Chemring Grp Plc Unsp/Adr

And welcome... to the presentation of Kemring's interim results for the six months to the 30th of April, 2025. I am, as usual, joined by our CFO, James Mortenson. I'll briefly cover some of the group highlights from our first half before handing over to James, who'll take you through our financial and operational performance. I'll then comment on the general market environment and the progress we are making in delivering our incremental growth strategy, which is underpinned by our values of safety, excellence, and innovation. We'll then take questions. Our momentum from 2024 has been maintained into this year with the continued delivery of our long-stated goal of balancing near-term performance with longer-term growth and value creation. Across the first half, our operational and trading performance has been robust and in line with the expectations we set out in December, continuing to demonstrate the resilience and quality of the group. Our record order book and associated trading visibility underpins our growth ambitions as we build towards our goal of increasing annual revenue to £1 billion by 2030 and be assured we will continue to closely manage operational and financial risk during this period of organic and inorganic growth. In summary, the Board's expectations for the full year are unchanged. Clearly, none of this is possible without the commitment and dedication of my colleagues across the group, and I want to take this opportunity to acknowledge and thank them all for their unrelenting professionalism and hard work. Turning to the headline numbers, for me the standout is our record £488 million of order intake, which is a 42% increase from last year, and the resulting £1.3 billion order book, which is the highest in the company's history. Operationally, our revenue was up 5%, driven by a strong performance across countermeasures and energetics. Operating profit was up 8%, resulting in earnings per share being up 3%. You hear me say at all these presentations that safety is one of our core values, and I highlight on this slide that we have reduced our total recordable injury frequency rate to 0.63, which underpins our journey to a proactive safety culture and a zero-harm ambition. I will now hand over to James.

Thanks, Mick. We're pleased to report results in line with expectations as we deliver the plan. Here are the highlights. A new record order book for the group at 1.3 billion, up 25%. Revenue up 5%, showing continued strong momentum. Operating profit was up 8%, with improved operational execution and countermeasures and energetics. Group operating margin improving to 11.6%. EPS was up 3% and we had strong cash conversion at 80%. And so the board has declared an interim dividend of 2.7p up 4%. So turning next to our segmental performance. Countermeasures and energetics revenue grew 20% as we saw strong operational execution. So operating profit was up 73% and margin increased to 14.4%. It was a weaker period in census information, as expected and previously highlighted. This was because the prior year benefited from JBTDS LRIP and there were delays to UK government spending, which meant revenue was down 12% and operating profit down 26%. You will see we booked a small exceptional charge in the year relating to ROC, which Mick will talk about later. There was a small FX headwind in the period. On a constant currency basis, group revenue would have increased by 6%, and operating profit by 10%. Turning to the cash flow, we kept a strong focus on cash generation, with cash conversion of 80%. We have continued to invest in our operations with 46 million of capex spent in the period. Of this, 35 million was spent on energetics expansion projects and this was offset by 13 million of grant funding. This brings the total spent on energetics expansion projects to 70 million, offset by total grants of 24 million. In the period, we returned £17 million to shareholders, £14 million through our dividend and £3 million through the share buyback. We also purchased some shares to satisfy acquisition consideration in employee share options. We've refinanced our RCF in April. We've increased it from 150 to 180 million. It will run until December 2028 and could be extended a further three years and is on attractive pricing. In addition, we also have a 20 million US dollar overdraft and a UK loan of 80 million. So we have good, immediately available liquidity with facilities up to 275 million available. we had closing net debt of 93 million, less than one times leverage, and we expect to end the year only slightly higher. There's no change in relation to our capital allocation policy. Overall, we want to maintain a resilient balance sheet and will target leverage of less than 1.5 times. We'll continue to execute that policy through the four pillars of investing in the business, focused M&A and returning capital to shareholders through the dividend and surplus capital through the share buyback. I would just highlight that in May, after the period end, we completed the disposal of the explosive hazard detection business, which we sold for 9 million US dollars in cash. We regularly review our portfolio and we'll take action to change it if necessary. We'll remain disciplined, but we also have a very attractive pipeline of opportunity in Roke where we remain most active and we continue to develop our pipeline in space and missiles. Next, I'll cover our longer-term and then shorter-term guidance. First, longer-term. Our ambition is the same, a billion in revenue by FY30, and we remain on track. Within energetics, we see enduring demand for our products, for which we earn stalling capacity, as evidenced by the long-term agreements entered into with the likes of Deal, Saab, and Northrop Grumman. Whilst Roke's growth has slowed this year, longer term we still see Roke growing at a high to mid-single digit CAGR to 250 million in FY28 and then beyond. I've already talked about our disciplined approach to M&A and so would also highlight the potential further expansion projects that Mick will cover later in Norway, Germany and the UK as ways to supplement our ambition organically. On margins, we have guided to mid-teens in the medium term, but you can imagine we'll add some significant revenue in our higher margin businesses, and so you'd expect some operational leverage in the longer term. This guidance is getting nearer since we first publicly committed to it. So, too, is the significant growth in the next couple of years, which is included in existing