Chemring Grp Plc Unsp/Adr

Good morning and thank you for joining us for Kemring's full year results for the period ending 31st of October 2025. I'm joined today by James Mortenson, our Chief Financial Officer, and we have Tony Wood, our Chairman, with us also. This morning I'll start with the group highlights for the year, then hand over to James for a detailed review of our financial and operational performance. I'll then return to discuss the market environment and update you on the progress we've made in delivering our growth-oriented strategy. FY25 was another year of solid performance for Kemring. What was particularly pleasing is that we achieved this despite some short-term headwinds, most notably softness in UK government order placement across national security and defence, which impacted ROC. This resilience reflects the work we've done to build a high-quality business capable of navigating challenges and delivering sustainable growth. Global defence spending continues to increase, driven by US demands for greater burden sharing across NATO, the conflict in Ukraine and rising tensions in the Asia-Pacific region. These dynamics underpin a sustained upcycle in defence and security investment, which is expected to persist into the next decade. Our record order book is clear evidence of this trend. During the year, we secured several strategically important contracts, including Storm, Rogue's £251 million UK MOD multi-year missile defence programme. These wins strengthen our future prospects and support our ambition to double annual revenue to £1 billion by 2030 while maintaining strong margins. Turning to the headline numbers. our three Energetics businesses delivered exceptional results, with all three achieving record order books and two delivering record revenues and operating profits. The group revenue increased by 2% to £498 million, and operating margin improved from 14.3% to 14.8%, reflecting strong operational effectiveness and agility. Earnings per share were 19.4 pence and cash conversion rose to 114%, reinforcing the cash-generative nature of the group. Order intake reached £781 million, up 20% year-on-year, delivering another record order book of £1.3 billion, up 32% since last year. We also continue to advance our safety and ESG agenda, and our total recordable injury frequency rate fell to 0.48 from 0.69, demonstrating progress to our zero-harm ambition. Looking ahead, I'm more confident than ever in Kemring's position to capitalise on long-term demand. We are a specialist manufacturing and technology business with unique positions at the heart of national security, defence and space markets. all markets in which growth is being driven by rising global instability and the need to rebuild defence industrial capacity after decades of underinvestment. With market-leading positions, which are often sole source, our diversified and synergistic portfolio is, by design and hard work, positively exposed to structural tailwinds expected to persist for many years and our track record of execution is evident in expanding margins and excellent cash conversion. Our resilient balance sheet enables investment in organic and bolt-on acquisitions and enhance our offering and strengthen market leadership. In summary, Kemring is very well positioned to deliver superior and sustainable shareholder value over the longer term. I'll now hand over to James, who will take you through the financial results, operational performance, and our innovation review in more detail.

Thanks, Mick. In what has been a challenging UK contracting environment, we have still managed to deliver an improvement across all of our key metrics, demonstrating the resilient, high-quality nature of the business. So first, to the highlights. Another record order book, at 1.3 billion, up 32%. Continued momentum in revenue, up 2%. Operating profit was up 6%, resulting from a focus on operational excellence, This resulted in margin up 50 basis points to 14.8%. EPS up 3% despite higher tax and finance costs. Strong cash conversion at 114%. And so the board has declared a final dividend of 5.3p, giving a total dividend of 8p, up 3%. So turning next to our segmental performance. Countermeasures and energetics revenue grew 17%. Energetics delivered ahead of schedule and improving operational performance at our Tennessee countermeasures business resulted in a strong result. Operating profit was up 37% and margin increased to 19.1%. It was a weaker period in sense and information as expected and previously highlighted. This was because there were delays to UK government spending and the prior year benefited from JBTDS LRIP. This meant revenue was down 18% and operating profit down 25%. As a result of early action to control cost, we maintained operating margins of nearly 18%, demonstrating how even in the current market, this is a high quality business. Group revenue was up 2%. Despite an FX headwind of 5 million, group operating profit was up 6%, and the operating margin was up 50 basis points to 14.8%. On a constant currency basis, group revenue would have increased by 3%, and operating profit by 7%. So let's look