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Chairman's statement

“2016 has been a year of progress with the Group continuing its recent focus on operational and safety improvements, in addition to restructuring its balance sheet.”

Carl-Peter Forster
Chairman

After a disappointing first half that was impacted by delayed contract starts and operational issues, full year performance was heavily weighted to the second half. Production and delivery performance across all sites in the second half was at or above target levels and the Group therefore met the Board’s expectations for the year.

This improved performance reflects the progress that has been made, and continues to be made, across the Group. Improved operational focus and greater collaboration amongst the businesses is delivering tangible benefit in a market that is starting to recover from multi-year softness, while the Programs of Record in the Sensors & Electronics segment offer opportunities for future growth.

In February 2016, the Company raised £80.8 million via a rights issue, the primary purpose of which was to alleviate the constraints that the Group’s indebtedness was putting on growth opportunities. £48.8 million of the proceeds was used to repay a proportion of the Group’s outstanding US loan notes, significantly reducing the Group’s future finance costs.

Having strengthened the balance sheet, the Group is now fully focusing on the operational priorities that will underpin its future growth. These priorities include capacity investment projects, implementing significant cost saving initiatives, ensuring excellence in contract delivery and delivering improved working capital management.

The effects of this renewed focus are visible in these results and, in particular, the improving operational performance across the Group in the second half of the year.

Site consolidation initiatives are now underway, such as the enhancement of our Chemring Energetic Devices’ facility in Illinois, that will allow the transition of operations to Illinois and subsequent closure of the California facility, delivering $5 million of annual cost savings.

We are also looking to close one of our two Countermeasure facilities in Philadelphia, delivering further ongoing savings.

Since joining the board on 1 May 2016, and my subsequent appointment as Chairman on 1 July 2016, I have taken the opportunity to visit most of our manufacturing operations both in Europe and North America. I have been encouraged by the Group’s diverse portfolio of products and the strength of its market positions, and by the quality of many of our facilities.

But I have been most encouraged by the calibre of our many employees who, through difficult times, have remained committed to Chemring and focused on the goals of collaboration and continued operational improvement. I would like to take this opportunity to thank them for their loyal service and hard work.

A significant amount has been achieved over the past couple of years in terms of re-shaping the Group’s organisational structure, reducing the cost base and improving operational performance. However, if Chemring is to remain at the forefront of its markets, then we need to build on this progress, and commit further investment in both people and practices.

At the start of 2017 we therefore launched the Operational Excellence Programme. This initiative is designed to enable the Group to realise its full potential. It will focus on safety, reliability, on-time delivery, improved productivity and profitability, and reduced working capital. It will develop strategic and operational process sets that are, where appropriate, common across the Group.

Aligned to this programme, a best practice sharing forum will be established for each production and functional area. This will be aimed at determining where within the Group we currently achieve best practice and how we can share this better, what we can do to enhance recognised best practice against our industry background, and how we can roll this out to other business units.

The ability to focus on these operational priorities and growth initiatives comes as a direct result of the rights issue, which has enabled management to focus on managing the business, rather than managing the debt. This could not have happened without the support of our shareholders and I would therefore like to acknowledge and thank them for their continued support.

There is a growing sense of momentum across the Group. We entered the new financial year with a strong order book, excellent strategic positions on long-term programmes, and with a focus on continued operational improvement. Overall, I look to the future with optimism.

Trading summary

Revenue from continuing operations was £477.1 million (2015: £377.3 million). This revenue generated an underlying operating profit of £48.5 million (2015: £34.4 million). Including non-underlying items, total operating profit was £26.2 million (2015: £5.5 million).

Underlying profit before tax increased by 71.7% from £19.8 million to £34.0 million, resulting in underlying earnings per share of 10.3p (2015 as restated: 7.1p).

The closing order book for continuing operations increased by £23.3 million during the year and at 31 October 2016 was £592.9 million (2015: £569.6 million).

The Group’s net debt at 31 October 2016 was £87.6 million (2015: £154.3 million).

In view of the rights issue that was announced in January 2016, the Board did not recommend a final dividend in respect of 2015, nor did it recommend an interim dividend in respect of the six month period ended 30 April 2016.

Recognising that dividends are an important component of total shareholder returns, and in view of the Group’s improved trading performance for 2016, the Board intends to resume paying dividends and is recommending a final dividend for the year ended 30 October 2016 of 1.3p per ordinary share. If approved, the final dividend will be paid on 18 May 2017 to shareholders on the register on 28 April 2017.

This year has seen the Group reshape the membership of the Board.

Peter Hickson retired as a director at the end of June 2016, having been appointed as Chairman of the Board in October 2010. During Peter’s tenure the Group transitioned through a period of unprecedented change within the defence industry, following the end to the wars in Iraq and Afghanistan. This was not an easy period and Peter deserves the Group’s gratitude for his leadership and commitment. He left the business well-placed for future growth.

I joined the Board on 1 May 2016 as an independent non-executive director and Chairman-designate.

I succeeded Peter Hickson as Chairman of the Board following Peter’s retirement on 30 June 2016.

Daniel Dayan joined the Board as an independent non-executive director on 7 March 2016, becoming Chairman of the Remuneration Committee from that date.

Ian Much and Andy Hamment stood down from the Board on 21 March 2016 and 30 April 2016 respectively. Nigel Young succeeded Ian Much as Senior Independent Director with effect from 21 March 2016.

Andrew Davies joined the Board as an independent non-executive director on 17 May 2016.

On 29 June 2016, the Group announced that Steve Bowers, Group Finance Director, had informed the Board of his intention to leave the Group. Steve left the Group on 30 September 2016 and his role has since been covered on an interim basis by Andrew P. Davies, Deputy Group Finance Director.

On 13 December 2016, the Group announced the appointment of Andrew Lewis as Group Finance Director. He was previously Group Finance Director of Avon Rubber p.l.c. Andrew joined Chemring on 9 January 2017 and will join the Board of Chemring on 19 January 2017 after the approval and announcement of the 2016 results.

Trading since the start of 2017 has been in line with expectations across all businesses.

The Board’s expectations for the Group’s performance for 2017 remain unchanged, based on current foreign exchange rates.

The expected profile of orders, revenue and margins, combined with routine seasonality within the business, means that the Group continues to expect 2017 to reflect a significant second-half weighting in profitability.

The order book as at 31 October 2016 increased 4.1% to £592.9 million, of which £368.0 million is currently expected to be recognised as revenue in 2017. On a constant currency basis using 2015 rates, the order book was £489.8 million.

The order book at 31 December 2016 was £572.1 million.

Carl-Peter Forster
Chairman
19 January 2017

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