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Keyword:

Strategy

Our strategy builds on our business model and reflects the current dynamics of our defence and security markets.

Our markets have been driven by the long decline in defence spending over the last five years. In particular, the US, which accounts for about half of Chemring’s revenues, has reduced its total spend by nearly 20% since 2010, with much of the reduction in Overseas Contingency Operations funding. This US trend has been mirrored across NATO allies as operations have ceased in Iraq and Afghanistan. Now, across the US and Europe the decline appears to have levelled at a macro level, and the impact of this is slowly filtering down to the relatively low value systems, products and components which Chemring manufactures: IED detection systems are now recognised as Programs of Record in the US defence budget; excessive stockpiles of consumables bought to support operations have now been run down; and procurement of new combat aircraft is driving emerging demand for bespoke, next-generation countermeasures. We anticipate that the overall defence markets in the US and Europe will remain subdued but stable.

In the UK, Roke, which provides technology solutions to security agencies, is seeing a growth in demand for its services – following the Chancellor’s commitment to increase spending on cyber-security for the UK, this growth is likely to continue.

Australia is Chemring’s other “home” market. The Commonwealth has declared a ten-year plan to grow defence spending by over 80%, and in particular has recognised that this needs to be de-coupled from GDP growth to maintain an appropriate response to China’s increasingly capable forces in the region.

The Middle East remains an important export market for Chemring, but it has become much more volatile, with the opposing forces of escalating conflicts in the region, countered by the collapse in oil prices since 2014. The region had consistently increased year-on-year defence spending from 2006 to 2014, but in 2015 defence spending reduced by 10% as oil-producing countries were forced to tighten their belts in response to declining income. The Group has already seen a number of order delays and cancellations, and the outlook is likely to remain volatile, with only urgent operational requirements likely to receive support and funding.

Against this backdrop, our strategy builds on three themes.

As the defence sector emerges from a period of sustained decline, our short-term priority is to deliver profit and cash. We have re-scaled the Group to reflect current market conditions and have completed several restructuring programmes, with several more under way as specific production programmes complete.

Many of our facilities handle and process energetic materials, which require special facilities and often large sites with high fixed costs. We continue to monitor the cost base at a Group, segment and site level, and benchmark fixed costs both internally and externally to ensure that all our businesses are scaled and scoped to operate safely, effectively and efficiently.

Tight control of the overhead base means that the Group is positioned to deliver profit and cash from its strong order book, which currently benefits from a handful of major international orders in the Energetic Systems segments.

The second theme of our strategy is to systematically upgrade our businesses through a Group-wide Operational Excellence Programme.

As a Group, we have recognised that there are common operational themes and challenges across the Countermeasures, Sensors & Electronics, and Energetic Systems segments, despite the apparent diversity of products across the businesses. For example, few of our manufacturing operations are continuously producing any single product, and several businesses deliver completely different products from one year to the next. Other common challenges include development to production transition, right-first-time production and a systematic approach to trouble-shooting when there are problems.

In order to address these common challenges, we have established a programme to develop and roll-out a common operating model and tool-set, which builds on and shares the collective experiences and best practices across the Group. We expect this to deliver tangible benefits in:

  • Safety
  • Eliminating rework
  • On-time delivery
  • Profitability
  • Working capital

A key part of the programme will be to establish common key performance indicators, and to measure progress and improvements against these KPIs.

Finally, the Group will prioritise investment in equipment, facilities and development to deliver growth. As a result of its position in the US countermeasures market, and strategic investments in sensors technology, the Group is well positioned on several major programmes, mainly in the US. These multi-year, multi-million dollar “Growth Programmes” underpin the growth of the Group and extend to the mid-2020s, and include:

  • F-35 countermeasures
  • Joint Biological Tactical Detection System
  • Next Generation Chemical Detector
  • Husky Mounted Detection System

In addition to these specific Programs of Record in the US, our UK Sensors & Electronics businesses face exciting opportunities in next-generation electronic warfare, cyber electro-magnetic activity (“CEMA”) and consulting and R&D for UK agencies.

These programmes are the main priorities for investment to ensure that Chemring secures and maintains its position as sole-source supplier of these key military capabilities. We will fund this investment by managing the portfolio, particularly in the Energetic Systems segments, to deliver profit and cash.

Countermeasures Strategy:

The Group intends to maintain its leading position in the market for conventional and advanced countermeasures through continuous operational improvement and targeted investment in technology.

New automated manufacturing facilities in the UK and Australia are operational, and Chemring has a strong focus on improving the operational performance of all facilities. The Group also intends to maintain its technological lead in air countermeasures through targeted R&D investment to meet evolving needs and to sustain its sole source positions on the key US and NATO next-generation platforms – the Typhoon, F-22 and F-35. In May 2016, as part of its targeted investment in technology, the Group completed the purchase of Wallop Defence Systems Limited’s countermeasures products, patents and intellectual property.

In the naval countermeasures segment, the Group intends to complete the development of the CENTURION fully-trainable naval decoy launcher in close collaboration with a launch customer, and will continue to evolve naval decoy technology by working closely with lead users, particularly the UK MoD. Additionally, the Group plans to grow its market share through in-country relationships and technology transfer in emerging markets.

Over the past year new systems have been implemented to improve the management of safety and production, and further initiatives are underway to focus on the delivery of production efficiencies, waste reduction and more efficient working capital management.

Sensors & Electronics Strategy:

The Group intends to grow its Sensors & Electronics business by developing and exploiting technologies for its niche markets in IED defeat, chemical and biological threat detection, and land-based electronic warfare. To do so, the Group aims to exploit its international footprint to continue to develop advanced technologies and win key, identified programmes such as the Husky Mounted Detection System (“HMDS”) Program of Record, the Next Generation Chemical Detector (“NGCD”), the Joint Biological Tactical Detection System (“JBTDS”), and several next-generation electronic warfare programmes.

The Group also intends to maintain and grow its specialist contract research and development business to sustain its technology base and benefit from the customer insights this provides.

Energetic Systems Strategy:

The Group intends to secure the position of its Energetic Systems components on next-generation platforms for missile and space programmes in the United States and Europe, through improved delivery performance on current programmes and strong customer and partner interaction. In military pyrotechnics, it intends to upgrade key products to ensure that it can offer the full range of rockets, smoke grenades and flares required by its military and security customers. In addition to maintaining and upgrading its current business base and product offering, the Group intends to seek new markets with a focus on growing its business in the Middle East and Asia Pacific markets.

 
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