in a bit more detail at each of the segments. There was another strong year for order intake in countermeasures and energetics, demonstrating the critical, often sole source, highly engineered nature of the products in this segment. Order intake was up 21%. As our customer programs are ramping, we are seeing that demand often in the form of multi-year orders. There was a strong performance in energetics, with completed projects delivering ahead of schedule in Chicago and Norway. We also saw some benefit from increased pricing and the results of our continued focus on operational excellence improving volumes. This resulted in a particularly strong H2 margin performance. The expansion projects in Chicago and Scotland are substantially complete with just the commissioning phase to be completed in Scotland. In Norway, the first phase is complete and delivering ahead of schedule. However, as a result of higher infrastructure and groundwork costs, we now expect total costs of £180 million, up from the £145 million initial estimate. This will be offset by £90 million of grants, with a net spend of £90 million. We still expect to generate very attractive returns on the investment, and for group revenue to increase by £100 million per annum, and operating profit by £30 million per annum, from 2028 once the three capacity expansion programs are complete. In countermeasures, teams are executed well across all of our facilities. In particular, we saw improving operational performance of our Tennessee countermeasures business with improving volumes coming out of that facility, the operational challenges and low margin contract that held us back last year and are completely behind us. Operating profit grew 37%, and margin was up 280 basis points to 19.1%, reflecting that strong operational execution. We have great visibility into next year and beyond. Order cover remains really strong, with 95% coverage for 26%, 93% for 27%, and 59% for 28%. So moving now to a sense of information where order intake grew 19% to £179 million. In particular, it was pleasing to see that Roque order intake was up 24% on the prior year. Revenue was down 18% to £175 million as a result of a softer UK government contracting environment affecting Roque. We have tightly managed the business in this challenging environment, reducing headcount by about 80 in the year whilst protecting key capabilities. We now have a bigger bench of employees with the highest clearance than when we started the year. This demonstrates we are well positioned for the current environment and for when order flow improves. We continue to execute well in our US Census business, receiving a $15 million order for the naval version of our biologic detector. we remain on track to receive the FRP award for the Army version, JVTDS, in 2026. In August, we completed the Landguard acquisition. Integration has progressed well and the business performed in line with plan. We think this is a great business with a strong management team and we are confident this is a combination that will deliver. Early action to manage our cost base meant we held operating margin at 17.8%, Operating profit fell 25% following the drop in revenue. The order book grew 5% on prior year at 45% order cover for FY26. It's in a similar place to last year, and we expect a return to growth in the second half of FY26. Given the critical areas where we support our customers and a strong pipeline of opportunity for product sales, we remain on track to grow rope to 250 million by FY28. So moving on to net debt, with a strong focus on cash generation, cash conversion was 114% in the year with operating cash of 112 million. We have continued to invest in additional capacity with 76 million spent in the energetics and a further 29 million spent on automation and maintenance. This has been offset by 24 million of grant funding. We've also returned 26 million to shareholders through our growing dividend and the share buyback, and we've also purchased shares to satisfy acquisition consideration and employee share options. After great progress made by the business in managing working capital, closing net debt of 89 million was lower than expected, representing 0.95 times leverage. On capital allocation, we remain consistent. Overall, we want to maintain a resilient balance sheet, and we will target leverage of less than 1.5 times. First, we'll continue to invest in the business. Norway is now the primary focus given spending is largely complete in Chicago and Scotland, but we were also looking at opportunities for further automation, like at our UK countermeasures business. Second, we'll continue to execute focused M&A. Landguard was a good example of a bolt-on within ROC, which remains the main focus. We'll also continue to screen for targets in space and missiles in the US and Europe. We'll remain disciplined, and we have a healthy pipeline of opportunity. The target annual dividend cover of 2.5 times has now been met, and so we expect to maintain that level of cover going forwards. And finally, we'll return surplus capital to shareholders. We've returned 4 million in the year, with 36 