Trading Statement

RNS Number : 4948D

Chemring Group PLC

26 October 2015

 

FOR IMMEDIATE RELEASE                                                                                                 26 OCTOBER 2015

THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN, INTO OR FROM THE UNITED STATES, CANADA, AUSTRALIA, JAPAN, SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL. PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT.

CHEMRING GROUP PLC

UPDATE ON TRADING AND FINANCIAL POSITION

Chemring Group PLC ("Chemring" or "the Group") today issues an update on its trading and financial position.

Key points

·    Despite significant progress having been made, there is potential for delay to revenues from the 40mm ammunition contract announced on 14 September 2015

·    As a result of this and other issues, there is now a realistic prospect that year ending 31 October 2015 ("FY15") underlying operating profit¹ could be reduced by approximately £16 million to approximately £33 million

·    Order book at 30 September 2015 of £606.3 million; £344.6 million for delivery in FY16, representing more than 75% of expected FY16 revenue of £450 million

·    Discussions will be held with debt providers to negotiate amendments to the operation of covenants and the waiver of any event of default that may result from the 40mm contract delay

·    Proposed rights issue (the "Rights Issue") of up to £90 million in Q1 2016; fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove

·    Resultant medium term target capital structure of 1.0x - 1.5x net debt to EBITDA

1                     Underlying measures referred to in this announcement are stated before costs relating to acquisitions and disposals, business restructuring and incident costs, profit/(loss) on disposal of businesses, items deemed to be of an exceptional nature, impairment of goodwill and acquired intangibles, impairment of assets held for sale, amortisation of acquired intangibles and gains/losses on the movement in the fair value of derivative financial instruments, as stated in the 2014 Annual Report and Accounts.

Michael Flowers, Chief Executive, said:

"The Group has made good progress in the procurement and qualification of product relating to the major 40mm contract announced on 14 September 2015, for which revenue was included in the Group's previous FY15 expectations.  However, despite every effort, we are still awaiting the receipt of necessary permits and export approvals associated with this contract. Given the proximity of our year end, the Board considers that there is now a realistic prospect that the Group does not receive these permits and approvals in time to recognise revenue under the contract in the current financial year.

These delays are frustrating in the context of the out-turn for FY15. We have, however, significant order cover for future years, with £344.6m of orders on hand expected to be recognised as revenue in FY16.  

The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time has been spent managing this debt, at the expense of further operational improvement and fully capturing the longer term growth opportunities open to the Group. We have therefore announced today that the Group proposes to launch a fully underwritten rights issue to raise up to £90 million, the proceeds of which will be used to fundamentally address the high levels of debt and to provide a competitive capital structure."

Current trading

In the trading update issued on 14 September 2015, the Group announced that a significant non-standard ammunition contract from the US Government, which had been anticipated to be wholly fulfilled in FY15, was expected to be terminated for convenience by the US Government. Despite losing the profit contribution from this contract, the Group's expectations for FY15 were unchanged as the Group also announced that it had received an order, with a value in excess of £100 million, relating to the supply of 40mm ammunition to the Middle East. This order was expected to contribute to revenue and profitability in FY15 and in following years. The Group has made good progress in the procurement and qualification of product relating to this 40mm contract, however the Group is still awaiting the receipt of necessary permits and export approvals. Given the proximity of the year end, the Board considers that there is now a realistic prospect that the Group does not receive these permits and approvals in time to recognise revenue from this contract in FY15. In addition, there is now a realistic prospect that a cash advance payment associated with this contract of £12 million, originally expected to be received in FY15, will be received in FY16 instead.

As a result of this and other issues, underlying operating profit for FY15 is expected to be reduced by approximately £16 million to approximately £33 million.

The net interest expense for FY15 is expected to be approximately £15 million.  The effective tax rate on underlying profit before tax is expected to be approximately 20 per cent.

Non-underlying items for the year ending 31 October 2015 are expected to be approximately £30 million, principally comprising £17 million relating to the amortisation of acquired intangibles and gains/losses on the movement in the fair value of derivative financial instruments, and £13 million relating to business restructuring, claim related costs and costs relating to acquisitions and disposals.

Capital structure

If the 40mm contract and its associated cash flows are delayed, this together with other short-term timing issues associated with customer receipts, would result in the Group's expected net debt at 31 October 2015 being in the range of £155-£165 million.

The Group's £70.0 million revolving credit facility includes a net debt to EBITDA covenant of not greater than 3.00x and an interest cover covenant of not less than 4.00x.  The Group's loan notes, amounting to £167.5 million ($244.6 million and £8.1 million), have a gross debt to EBITDA covenant of not greater than 3.75x, an adjusted debt to EBITDA covenant of not greater than 3.00x and an interest cover covenant of not less than 3.50x.

