Chemring Group PLC Half year results to 30 April 2023 (7046B)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Chemring Group Plc	LSE:CHG	London	Ordinary Share	GB00B45C9X44	ORD 1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.50	0.15%	344.00	345.00	346.00	359.50	338.50	359.50	376,834	16:35:26

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Aircraft Parts, Aux Eq, Nec	481.9M	5.4M	0.0195	177.18	955.24M

TIDMCHG

RNS Number : 7046B

Chemring Group PLC

06 June 2023

                                                                                        CHEMRING GROUP PLC                                             6 JUNE 2023

("Chemring" or "the Group" or "the Company")

INTERIM RESULTS FOR THE SIX MONTHS TO 30 APRIL 2023

Record order book, full year expectations unchanged, strong long-term prospects

 
                                             As reported         At H1 2022 
                                                                exchange rates 
                                           H1 2023   Change    H1 2023   Change   H1 2022 
 
 Order intake (GBPm)                         338.2     +81%      338.6     +82%     186.4 
 Revenue (GBPm)                              212.1      -4%      210.2      -5%     220.4 
 Underlying EBITDA(*) (GBPm)                  35.7     -17%       35.9     -16%      42.8 
 Underlying operating profit(*) 
  (GBPm)                                      26.6     -21%       27.0     -19%      33.5 
 Underlying profit before tax(*) 
  (GBPm)                                      25.6     -23%       26.0     -21%      33.1 
 Underlying basic earnings per share(*) 
  (pence)                                      7.7     -29%        7.8     -28%      10.8 
 Statutory operating profit (GBPm)            23.0     -22%       23.4     -20%      29.3 
 Interim dividend per share (pence)            2.3     +21%        2.3     +21%       1.9 
 Net debt at 30 April (GBPm)                  25.0     +35%       24.7     +34%      18.5 
 Order book (GBPm)                           749.5     +54%      765.1     +57%     488.1

Highlights

 
 
       *    H1 2023 was in line with the Board's expectations. As 
            previously announced, delays to order intake in 2022 
            following the extended US Continuing Resolution have 
            resulted in a heavier weighting of trading 
            performance and cash generation expected in the 
            second half of the financial year for the 
            Countermeasures & Energetics sector 
 
 
       *    Record H1 order intake and order book, at the highest 
            level in over a decade at GBP750m 
 
 
       *    Order intake for Sensors & Information was GBP100m, 
            up 35%, with Roke continuing to execute its growth 
            strategy 
 
 
       *    Order intake for Countermeasures & Energetics was 
            GBP238m, up 113%, driven by strong demand at our 
            niche energetics businesses including an order for 
            our Scottish facility of GBP43m for the delivery of 
            critical components used on the Next Generation Light 
            Anti-Tank Weapon system ("NLAW") 
 
   *    Roke revenue in the first half was up 44% to GBP78m 
        and order intake up 41% to GBP82m with the business 
        well positioned to continue its growth trajectory in 
        what continues to be a buoyant market 
 
 
   *    Sensors & Information underlying operating margin was 
        19.4% (H1 2022: 21.5%, 2022: 18.5%), the decrease on 
        H1 2022 driven by the Husky Mounted Detection System 
        ("HMDS") program transition to sustainment in H2 2022 
        and continuation of operating expense investment at 
        Roke ahead of the revenue curve 
 
   *    Countermeasures & Energetics underlying operating 
        margin was 13.3% (H1 2022: 16.4%, 2022: 17.4%), the 
        decrease reflecting the operational gearing impact of 
        revenue being weighted towards the second half of 
        2023 and increased energy costs 
 
   *    Net debt was GBP25.0m (H1 2022: GBP18.5m), the 
        increase due to timing of working capital investment 
        required to deliver H2 revenue. Net debt to 
        underlying EBITDA of 0.33 times (H1 2022: 0.23 
        times). H2 cash generation is expected to improve 
        markedly 
 
 
   *    GBP90m capacity expansion plan to 2026 initiated to 
        capitalise on growing demand in Energetics, 
        delivering incremental revenue of GBP60m per annum 
 
 
   *    Interim dividend per share of 2.3p, up 21% (H1 2022: 
        1.9p) 
 
   *    The Board's expectations for 2023 are unchanged. 
        Approximately 90% (H1 2022: 85%) of expected H2 
        revenue was in the order book at 30 April 2023. The 
        Group's longer-term prospects are strong, underpinned 
        by activity levels and our leading technological 
        offering

Michael Ord, Chemring Group Chief Executive, commented:

"It has been a period of heightened activity across the Group as we adapt to changing customer spending priorities. In response to increased global uncertainty and competition, demand for both technology-driven solutions and a resurgent demand for traditional defence capabilities, has resulted in record H1 order intake and an order book at its highest level for over a decade.