million remaining on the buyback. So now let's turn to FY26 and how we see that progressing. Overall, training guidance unchanged, with 76% revenue cover next year, with a similar H2 weighting to prior year. In countermeasures and energetics, we are targeting low double-digit growth, That's made up of mid-teens growth in energetics and low single-digit growth in countermeasures. Like last year, we expect an H2 weighting. Sensored information, we are targeting mid-double-digit growth. US sensors will be flat as we wait for JVCDS to full rate production, expected to start in FY27. We expect ROPE to return to near 24 revenue levels next year, but a return to growth in H2, so an H2 weighting for revenue and profit. Interest costs will be about 10 million. Rates haven't come down as much as we thought, and net debt is higher. We now expect CAPEX in 26 to be in the range of 100 to 110 million, mainly resulting from higher costs in Norway. And finally, as we enter a growth phase, we expect cash conversion in the range of 80% to 85%, but returning to normal levels in the medium term. We're also mindful of some external factors, which we also flagged last year, continued short-term budget timing disruption in the US and UK, and obviously any significant movements in FX. So that was the numbers. Now for innovation. one of our core values, and it still amazes me just how much capability we have. Drones pose an increasing threat, not just to our armed forces, but also to our civilian infrastructure. This is Cortexa, a small, rapidly deployable system that is a result of over five years' work with the UK MOD. It's a great example of how Rote can fuse its software with the best off-the-shelf technology. Depending on the mission, you can swap out the sensors and it's compatible with a range of factors. As the threat changes, it can evolve by training the AI classifier. It combines miniature active radar and point-tilt-zoom sensors to provide a high-resolution capability in day or night. The AI in Roke software allows you to identify multiple threats automatically. First on radar, so the system can determine its location and its track. Next, an image generated by the sensor. Using an image generated by the sensor, AI classifies the object. Is it a threat? And how serious? So not just if it's a drone, but what kind of payload does it have? Then this is fed back to operators in a simple user interface so they can take appropriate action fast. The system can track more than 20 threats at a time, so it can counter the increasing threat of drone swarms. This product has both military and civil applications. Having already sold our first pre-production units to a key reference nation, we can see a clear market opportunity. So thank you. That brings me to the end of my section. I'll hand back to Mick for the strategy update and outlook.

Thanks, James. Before turning to our operational performance and growth opportunities, let me start with what we're seeing in our core markets and why this underpins our confidence in the longer term outlook. Geopolitical tensions remain at the highest levels in recent memory, whether it's the conflict in Ukraine and an increasingly assertive Russia or rising tensions across the Asia-Pacific. This environment is driving a fundamental rearmament cycle expected to last at least a decade, possibly two. Technology and innovation continue to reshape defence and security activities, and demand for traditional capabilities such as munitions and missiles is growing alongside disruptive technologies. This very significant increase in demand has exposed vulnerabilities in NATO's defence industrial base after years of underinvestment. Rebuilding resilience will take time and governments are placing greater emphasis on national security and closer collaboration with industry. In the US, the world's largest defence market, the Trump administration is focused on maintaining overwhelming military superiority. The FY26 DoD funding request is $961 billion and in parallel the US has signalled it will no longer shoulder NATO's financial burden prompting members to target defence spending of 3.5% of GDP by 2035. How nations respond to this rising global instability will likely create significant opportunities for KEMRING. Next, I'll focus on the UK and Europe. Starting with the UK, while short-term softness persists, we expect sustained investment in capability, resilience and technology over the medium to longer term. The UK government has committed to increase defence spending to 2.5% of GDP by April 2027, and an ambition to reach 3% in the next Parliament. Recent publications, notably the Strategic Defence Review, National Security Strategy and Defence Industrial Strategy, all signal a focus on sovereign-based manufacturing and advanced technologies. Priorities in munitions, energetics, active cyber defence and operational mission support are all aligned with ChemRing's strengths. The Defence Investment Plan expected before year-end should outline funding priorities and its release should trigger new contracts in munitions, energetics and digital defence capabilities. Turning to