Notwithstanding whether the 40mm contract delivers the revenue and profit in FY15 previously expected, the Chemring Board, advised by Rothschild, has concluded that in any event it is in the best interests of the Group to significantly reduce its structural indebtedness and that the appropriate leverage target for the Group over the medium-term is a net debt to EBITDA ratio of between 1.0x and 1.5x.  As a result, the Board intends to undertake a rights issue to raise up to £90 million, conditional on securing covenant waivers as required from the Group's debt providers as a result of the reduction in the Group's profit and cash positions.  This is anticipated to be launched in Q1 2016 alongside the publication of the Group's FY15 results.  The proposed rights issue has been fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove, the Group's joint brokers. The standby agreement contains customary representations and warranties, undertakings, conditions, and termination rights.

Chemring will be formally notifying the banks providing its revolving credit facility and its loan note holders of the matters described in this announcement and, in the case of the banks providing its revolving credit facility, that the reduced expectations of FY15 trading may amount to a material adverse effect constituting an event of default. The Group will also commence discussions with the banks providing its revolving credit facility and its loan note holders to seek a waiver of any event of default that may result from the matters described in this announcement and to amend the operation of covenants to ensure that, going forward, the Group remains in compliance with the terms of its debt facilities and to reflect the Group's intention to strengthen its capital structure through the proposed raising of new equity.

Should the revenue and profit associated with the 40mm contract originally expected in FY15 be received in that year, the Board still intends proceeding with the proposed rights issue in order to reduce the Group's indebtedness.

Dividend policy

The Group's current dividend policy is to pay a dividend that is covered three times by underlying earnings. The Board intends to maintain this policy.

Outlook

The Group's order book at 30 September 2015 was £606.3 million.  Of this, £344.6 million is currently expected to be recognised as revenue in FY16, representing more than 75% of expected FY16 revenue of £450 million.  This level of order cover for FY16 is encouraging, with orders still required being less reliant on larger one-off items than in recent years. 

The Group currently expects revenues under the 40mm contract to commence in the first quarter of FY16, with fulfilment of the contract occurring in FY16 and future years.  Due to production capacity and supply chain constraints, revenues under this contract originally expected to arise in FY15 are now expected to fall partly within FY16, with the remainder of the revenues deferred into future years.

The significance of the 40mm contract is expected to result in the Group's FY16 financial performance being weighted towards the Energetic Systems segment, with a lower contribution from Sensors & Electronics while its US operations focus on research and development activity under long-term Programs of Record. 

The expected profile of orders, revenue and margins mean that the Group again expects a significant second half weighting in FY16.  Assuming the successful completion of the proposed rights issue the Group would expect to benefit from a reduction in its future net finance expense.

The Board expects the wider market backdrop for global defence spending to be one of slow recovery from 2016. The situation for the US is more positive than it has been for some time, and ongoing geopolitical tensions in the Middle East and elsewhere emphasise the need for robust defence and security measures. Whilst the timing of international order placements is difficult to predict, the Group is well positioned to benefit from any sustained increase in demand.

Future direction and developments of the Group

Vision

The Group's vision remains to be the leading developer and manufacturer of advanced detection, countermeasure and energetic technologies to defeat threats from radio frequency and network-based electronic warfare, improvised explosive devices ("IEDs"), chemical and biological agents, and guided missiles.  The Group's three strategic product segments remain:

-    Countermeasures: the world's leading manufacturer of expendable decoys to protect aircraft and ships from the threat from guided missiles;

-    Sensors & Electronics: the Group's products include world-leading systems for detecting IEDs, and chemical and biological agents, and core technologies for detecting, intercepting and jamming electronic communications; and

-    Energetic Systems: Chemring's energetic systems are safety-critical components of missiles, aircraft and space launch systems.  The Group also supplies a specialist range of pyrotechnic and high explosive products, including mine-field clearance systems, demolition stores and 40mm ammunition.

Strategic business development

Notwithstanding the delays to the 40mm contract, the Group continues to make important strategic progress in a number of areas. In particular, the Group remains involved in a number of significant long-term US programmes, each of which are multi-year in life and significant in size. These comprise:

-    Counter IED Husky Mounted Detection System ("HMDS") A2 Ground Penetrating Radar. The Group has a sole source Engineering and Manufacturing Development ("EMD") contract to design the next generation HMDS;

-    Next Generation Chemical Detection ("NGCD"). NGCD is a competitive programme, with the Group having received EMD contracts for each of the three elements of the programme;

-    Joint Biological Tactical Detection System ("JBTDS").  The Group has been confirmed as sole source provider and production contracts are expected to follow the EMD phase; and

-    F-35 countermeasures.  Chemring's Kilgore operation is the sole qualified supplier of countermeasures for the F-35 programme.  Qualification of the Group's Australian operation as the second qualified source currently underway.

Outside the US, the Group continues to target opportunities in other international markets, particularly for the sale of its Sensors & Electronics products, with a focus on growing sales to customers based in North Africa and Asia-Pacific.

