HARLAND AND WOLFF, LIMITED

Factors contributing to Adverse Results

DR. DENIS REBBECK ON CONDITIONS AND PROSPECTS

THE eighty-first Annual General Meeting of Harland and Wolff, Limited will be held in Belfast on 18th may. 1966.

In his statement, which has been circulated to stockholders, Dr. Denis Rebbeck, C.B.E., M.A., D.L., J.P., Chairman and Managing Director, laid:

"Since our meeting last year the published results of a number of leading British shipbuilding firms lave successively reflected the rapidly worsening trading conditions under which our industry is operating. It is therefore hardly surprising that this Company's working results for 1965 should broadly follow a similar pattern. Indeed it is the apparent inevitability of the results which your Board finds to disturbing. The prime factor in the situation in shish our industry finds itself remains the low price of Japanese built ships and there is no escaping the stark fact that Japanese prices, having largely destroyed the profitability of British shipbuilding, are sow inexorably eroding the industry itself. More- MCI it is clear from my personal contacts with other members of the Association of West European Ship- builders that the same chill wind from the East is king increasingly felt on the Continent and I am sure that Japan is determined to corner the market It World shipbuilding.

"A year ago our previous Chairman made a pre- diction, with which the Board was in full agreement, that the results for 1965 would show a substantial improvement on those for the previous year. Al- though his forecast did not envisage a return to reasonable profitability during 1965, there were good grounds for believing that it would be possible to achieve a significant reduction in the loss recorded for the previous year. His hopes have not been realised and you will naturally expect me to give some explanation.

"Firstly, a marked inflationary rise in costs both for labour and materials has far exceeded any sen- sibk forecast of probable future trends. The geo- traphical isolation of our Belfast shipyard does not cushion us against pressures arising from upward wages movements in the other main shipbuilding centres. A wave of substantial increases granted' in areas where labour is critically short and increasingly costly was all too quickly reflected in wage levels at Belfast, without a matching improvement in productivity.

"Secondly, despite all our efforts, productivity did not increase as expected during the year under review. Indeed, over the last six months there was an unwelcome downward trend. I find it particularly galling that all our extensive reorganisation and capital investment have so far evoked only a very limited response from our labour force, despite the gravity of the industry's plight.

"Thirdly, I must also emphasise that the year's losses derive almost entirely from the hull building side of our business in which we were plagued with a series of restrictive and disruptive actions by a number of key sections of our employees. Although some of the incidents were relatively unimportant in themselves, their cumulative efforts were considerable It that they made it impossible for us to maintain at steady and purposeful working rhythm for the treater part of the year.

'The inter-action of the three adverse factors, to which I have referred, had inevitable financial con- sequences. The expected profitability of one dip.

building contract was seriously reduced and the somewhat diminished profit earned on another could not be brought to account during 1965 because of an enforced deferment of delivery until this year. There was thus available to us substantially less profit than we had anticipated to set against expected shipbuilding losses which, in turn, became further inflated.

ACCOUNTS "The loss on trading amounted to £851,710 after charging depreciation on Fixed Assets of £579,111. In addition, it has been found necessary to add a further sum of £1,225,000 to the amount of £475,000 provided in 1964 in respect of prospective estimated losses on certain orders for shipbuilding work. I must emphasise that the total provision of £1,700,000 relates solely to shipbuilding contracts entered into prior to 31st December, 1965, and is based on current costs of production. You will appreciate that this provision does not reflect profits which should accrue during 1966 and succeeding years from the Com- pany's other activities.

"Arising out of the completion of the Accounts of the subsidiary companies which ceased to trade in 1964, final dividends amounting to £72,269 have been received. In this connection I would draw your atten- tion to Note 4 in the Annual Report.

"In order to make the provision to which I have drawn your attention and to extinguish the adverse balance on the Profit and Loss Account, £1,950,000 has been transferred from General Reserve. Al- though a nominal dividend on the Ordinary Stock was paid last year, in the circumstances to which I have referred the Board regrets that it cannot recom- mend the payment of a dividend on the Ordinary Stock.

"During the year £228,615 was received from the sale of redundant freehold land and buildings. Nego- tiations have recently been completed for the sale of further redundant properties at prices which enable the Board to be satisfied that the value placed upon these assets in the Balance Sheet is realistic.

GEDDES REPORT "Against this dismal background your Board welcomes the Report of the Geddes Shipbuilding Inquiry Committee as a penetrating, constructive and independent study of British shipbuilding's present difficulties. Inevitably there will be some dissent from certain aspects of the Committee's diagnoses and prescriptions but such differences as are likely to arise will be mainly about points of detail and emphasis rather than of principle.

"The Report gives due recognition to the special position of your Company's shipbuilding facilities at Belfast arising from their size and comparative geographical isolation, and also to the status of our Marine Engineering Works at Belfast in the field of main engine production. In conformity with the strict timetable for action which the Committee has laid down, your Board is giving urgent consideration to the implications of all recommendations which affect the Company.

"It will not have escaped attention in this country that the Report highlights the disproportionate advantages enjoyed by shipbuilding industries in certain other countries. In Japan, in addition to an export finance scheme, credits are also made avail- able to home owners whereby the government a-di-I'm* SO per cent of the coat of ships at 4 per vent for 15 years with a moratorium for the first three years (as against an effective market rate of 9 per cent). The scheme is clearly recognized as a means of assisting their shipbuilding industry."