Europe, Defence budgets are rising sharply, reaching €326 billion in 2024, with a further €100 billion increase projected by 2027, alongside major EU initiatives, including the €800 billion Readiness 2030 programme and the €150 billion Security Act for Europe instrument. European priorities are to increase industrial capability and military readiness, and the Nordic nations in particular are investing heavily in energetics. Our sales into Europe have grown over 120% in the past three years, and we expect this upward trend to continue. Against this positive backdrop, let's review our progress in 2025. We set out three strategic imperatives last year, grow, accelerate and protect, and I'm pleased to report good progress against all three areas. Organic growth initiatives are on track, with some ahead of schedule. Our U.S. countermeasures business rebounded after FY24 challenges, with operational improvements in Tennessee delivering higher production volumes and reduced downtime. And in August, we acquired Landguard Group, enhancing ROC's defence technology portfolio and creating operational synergies. Integration is progressing well, and we see a healthy pipeline of similar bolt-on opportunities across ROC and the US space and missiles market. And, as always, safety remains non-negotiable, with our recordable injury frequency rate reduced, reinforcing our zero-harm ambitions. Our energetic expansion programme is advancing well. In Chicago, the expansion programme is extensively complete and was delivered on budget. The facility fit-out has been successful, with the team establishing continuous flow production operations ahead of schedule. With strong order visibility, the business is firmly on the front foot. In Scotland, construction of the new propellants facility is complete, along with the installation of production machinery. Facility commissioning is underway, and revenue generation is on track for FY27. Market demand for double-base propellants remains strong, and the facility's order book is underpinned by a 12-year agreement with Martin Baker and £47 million worth of Enlaw missile orders from Saab. In Norway, phase one of the expansion programme is ahead of schedule and phase two is progressing well despite some cost increases. However, investment returns remain strong. In addition to our existing production site, the Norwegian government has allocated funding for the next phase of work to establish the new greenfield production facility. In Germany, work is on track to deliver a new energetics blending facility in 2027, supporting Deal Defence's 155mm munitions line under our €231 million framework contract. And in the UK, we are completing customer-funded studies assessing the feasibility of establishing new energetic material production capabilities at our RDS site in Scotland. These projects strengthen our critical position in munitions and missile supply chains, and whilst they are long-term in nature, we remain focused on delivering near and medium-term growth. Rogue faced a challenging UK market in FY25, with slower-than-expected recovery in UK government order placement. But importantly, we've seen no cancellations and no competitive losses, only contract delays and extensions. And notwithstanding these challenges, Rote was successful in securing £65 million worth of contract renewals from national security customers, continuing to provide a very solid underpin for the business. Looking forward, Roke will increase revenues from its growing portfolio of market-leading defence products, and we will continue to access more international markets. Highlights for the year have been the launch of the Deceive EW detection and attack system and Cortexa, the counter-drone system which James took you through, both of which have been well received by UK and international customers. And the team won more than £20 million in defence product orders outside of the UK, including resolve, perceive and locate systems to Latvia, Sweden and Egypt, and with the expectation of further orders to come in 26. With recovery in national security expected in H2 of 26, and with opportunities pipeline that exceeds £900 million, ROPE remains well positioned for future growth. and all of which supports confidence in Roke achieving £250 million worth of revenue by 2028 with continued strong margins. So, to conclude, we've made solid progress in 2025, continuing to build a high-quality and resilient business whilst investing for future growth. Trading since the start of the current financial year is in line with our plans, and with 76% of expected 26 revenues already in the order book, the Board's expectations for 26 performance remain unchanged. With market-leading products, technologies, and services critical to our customers, and with a resilient balance sheet, we are confident in achieving our ambition of $1 billion annual revenue by 2030 and balancing near-term performance with longer-term growth and value creation. So that concludes the presentation, and we're now happy to take your questions. Could I ask that you state your name and the organization that you represent before asking your question?