"The outlook for the global defence market is increasingly positive, with strong growth predicted over the next decade. This growing visibility and the increasing desire of our customers to move to long-term partnering agreements gives us the confidence to continue to invest for the future, balancing short-term performance with heightened long-term growth and value creation. Chemring is well placed to capitalise on its many opportunities and with 90% of expected H2 revenues covered by the order book, the Board's full year expectations are unchanged."

Notes:

* All profit and earnings per share figures in this news release relate to underlying business performance (as defined below) unless otherwise stated.

The principal Alternative Performance Measures ("APMs") presented are the underlying measures of earnings which exclude exceptional items, gain or loss on the movement on the fair value of derivative financial instruments, and the amortisation of acquired intangibles. The directors believe that these APMs improve the comparability of information between reporting periods as well as reflect the key performance indicators used within the business to measure performance. The term underlying is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

EBITDA is defined as operating profit before interest, tax, depreciation and amortisation. Reference to constant currency relates to the re-translation of H1 2023 financial information at the H1 2022 exchange rates to reflect the movement excluding the impact of foreign exchange. The exchange rates applied are disclosed in note 12.

A reconciliation of underlying measures to statutory measures is provided below:

 
 Group:                                    Underlying   Non-underlying   Statutory 
 EBITDA (GBPm)                                35.7          (1.4)          34.3 
                                          -----------  ---------------  ---------- 
 Operating profit (GBPm)                      26.6          (3.6)          23.0 
                                          -----------  ---------------  ---------- 
 Profit before tax (GBPm)                     25.6          (3.6)          22.0 
                                          -----------  ---------------  ---------- 
 Tax charge on profit (GBPm)                 (3.9)           0.6           (3.3) 
                                          -----------  ---------------  ---------- 
 Profit after tax (GBPm)                      21.7          (3.0)          18.7 
                                          -----------  ---------------  ---------- 
 Basic earnings per share (pence)             7.7                           6.6 
                                          -----------  ---------------  ---------- 
 Diluted earnings per share (pence)           7.5                           6.5 
                                          -----------  ---------------  ---------- 
 Segments: 
                                          -----------  ---------------  ---------- 
 Sensors & Information EBITDA (GBPm)          20.8          (1.8)          19.0 
                                          -----------  ---------------  ---------- 
 Sensors & Information operating 
  profit (GBPm)                               19.0          (2.9)          16.1 
                                          -----------  ---------------  ---------- 
 Countermeasures & Energetics EBITDA 
  (GBPm)                                      22.3            -            22.3 
                                          -----------  ---------------  ---------- 
 Countermeasures & Energetics operating 
  profit (GBPm)                               15.2          (1.1)          14.1 
                                          -----------  ---------------  ----------

The non-underlying adjustments comprise:

 
 
   *    amortisation of acquired intangibles of GBP2.2m (H1 
        2022: GBP2.1m, 2022: GBP4.6m) 
 
   *    gain on the movement in the fair value of derivative 
        financial instruments of GBP0.4m (H1 2022: GBP1.6m 
        loss, 2022: GBP4.1m loss) 
 
   *    acquisition expenses of GBP1.8m (H1 2022: GBP0.5m, 
        2022: GBP2.0m) which includes GBP1.7m of deferred 
        consideration accounted for as a post-acquisition 
        expense under IFRS 2 
 
   *    tax impact of adjustments of GBP0.6m credit (H1 2022: 
        GBP0.5m credit, 2022: GBP1.3m credit)

Further details are provided in note 3.

For further information:

 
                    Group Director of Corporate Affairs, 
 Rupert Pittman      Chemring Group PLC                     +44 (0) 1794 463401 
                                                            +44 (0) 20 3128 
 James McFarlane    MHP Group                                8100 
 Ollie Hoare

Cautionary statement

This announcement contains 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.