analysts' forecasts. Short term, for FY25, our overall guidance is unchanged, supported by 85% of expected revenue having been delivered or in the order book. In countermeasures and energetics, we are still targeting low double-digit growth, supported by order cover of 96% this year. In sensitive information, we are targeting flat. In just the time since the half-year end, order cover has risen to 73%. Growth in ROC will offset the decline in US sensors as JVTDS has now completed low-rate initial production and we await the full-rate production award expected in FY26. We are still targeting mid-teens margin in the medium term, but unlikely to hit that in 2025. And we expect H1-H2 phasing of operating profit to be similar to last year. On US tariffs, we expect the impact to be negligible. The majority of our sales in the US are supplied by our US operations. Under our contracts, sales from outside the US are largely exempt from tariffs. As usual, I want to flag there are some external factors which could impact us in the near term. There could still be budget timings disruption in the US and from the SDR in the UK, and obviously any significant movements in FX. So now for innovation, an area where Kemring excels on one of our core values. The war in Ukraine has reinforced the importance of advanced electronic warfare technologies. The return of a European peer threat has highlighted the underinvestment many countries have made in their capabilities over the last 10 years. There is now a drive to rebuild those capabilities in this highly contested environment. That means we are seeing a pipeline of more than 300 million of potential opportunity for our electronic warfare products. There have been two key learnings from the war in Ukraine. First, technologies are evolving rapidly. Systems have to evolve quickly to address new threats, with open architectures enabling faster development. Second, survivability. Large exquisite systems were quickly disabled on the battlefield. Smaller, highly mobile systems are required. Roke have used their deep understanding of electronic warfare and real world experience to develop this next generation system, Deceive. It has a number of attractive features. It's multifunctional and has a software-defined radio at its core, so you can reconfigure it to address the full spectrum of electronic warfare effects, including electronic attack and counter-drone operations. It's sovereign, UK designed and built, and it uses open architecture, meaning it could rapidly evolve to counter new threats, so it's ready for the future now. What you should take away is that we have and will maintain investment in Roke and the next generation of products we need, and so that gives us confidence in the growth outlook for the business. Deceive was launched last month, and we're already seeing international interest from more than 15 countries. Thank you. That brings me to the end of my section. Back to Mick for the market update and outlook.

Thanks, James. Turning now to our market environment, global attention on defence spending remains high, fuelled by uncertainty regarding US support for NATO, the ongoing events in Ukraine and the enduring tensions in the Asia-Pacific region. These geopolitical dynamics underpin a positive outlook for defence and security spending for the foreseeable future. With the Ukraine war now in its fourth year, defense spending is rising across Europe, along with an increasing trend for developing sovereign capabilities and supply chains. Here in the UK, recently announced, Here in the UK, the government recently announced the largest sustained increase in defence spending since the Cold War, with budgets set to rise to 2.5% of GDP by 2027 and to 3% in the following Parliament. Delivering on NATO commitments and ensuring a resilient nuclear deterrence are among the core priorities for this spend. Industrially, this is expected to be accompanied by capability reshoring, stockpile production to build national resilience. The UK Strategic Defence Review, which was published yesterday, defines the long-term strategic direction of UK defence policy, ensuring the nation is equipped to address the emerging threats, global security challenges and technological advancements, whilst also seeking to reinforce resilience and sovereign capability. The group is well placed to benefit from many aspects of the SDR, but I highlight just two. The first is the establishment of the new Cyber and Electromagnetics Command to oversee the UK's defensive and active cyber activities, alongside electronic warfare efforts, and they should create significant opportunities for ROC. And the second is the commitment to invest £1.5 billion in an always-on pipeline for munitions, building at least six new facilities in the UK to produce munitions and energetics. And also the commitment to build up to 7,000 UK-built long-range weapons to strengthen Britain's arms forces. And in the U.S., the Trump administration is focusing on deterring adversaries by maintaining overwhelming military superiority. In its recent budget proposal, the White House is requesting a total of $1 trillion in national defense spending for FY26. The expected capability focus for this budget will be on countering the threats posed by China's large missile inventories, a rapidly growing naval force, and sophisticated cyber capabilities. These also represent a growing opportunity for the group. You may remember me putting up this chart in December to illustrate our drivers of opportunity and growth, and this time we have tweaked the order of the slide as we believe Europe will be at the foremost driver of growth in the medium term. The US has linked its continued support for NATO to greater European burden-sharing, pushing for higher defence spending by Allies. This has already resulted in European countries committing to increase their defence budgets. The European Defence Industrial Strategy sets out a long-term vision to achieve defence industrial readiness across the European Union, with the Readiness 2030 initiative aiming to increase defence investment and defence capabilities. Whilst the detail is still to be confirmed, the recent EU-UK summit established a Defence and Security Pact, which the government says will pave the way for UK businesses to access EU rearmament funds. And we are currently working with stakeholders to identify opportunities where Kemring can address both product demand and further grant funding opportunities through initiatives such as the European Defence Industrial Programme. We