the execution of a number of challenging innovative projects, the loss for 2018 ultimately amounted to € 80.6 million.

IHC has initiated a number of clear actions in order to restore profitability. For example, the organisation has applied focus to – and accelerated – the transformation that has already begun by concluding contracts under better conditions, and strengthening its management and improving processes, among others. At the same time, IHC has been reinforced with € 120 million in additional financing.

IHC’s CEO Dave Vander Heyde said: “We’re convinced that, after a difficult period, we have taken the right steps and necessary measures to safeguard our quality, innovative strength and strong relationships that have made IHC a leading player in its market for the future.

“The trust and commitment we have received from our stakeholders underlines the support for our strategy, which is now bearing fruit in a high-quality order book. This lays the foundation on which IHC can achieve a positive result in 2019.”

Result 2018

The result for 2018 was strongly influenced by a number of challenging innovative projects that were contracted in the market during the earlier crisis period (2015-2017). These projects are now in the final phase, but with significant cost overruns. For the 2018 financial year, this ultimately led to a negative EBITDA of € 40.8 million and a net loss of € 80.6 million.

The order book at 31 December 2018 was € 1,184.5 million, which is lower than a year earlier. The newly signed orders in 2018 amounted to € 594 million. These orders have a lower risk profile and have been concluded under better conditions, which means that they will already have a positive impact on the result in 2019. The revenue for 2018 was 18% higher at € 941.7 million (2017: € 800.2 million). A higher turnover is expected for 2019 alongside a turnaround of the operational result.

Clear strategic focus with better balance in the risk profile

Risk reduction is an important part of the company’s focus to keep its challenges manageable. The emphasis is on improving the balance between income and risks through tighter contract and project management, and by further strengthening the order acceptance process.

A broad transformation process is underway for this, in which attention is also being paid to cost reduction and project implementation. To further accelerate this transformation, the Board of Directors was strengthened by the appointment of a Chief Transformation Officer (CTO) with effect from 1 July. Furthermore, external support has been recruited temporarily to implement this process quickly and efficiently.

Commitment of shareholders and banks in strengthening financial position

IHC, its shareholders and the banks have recently looked at the company’s financing requirements. This is due to the higher than normal working capital requirement, which is a consequence of the projects pre-financed by IHC and due to project losses for 2018.

An extension of the long-term financing facilities was concluded with existing financiers in 2018 until 2022.
Furthermore, an agreement was reached in mid-July 2019 on the additional financing of € 30 million in guarantee capital and an additional loan of € 90 million, whereby shareholders and banks will provide IHC with € 120 million in credit facilities, for a maximum period of two years.

[Dredging360.com]

Not that easy for the Dutch

We are used to talking about the low competitiveness of Russian shipyards. However, not everything is so simple abroad. Thus, one of the leading shipbuilding groups Royal IHC, specializing in innovative shipbuilding, does not seem to stand up to global competition being in a crisis situation, disrupting the delivery time of ships and increasing the cost of their construction.

Shipbuilding group Royal IHC is in a critical financial position, said Het Financieele Dagblad, a leading Dutch daily on economics and business.

Thus, according to the group's annual report published recently, the company's net loss in 2018 almost quadrupled - to 80 million euros compared to the previous year. The conclusion of the auditing company KPMG states that unless the situation is radically changed, there may be "reasonable doubts" about the future of IHC.

As a result of the losses incurred, the company warned that it would no longer be able to comply with certain terms of agreements with creditor banks.
As IHC told IAA PortNews, the company is not in pre-bankruptcy phase. “The highly complex and large vessels led to extensions of our building phase, additional costs and some delay in delivery. Subsequently the milestones are paid later as they are reached later in time. With the additional financing of 120 million IHC's continuity is guaranteed”, comments IHC.
The company admits that market prices are under pressure influencing IHC's margin. At the same time, there was a significant cost overrun for a number of large and complex projects, including the construction of a dredger on liquefied natural gas (LNG) for the Belgian DEME. Although the parameters of the respective contracts have been reviewed (including those with DEME), the situation has deteriorated further in 2019, which, as stated in the annual report, has led to "uncertainty regarding bank liabilities and liquidity".
The protracted time frame for the commissioning of ships and the increase in contract costs have caused disputes with customers, who in turn have postponed payment terms. As a result, the group will transfer funds later than planned.

"We underestimated the complexity of these contracts. In addition, many good professionals had to leave in the process of reorganization back in 2015-2016," the company's CEO Dave Vander Heyde said. According to him, because of this, the company intends to focus on less technologically complex projects.

To get out of a critical financial situation, the group intends to look for new investors, but whether it will be able to find them in such circumstances is a big question. In addition to Rotterdam investment company Indofin (72%), IHC shareholders are Rabo Capital (11%) and Rabo Capital (11%). The last two investors are reluctant or unable to provide additional capital.

“IHC strongly believes it will get a new investor on board. We do not expect our existing investors, that have been with us for a long time, are going to contribute more when the additional financing term ends two years from now”, says the company.

"We will not try very hard to be bought. Anyway, if someone makes a very tempting offer, I'm not ruling anything out. Everything is sold at a good price," Vander Heyde commented on the prospects of selling the group.

Now IHC is trying to optimize its expenses and business processes, with the management having introduced anti-crisis managers to this end. IHC says it is investing in its management and employees to align processes and enable competences. “No reduction of staff is at hand as we have a filled order book for which we need our organization”, emphasizes IHC.

The situation with IHC demonstrates the fact that global competition in the innovative shipbuilding market is increasing. If we go back to Russia, which is developing its shipbuilding industry in the segment of technologically complex vessels, we must admit that without state support and reasonable protectionist measures, as well as cooperation with leading foreign companies, it is unlikely to survive global competition.