Notes to editors

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

-- Employing approximately 2,500 people worldwide, and with production facilities in four countries, Chemring meets the needs of customers in more than fifty countries

-- Chemring is organised under two strategic product segments: Sensors & Information and Countermeasures & Energetics

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

-- Operating in niche markets and with strong investment in research and development ("R&D"), Chemring has the agility to rapidly react to urgent customer needs

www.chemring.com

Presentation

A video presentation and accompanying slides will be available at the Chemring Group results centre www.chemring.com/investors/results-centre at 07.00 (UK time) on Tuesday 6 June 2023.

Analyst meeting

An analyst meeting will take place at 09.00 (UK time) on Tuesday 6 June 2023 at the offices of Investec Bank plc, 30 Gresham St, London EC2V 7QP. To confirm attendance please contact MHP Group: chemringplc@mhpgroup.com.

Photography

Original high resolution photography is available to the media by contacting Catherine Chapman, MHP Group: catherine.chapman@mhpgroup.com / tel: +44 (0) 20 3128 8339.

INTERIM MANAGEMENT REPORT

Group overview

The Group's first half performance was in line with the Board's expectations. As previously announced, delays to order intake in 2022 following the extended US Continuing Resolution have resulted in a heavier weighting of trading performance and cash generation expected in the second half of the financial year.

Order intake for H1 2023 was exceptionally strong in both segments, up 81% to GBP338m (H1 2022: GBP186m, 2022: GBP551m). Revenue was down 4% to GBP212.1m (H1 2022: GBP220.4m, 2022: GBP442.8m) reflecting the expected bias of trading performance in the second half of 2023.

Underlying operating profit was down 21% to GBP26.6m (H1 2022: GBP33.5m, 2022 GBP64.0m) resulting in an underlying operating margin of 12.5% (H1 2022: 15.2%, 2022: 14.5%). The decrease compared to H1 2022 primarily reflects the operational gearing impact of the second half bias of revenue in Countermeasures & Energetics, and in Sensors & Information, HMDS moving to sustainment offset by continued strong growth at Roke.

Total finance expense was higher at GBP1.0m (H1 2022: GBP0.4m, 2022: GBP1.5m) reflecting the significant increase in interest rates during the second half of 2022 which has continued into 2023.

Underlying profit before tax was GBP25.6m (H1 2022: GBP33.1m, 2022: GBP62.5m). The effective tax rate on the underlying profit before tax was 15.2% (H1 2022: 8.8%, 2022: 9.1%). The charge in the previous period was reduced by a credit for the recognition of a deferred tax asset in respect of future US interest deductions that were previously unrecognised. The underlying earnings per share was 7.7p (H1 2022: 10.8p, 2022: 20.2p).

The bias in trading performance to the second half in FY23 has resulted in a working capital investment timing difference increasing net debt at the half year to GBP25.0m (H1 2022: GBP18.5m, 2022: GBP7.2m). In addition, we have continued with our capital investment activity, including the acquisition of Geollect.

Underlying operating cash inflow of GBP22.9m (H1 2022: GBP43.3m, 2022: GBP90.1m) represented 64% (H1 2022: 101%, 2022: 109%) of underlying EBITDA. Whilst the half year cash conversion has reduced due to the timing difference mentioned above, our two-year rolling average cash conversion has been 100%, showing the ongoing focus on working capital improvements is delivering long-term, sustainable positive results. We expect cash conversion for FY23 to return to circa 90% which would result in the three-year rolling average cash conversion being circa 100%.

The Group's order book at 30 April 2023 was GBP750m (H1 2022: GBP488m, 2022: GBP651m). Approximately GBP232m of the order book is scheduled for delivery during the second half of FY23. This represents cover of approximately 90% (H1 2022: 85%) of expected second half revenue. This leaves GBP518m of order book to be delivered in FY24 and beyond. At this stage, this provides approximately 78% (H1 2022: 66%) cover of expected FY24 revenue and approximately 60% cover of expected FY25 revenue in Countermeasures & Energetics. In Sensors & Information this provides approximately 30% (H1 2022: 31%) cover of expected FY24 revenue.

