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.