believe the increased demand for our products is long-term, which underpins our decision to invest in increasing the capacity of our three Energetics businesses. I'm pleased to report that we continue to make good progress across our organic growth projects, with 35 million of capex spent on these projects during the first half. In Scotland, where we are building an advanced extruded double-base propellants manufacturing facility, the project is on schedule and on budget. Construction of the new buildings is now complete, equipment is being installed and the commissioning, licensing and qualification processes are well underway and live production is scheduled to commence in early 2027. In parallel to this project, the team in Scotland have delivered a feasibility study to the UK MOD, setting out options to establish the manufacturing of military high explosives at our DEA site, and we stand ready to work with the MOD and industry partners to establish this sovereign capability. Our Norwegian military explosives business is a significant growth opportunity as a response to the unprecedented market demand to supply missiles and munition programs. The substantial capacity expansion programs we are building at our Setra site remain on track. And in parallel to the expansion, etc., we continue to work closely with the Norwegian government to explore options to build a second manufacturing plant, which will greatly increase the supply of military high explosives to NATO. Outside of Norway, the business is pursuing several international opportunities of which Germany is progressing at pace. As part of the 12-year framework agreement that was signed in November with Deal Defense, we are establishing in Germany the necessary facilities to perform the blending stage of the manufacturing processes. We are also exploring far broader opportunities to establish further manufacturing facilities in Germany to build a sovereign supply chain for military high explosives. You'll note I have not mentioned our capacity expansion activities in Chicago as they are now complete. During the period, our Chicago business won significant order intake, which included an order valued at $106 million for the delivery of critical components for use in an undisclosed U.S. missile program. Deliveries under this contract, which will be a five-year period, commence in 2026, with continuous flow manufacturing made possible by the additional 45,000-square-foot facility that commenced operations last year. As a reminder, once complete, the three capacity expansion projects will deliver incremental revenue of £100 million per annum and incremental operating profit of £30 million per annum by 2028. Now turning to Roque. Pleasingly, the business continues to make significant progress across several programmes which underpin its long-term growth plan. In January, Roche signed a multi-year strategic agreement with a major U.S. prime contractor for the supply of its high-speed miniature radar altimeter. This highlighted Roche's expertise in the field of electromagnetics and demonstrates that the critical role Kemring plays in multiple space and missiles programs is not confined to just our energetics businesses. In April, it was announced that ROC, in partnership with the United Kingdom's Missile Defence Centre, will lead a UK sovereign industry collaborative effort to provide security to the UK and its allies by countering current and future threats, including ballistic and hypersonic missiles. Valued at £251 million over six years, the STORM framework will see ROC enhance its role as a trusted partner to the UK MOD at the heart of UK missile defence ecosystems, at what is a pivotal time for national defence and security. ROC's STORM work will inform critical UK defence decision-making and will play a key role in developing next-generation missile defence capabilities. Alongside these wins, Roke continues to focus on growing all business areas and in parallel delivering industry-leading research and development, drawing on its world-class people and technologies. New product launches and strategic partnerships form an integral part of this work. In the period, ROC launched EMVIS Deceive, its new EW system that James has already spoken about, and it also signed a strategic partnership agreement with the Kegai Corporation to deliver advanced technologies into the Japanese defence and security markets. During the first half, ROC has seen softness of UK order intake across defence, national security and science and technology, which we believe is linked to the customer's workload associated with the SDR. Importantly, though, we have not seen ROC lose any significant contracts or programmes, but we have seen several delays and extensions. We anticipated these near-term headwinds, so in January we took action to match Roke's cost base with forecast demand. Having taken this action, and with the SDR now published, Roke is well positioned to capitalise upon the expected upturn in demand during the second half. We will also explore further acquisitions that can accelerate our growth strategy for Roke, and we are working a strong pipeline of opportunities across defence and national security. So with incumbency in markets with high barriers to entry, we remain on track to organically grow Roche's revenues to greater than £250 million by 2028 whilst maintaining strong margin performance. So, to summarise, we've had a good first half as we continue to build resilience and grow our high-quality company. We have continued the momentum from last year, resulting in a record order book of £1.3 billion, which provides 85% cover for in-year revenues. And against this robust backdrop, the Board's expectations for the full year are unchanged. We are committed to our incremental growth strategy to achieve £1 billion of annual revenues by 2030, which will require delivery of organic and inorganic opportunities. But as we do this, we will continue to operate with a laser focus on managing operational and financial risks and opportunities. So with our company underpinned by our values of safety, excellence and innovation, the outlook is increasingly robust. With Markin leading innovative products, technologies, and services that are critical to our customers, and with a strong balance sheet, I am very confident that we will deliver our strategy and goals. That concludes this morning's presentation. If anyone has any questions, we'd be happy to take them now. Could I please ask that you state your name and organization before asking your question?