Statutory operating profit was GBP23.0m (H1 2022: GBP29.3m, 2022: GBP53.3m) and after statutory finance expenses of GBP1.0m (H1 2022 GBP0.4m, 2022: GBP1.5m), statutory profit before tax was GBP22.0m (H1 2022: GBP28.9m, 2022: GBP51.8m). The statutory profit after tax was GBP18.7m (H1 2022: GBP26.5m, 2022: GBP47.4m) giving a statutory basic earnings per share of 6.6p (H1 2022: 9.5p, 2022: 16.9p). The impact of non-underlying items on statutory profit measures is provided in note 3. The non-underlying costs in H1 2023 related to the amortisation of acquired intangibles, costs relating to acquisitions, gains on the movement in the fair value of derivative financial instruments and the tax credit associated with these .

Segmental review - Sensors & Information

Performance

Order intake in the period increased by 35% to GBP100m (H1 2022: GBP74m, 2022: GBP195m) and revenue increased by 9% to GBP97.9m (H1 2022: GBP90.2m, 2022: GBP162.3m) with growth at Roke offset by the fall in revenue at our US sensors business due to the reduction in HMDS revenue, as it transitions to one predominantly now delivering on biological detection programs.

Roke

Roke has continued its positive momentum into FY23 delivering strong growth in orders and revenue, with order intake up 41% to GBP82m, and revenue up 44% to GBP77.8m. It has also maintained its track record of delivering double digit growth in underlying operating profit and has maintained strong margins despite increased investment in people, infrastructure and product development.

Roke continues to win a number of contracts as the prime contractor and therefore order intake and revenue contains an element of "pass-through". The table below shows order intake for Roke's products and service grew by 15% with revenue growth of 39%.

 
 Roke "pass-through"      H1 2023   H1 2022   Change 
  impact 
                             GBPm      GBPm 
 Order intake 
 Products and services         62        54     +15% 
 Pass-through                  20         4    +400% 
-----------------------  --------  --------  ------- 
 As reported                   82        58     +41% 
-----------------------  --------  --------  ------- 
 
 Revenue 
 Products and services         61        44     +39% 
 Pass-through                  17        10     +70% 
-----------------------  --------  --------  ------- 
 As reported                   78        54     +44% 
-----------------------  --------  --------  -------

The Integrated Review Refresh 2023 of Defence, Security and Foreign Policy ("IRR23") focused on the UK's ability to deter, defend and compete across all domains, most notably in areas including cyber, information advantage and the digitalisation of defence, artificial intelligence, and multi-domain integration. When matched with increasing budgets, this is expected to accelerate the demand for Roke's market-leading skills and technologies.

A key element of the IRR23 was the need to upgrade statecraft for systemic competition. This is driving demand for Roke's national security capabilities, particularly in active cyber defence and technological mission support services to core government customers.

In Roke's defence markets, the increasing importance of Cyber and Electromagnetic Activity ("CEMA") in today's threat environment, heightened further as a consequence of Russia's invasion of Ukraine, has led to a growing number of enquiries for Roke's suite of world-leading Electronics Warfare products. Roke currently has requests for quotation in excess of GBP200m outstanding, and is well positioned to win several multi-year orders.

A notable highlight in the period has been the progress made in the Roke Futures business area which has continued to make strong progress in scaling its business activities in H1 2023. Roke Futures delivers technology solutions to clients outside of National Security and Defence markets and is gaining traction with customers including Rolls Royce, Waygate Technologies, and Vodafone. Roke Futures is also now supporting a new client, a FTSE 100 multinational mining company, through the development of innovative technology solutions and approaches. Roke technologies and capabilities, such as autonomy and intelligent sensing, can fundamentally change the way in which minerals are processed, unlocking production capacity through improvements in efficiency and the reduction of waste.

US Sensors

Revenues from our US Sensors business decreased by GBP17.3m as expected, as a result of the re-prioritisation of US DoD budgets away from the HMDS in 2022, as previously highlighted. The Sensors & Information H1 2022 comparator included GBP28.5m of revenue and GBP4.3m of operating profit relating to HMDS.

FY23 represents a transitional period for our US Sensors business from explosive hazard detection to biological detection. Deliveries under the full rate production phase of the Enhanced Maritime Biological Detection System ("EMBD") program have continued as planned and we received a third option quantity exercised under the sole source $99m Indefinite Delivery / Indefinite Quantity contract of $15.3m with deliveries expected to be made in FY23 and FY24. Following the expected completion of the engineering and manufacturing development ("EMD") phase of the Joint Biological Tactical Detection System ("JBTDS") program, we anticipate being awarded a contract for low rate initial production ("LRIP") in the second half of the year. A LRIP Production Readiness Review, with supporting Manufacturing Readiness Assessment, took place in mid-May and the procurement decision expected to follow shortly thereafter.