Restructuring

During the past two years, the Group has been significantly restructured. This has included the removal of its divisional structure, the integration of businesses within the Group, closure of offices and a significant reduction in headcount.  These actions have significantly improved responsiveness, accountability and collaboration. The resulting knowledge and best practice sharing has enhanced production and safety performance, and together with increased shared customer insight is enabling the Group to better anticipate and react to customer demand.

Know-how

With significant experience in the defence industry, the Group has significant know-how in the sectors in which it operates. The Group continues to invest in research and development to provide technologically advanced solutions to its customers.

Customer relationships

The Group has numerous long-standing customer relationships and has established itself as a trusted supplier to key government agencies, contractors and businesses. Leveraging its customer relationships and market knowledge, the Group is able to obtain critical insight into customers' threats and requirements for protection and detection solutions, and using this insight is able to develop new technologies to meet these requirements.

Update announcement

The Group intends to provide a brief update announcement on 25 November 2015.

Analyst conference call

There will be a conference call for sell-side analysts at 08.30am tomorrow morning, Tuesday 27 October 2015. Participants wishing to join this call should contact MHP Communications on [phone] / [e-mail] to obtain the dial-in details. A replay facility will be available for seven days. To access the replay facility, dial [phone] and enter the PIN 663771#.

-ENDS-

For further information:

Michael Flowers	Group Chief Executive, Chemring Group PLC	01794 833901
Steve Bowers	Group Finance Director, Chemring Group PLC	01794 833901
Rupert Pittman	Group Director of Communications and Investor Relations, Chemring Group PLC	01794 833901
Andrew Jaques	MHP Communications	[phone]
John Olsen James White
John Deans Richard Sedlacek	Rothschild (Financial Adviser)	[phone]
Keith Anderson Chris Baird	Investec Bank PLC (Joint Corporate Broker)	[phone]
Robert Constant Laurene Danon	JP Morgan Cazenove (Joint Corporate Broker)	[phone]

About Chemring

·     Chemring is a global business that specialises in the manufacture of high technology products and services to the aerospace, defence and security markets

·     Employing approximately 3,000 people worldwide, and with production facilities in four countries, Chemring meets the needs of customers in more than fifty countries worldwide

·     Chemring is now organised under three strategic product segments:  Countermeasures, Sensors & Electronics, and Energetic Systems

·     Chemring has a diverse portfolio of products that deliver high reliability solutions to protect people, platforms, mission and information against  constantly changing threats

·     Operating in niche markets and with strong investment in research and development, Chemring has the agility to react rapidly to urgent customer needs

www.chemring.co.uk

Cautionary statements

This announcement contains unaudited information based on management accounts and forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Chemring's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are; increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approvals for engineering or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects.

Chemring undertakes no obligation to revise or update any forward-looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulations.

No statement in this announcement is intended as a profit forecast for FY16 and no statement in this announcement should be interpreted to mean that underlying operating profit for the current or future financial years would necessarily be above a minimum level, or match or exceed the historical published underlying operating profit or set a minimum level of underlying operating profit.

Investec Bank plc ("Investec") and J.P. Morgan Securities plc, which conducts its UK investment banking activities as J.P. Morgan Cazenove ("J.P. Morgan Cazenove"), which are both authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, are acting exclusively for Chemring and no-one else in connection with the Rights Issue and will not regard any other person (whether or not a recipient of this announcement) as their respective clients and will not be responsible to anyone other than Chemring for providing the protections afforded to their respective client or for providing advice in connection with the Rights Issue referred to in this announcement or any other transaction, arrangement or matter referred to in this announcement.

N M Rothschild & Sons Limited ("Rothschild"), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom, is acting exclusively for Chemring and for no one else in connection with the Rights Issue and will not be responsible to anyone other than Chemring for providing the protections afforded to clients of Rothschild nor for providing advice in relation to the Rights Issue.

This Announcement has been issued by Chemring and is the sole responsibility of Chemring. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by Investec Bank plc, J.P. Morgan Cazenove or Rothschild, or by any of their affiliates or agents as to, or in relation to, the accuracy or completeness of this announcement or any other written or oral information made available to or publicly available to any interested party or its advisers, and any liability therefore is expressly disclaimed.

Important notice

This announcement does not constitute or form part of, and should not be construed as, any offer, invitation or recommendation to purchase, sell or subscribe for any securities in any jurisdiction and neither the issue of the information nor anything contained herein shall form the basis of or be relied upon in connection with, or act as an inducement to enter into, any investment activity. This announcement and the information contained herein do not constitute an offer of securities in the United States. The securities referred to in this announcement have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act), and may not be offered or sold in the United States absent registration under the Securities Act or pursuant to an exemption from, or a transaction not subject to, such registration requirements. The Group has not registered and does not intend to register the offering of any securities in the United States or to conduct a public offering of any securities in the United States.

 

END

 

 

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