In his summary of the year's activities the Chair- man commented that since last year's meeting ship- building orders for a motor passenger and vehicle ferry, five bulk carriers and two cargo liners had been secured, and also that, by agreement between all the parties concerned, a berth reserved for Sigval

Bergesen of Stavanger, Norway for the construction of .a tanker of 167.000 tons deadweight had been

made available to Shell International Marine Limited

for the construction of a tanker of more than 170010 tons deadweight for an overseas associated Company.

The current order book comprised eleven merchant vessels and two naval vessels, H.M.N.Z.S. WAIKATO, a Leander class frigate, and the fleet replenishment ship REGENT. Continuing the Chairman said: "It is difficult to be precise in estimating the volume of future naval orders, but it is unthinkable that our Belfast establishment, with its great experience of naval work and its well-known facilities, ..hotild rot continue to play an important role in future buildinc programmes.

"The Geddes proposals for segregation of the con- struction of surface warships in three yards will require to be considered with the utmost care by the Ministry of Defence and by the individual ship- building firms concerned. In the meantime, we shall continue to submit tenders for all suitable naval contracts offering."

The results achieved by the Repair Works at Lon- don, Liverpool and Southampton had been satis- factory despite some under-employment of the Company's facilities. There had been a modest in- crease in the volume of work handled by the Ship Repair Department at Belfast. Work had commenced on the Belfast Harbour Commissioners' new dry dock, which will be the largest in the United Kingdom with a length of 1,100 feet and an entrance width of 165 feet. The dock would materially assist in augmenting the amount of repair and conversion work undertaken at Belfast.

The material improvement in the building pro- gramme for H & W—B & W marine diesels noted last year had been well maintained and at the end of 1965 the Company's order book represented some 25 per cent of all slow speed marine diesels on order from United Kingdom engine builders. The sustained popularity of the B d, \V engine continued to be a source of great encouragement to the Board. The benefits accruing from the policy of rationalising and concentrating production in one large Works at Belfast were becoming increasingly evident. Forward planning was designed to increase the annual throughput of engines, and production at Belfast was capable of further expansion should the need arise. Harland and Wolff had now specialised in the con- struction of Burmeister and Wain marine diesels for over 50 years and an extension for a further period of the licence arrangements had recently been negotiated.

There had been a steady expansion of activity in the Electrical Division, where the policy of con- centrating electrical manufacture in one group of shops at Belfast was being increasingly justified. Competition remained keen and profit margins small, but significant progress was being made. The work of the Steel Construction Division had continued at a satisfactory level during the year, and on the basis of present trends the Division should continue to be actively and profitably employed.

PROSPECTS

"Having regard to present conditions there can be no quick or easy return to profitable hull building. There seems to be no doubt that the pressures exerted by Japanese competition and by the continuing inflationary trends in the national economy will persist. It must never be forgotten, a, Geddes has pointed out. that shipbuilding is an assembly industry, buying as it does from outside sources some three quarters of its products sad. for this moot it is particularly susceptible to price increases in other sectors of British industry, which in most cases shipbuilders have to absorb without possibility of recovery. Your Board is making strenu- ous efforts to minimise losses on fixed price ship- building contracts and their effect on the Company's economy as a whole.

"Our shipbuilding programme stretches ahead to the autumn of 1968 and will not begin to taper off until the beginning of that year. Your Board has firmly decided that no further shipbuilding contracts will be taken unless two conditions are fulfilled. Firstly, that reasonable profitability is assured, and secondly, that the work offering is of a type which integrates readily with our programme.

"The implementation of the recommendations of the Geddes Report, particularly those relating to the re-organisation and flexibility of labour, will obvi- ously be an important factor in bringing about a return to profitability, but at best Geddes can only provide comparatively long term solutions to current problems.

"Your Board will continue to take all possible st"ps to expand the Company's present activities in other fields where there are prospects of profitable trading.

"It must be accepted that the losses on our current shipbuilding order book, alleviated as much as pos- sible by profits arising from other activities, will con- tinue to dominate our working results for at least the next two years.

BOARD

"As foreshadowed in the statement last year. Mr. J. S. Baillie relinquished his position as Chairman and resigned from the Board on 30th June, 1965. My co-directors appointed me Chairman and Managing Director and Mr. J. A. Watt, Managing Director, and both appointments took effect as from 1st July, 1965. At the same time, Mr. R. S. Punt, our Chief Tech- nical Engineer, joined the Board to fill the vacancy created by Mr. Baillie's resignation. Towards the end of the year Sir Andrew McCance, in conformity with his wish to reduce his business commitments, tendered his resignation as from the end of the year, and Mr. D. B. Kimber joined the Board on 1st Janu- ary, 1966, to become Director in charge of ship- building activities at Belfast from that date."

The Chairman welcomed the two new Directors and paid tribute to the services rendered to the Com- pany by Mr. Baillie and Sir Andrew McCance.

"As you will see from the Directors' Report, Mr. Punt and Mr. Kimber offer themselves for re-election in accordance with the Articles of Association. Mr. R. R. G. Cameron. Mr. J. H. Crossey and Mr. A. 0. Milne, who retire by rotation in accordance with the Articles, also offer themselves for re-election."