On the Aerosol and Vapor Chemical Agent Detector program, the customer procurement decision has been further delayed and is now expected in the second half of FY23. Chemring remains one of two contractors currently competing on this program.

Sensors & Information operating profit

Underlying operating profit was flat at GBP19.0m (H1 2022: GBP19.4m, 2022: GBP30.0m), as the underlying operating margin declined to 19.4% (H1 2022: 21.5%, 2022: 18.5%). We continued to invest in the Roke Academy and the graduate and apprentice programmes, recruiting circa 150 fee earners in the last year, positioning Roke well to deliver on its future growth ambition. Excluding Roke pass-through revenue, the operating margin for Sensors & Information would have been 23.4% (H1 2022: 24.1%, 2022: 20.5%). A bridge of revenue and operating profit from H1 2022 to H1 2023 is shown below.

 
 GBPm                                    Revenue   Operating 
                                                     profit 
--------------------------------------  --------  ---------- 
 H1 2022                                  90.2       19.4 
--------------------------------------  --------  ---------- 
 Increase in Roke products & services     17.2        4.3 
 Increase in Roke pass-through             6.7         - 
 Increase in Roke operating expense 
  investment                                -        (1.8) 
 Decrease in US Sensors HMDS             (28.5)      (4.3) 
 Increase in US Sensors EMBD              11.2        1.3 
 Exchange effects                          1.1        0.1 
--------------------------------------  --------  ---------- 
 H1 2023                                  97.9       19.0 
--------------------------------------  --------  ----------

Constant currency

On a constant currency basis order intake would have risen by 32% to GBP98.2m, revenue would have risen 7% to GBP96.8m and underlying operating profit would have been GBP18.9m.

Opportunities and outlook

The focus for Sensors & Information continues to be on expanding the Group's product, service and capability offerings in the areas of national security, artificial intelligence and machine learning, tactical electronic warfare, information security and biological detection.

In the UK, the national security and defence markets continue to grow with a focus on emerging technologies in connectivity, cyber, automation and data analytics. Driven by the needs of our national security, defence and commercial customers to access open source intelligence, Roke has created an Intelligence as a Service business which combines proprietary datasets, AI, and customer facing platforms to provide nation state level intelligence to both government and commercial customers. Viewed as a key enabler of tactical success, our expectations are that this business can grow at 35% CAGR. Roke will continue to focus its efforts on growing across all its business areas, delivering research, design, engineering and advisory services using its high-quality people and capabilities.

In our FY22 results in December 2022, we stated our vision for the next five years was to maintain Roke's recent record of growth, doubling annual revenue to greater than GBP200m organically, whilst maintaining strong margins. With the increased activity that we are seeing across all Roke's business areas we have revised that vision, raising our ambitions to increase Roke's annual revenues to greater than GBP250m organically by 2028, whilst maintaining strong margins.

As demonstrated with the acquisition of Geollect in December 2022, the integration of which is progressing as planned, we will continue to actively explore opportunities to expand and accelerate the Sensors & Information sector capabilities and offerings, both by leveraging opportunities in adjacent markets and through further bolt-on acquisitions. However, any acquisition must meet a strict set of criteria, enhance shareholder value and fit in with our wider growth plans.

The order book for Sensors & Information at 30 April 2023 has increased since the year end to GBP153m (H1 2022: GBP102m, 2022: GBP154m). While the Roke business remains a relatively shorter-cycle order book business, the segment has orders of approximately GBP67m for delivery in the second half of the year, representing 72% (H1 2022: 59%) coverage of expected H2 revenue.

Segmental review - Countermeasures & Energetics

Performance

In Countermeasures & Energetics, order intake was GBP238m, up 113% (H1 2022: GBP112m, 2022: GBP331m) with notable contract awards including a $39m order for the delivery of countermeasures from our newly commissioned automated facility in Tennessee, and a GBP43m order for the delivery of critical components used on the NLAW system from our Scottish facility.

