Chemring : FY25 interim results presentation transcript

Interim Results Transcript - 3 June 2025 - Analyst presentation

1. Title slide - Delivering the plan
2. Introduction - Michael Ord, Group CEO

   Good morning and welcome to the presentation of Chemring's interim results for the six months to 30thApril 2025.

   I am as usual joined by our CFO, James Mortensen.

   I'll briefly cover some of the Group highlights from our first half before handing over to James who will 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.

3. Delivering the plan

   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 our Group.

   Our record order book, and associated trading visibility, underpins our growth ambitions as we build towards our goal of increasing annual revenue to £1bn 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 trading 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.

4. H1 2025 good progress across KPI's

   Turning to the headline numbers:

   For me the standout is our record £488m of order intake which is a 42% increase from last year, and the resulting £1.3bn order book, which is the highest in the company's history.

   Operationally our revenue was up 5% driven by a strong performance across Countermeasures C Energetics, and 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'll now hand over to James.

5. Financial Review - James Mortensen - CFO

   Thanks Mick. We are pleased to report results in line with expectations, as we deliver the plan. Here are the highlights…

6. Financial Highlights

   • A new record order book for the Group at £1.3bn, up 25%

   • Revenue up 5% showing continued strong momentum

   • Operating profit was up 8% with improved operational execution in 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

7. Group and 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 Sensors and Information, as expected and previously highlighted. This was because the prior year benefitted 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 Roke, 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 and by 10%.

8. Group Net Debt Bridge

   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 £46m of capex spent in the period. Of this £35m was spent on Energetics expansion projects, and this was offset by £13m of grant funding.

   • This brings the total spent on Energetics expansion projects to £70m, offset by total grants of £24m.

   • In the period we returned £17m to shareholders, £14m through our dividend and £3m through the share buyback; we also purchased some shares to satisfy acquisition consideration and employee share options.

   • We refinanced our RCF in April. We have increased it from 150 to 180m, it will run until December 2028 and can be extended a further 3 years, and is on attractive pricing. In addition, we also have a 20m US dollar overdraft and a UKEF loan of £80m - so we have good, immediately available liquidity, with facilities up to £275m available.

We had closing net debt of £93m, less than 1x leverage, and we expect to end the year only slightly higher.

G. Capital Allocation

There is 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 1.5x.

We'll continue to execute that policy through the four pillars of investing in the business, focused MCA 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 9m US dollars in cash. We regularly review our portfolio and will 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.

1. £1bn revenue ambition

   First longer term - our ambition is the same - £1bn in revenue by FY30 and we remain on track.

   Within energetics we see enduring demand for our products for which we are installing capacity, as evidenced by the long term agreements entered into with the likes of Diehl, 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 £250m in FY28 and then beyond.

   I have already talked about our disciplined approach to MCA, 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.

2. Guidance and financial outlook

   • Shorter 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 Sensors and Information we are targeting flat, in just the time since the Half year end order cover has risen to 73%. Growth in Roke will offset the decline in US Sensors - as JBTDS 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 25

   • 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 timing disruption in the US and from the SDR in the UK

   • And obviously any significant movements in FX

3. Driving innovation

   So now for innovation, an area where Chemring excels and one of our core values.

   The war in Ukraine has re-enforced 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 £300m 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 need 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 multi-functional 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 can rapidly evolve to counter new threats. So it is ready for the future, now

   What you should take away is that we have, and will, maintain investment in Roke and the next generation products we need - and so that gives us confidence in the growth outlook for the business. Deceive was launched last month, and we are 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.

4. Michael Ord, Group CEO

   Thanks James.

5. Market Update

   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, defence spending is rising across Europe, for both NATO and non-NATO member states, with an increasing trend of developing sovereign capabilities and supply chains.

   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 deterrent are among the core priorities for this spend. Industrially, this is expected to be accompanied by capability re-shoring and stockpile production, to build national resilience.

   The UK Strategic Defence Review, published yesterday, defines the long-term strategic direction of UK defence policy, ensuring the nation is equipped to address 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'll highlight just two:

   The first is the establishment of the new CEMA Command to oversee the UK's defensive and active cyber activities, alongside electronic warfare efforts, which should create significant opportunities for Roke.

   And the second is the commitment to invest £1.5 billion in an "always on" pipeline for munitions, building at least six new factories in the UK to produce munitions and energetics, and the commitment to build up to 7,000 UK-built long-range weapons to strengthen Britain's Armed Forces.

   And in the US, the Trump administration is focused 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 defence 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. This also represents a growing opportunity for Chemring.

6. Chemring's growth is underpinned by three core drivers

You may remember me putting up a slide like this 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 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 in the European Union, with the 'Readiness 2030' initiative aiming to increase defence investment and defence capabilities quickly and significantly.