We are seeing increasing levels of activity and demand in the propellants and energetic materials markets as customers re--evaluate their operational usage and stockpile requirements associated with traditional defence capabilities, with order intake from our energetics businesses up 192% to GBP149m (H1 2022: GBP51m, 2022: GBP137m). Even prior to 2022 demand for these energetic materials has exceeded global supply, and customers are now seeking long-term strategic supply agreements, with corresponding orders, in order to secure their place in our production schedules.

Revenue fell by 12% to GBP114.2m (H1 2022: GBP130.2m, 2022: GBP280.5m) due to delays to order intake in 2022 following the extended US Continuing Resolution, which has resulted in a greater bias of trading performance and cash generation expected in the second half of this financial year. The segment reported an underlying operating profit of GBP15.2m (H1 2022: GBP21.3m, 2022: GBP48.9m). The underlying operating margin decreased to 13.3% (H1 2022: 16.4%, 2022: 17.4%) driven by the operational gearing impact of revenue being weighted towards the second half of FY23 together with increased energy costs and wage inflation. On a constant currency basis revenue would have been down 13% to GBP113.4m and operating profit would have been down 27% to GBP15.6m.

Opportunities and outlook

The Countermeasures & Energetics segment focus remains on maintaining and growing the Group's market-leading positions, in particular in the growing markets for propellants and precision engineered energetic devices, and in countermeasures on key platforms such as the F-35.

The Group's niche propellant and devices businesses in Scotland and Chicago are increasingly securing long-term contracts with customers, supporting greater short and medium-term visibility and providing a framework for long-term planning and investment decisions. Similarly, demand for high quality high explosives has enabled Chemring Nobel in Norway to work proactively with its customer base on long-term contracting models, providing significantly improved visibility.

As planned, we will complete the process of modernisation and automation across our sites. This is now embedded in our countermeasures sites and our future focus will be on our energetics facilities. The improved market conditions for our energetics businesses reflected in our order intake and order book has presented a strong organic growth opportunity to expand capacity at these sites in parallel with the planned modernisation to capitalise on the long-term demand we are seeing. A three year investment programme is planned through to FY26 at a cost of approximately GBP90m which, when completed, is expected to generate incremental revenue of circa GBP60m and incremental operating profit of circa GBP13m per annum.

Countermeasures & Energetics' order book at 30 April 2023 was GBP597m (H1 2022: GBP386m, 2022: GBP497m) of which approximately GBP165m is currently expected to be delivered in the second half of FY23, representing 99% (H1 2022: 98%) coverage of expected H2 revenue.

Retirement benefit obligations

The surplus on the Group's defined benefit pension scheme was GBP10.3m (H1 2022: GBP18.1m, 2022: GBP11.2m), measured in accordance with IAS 19 (Revised) Employee Benefits.

The surplus relates to the Chemring Group Staff Pension Scheme (the "Scheme"), a UK defined benefit scheme whose assets are held in a separately administered fund. The Scheme was closed to future accrual in April 2012. A full actuarial valuation for the Scheme was completed as at 6 April 2021, and has been prepared and updated to 30 April 2023, using the projected unit credit method. Despite the volatility in equity and bond markets throughout the period and increased inflation expectations, the resilience of the Scheme's investment strategy, which includes a liability driven investment which hedges future interest rate and inflation risk, has protected the Scheme's surplus position which represents 117% of scheme liabilities.

The 6 April 2021 triennial valuation showed a technical provisions surplus of GBP3.8m, which represented a funding level of 104% of liabilities. The Group agreed with the trustees that no further deficit recovery payments are required. The next actuarial valuation is due as at 6 April 2024 after which the future funding requirements will be reassessed.

As at 31 October 2022, GBP2.0m was due from the Chemring Group Staff Pension Scheme representing a short-term loan to fund margin calls on liability driven investments which was repaid in November 2022.

Dividends

At the Annual General Meeting on 15 March 2023 the shareholders approved a final dividend in respect of the year ended 31 October 2022 of 3.8p per ordinary share. This was paid on 14 April 2023 to shareholders on the register on 24 March 2023.

The Board continues to recognise that dividends are an important component of total shareholder returns. The Board's objective is for a growing and sustainable dividend and continues to target a medium-term dividend cover of c.2.5 times underlying EPS, subject inter alia to maintaining a strong financial position. Therefore, the Board has declared an interim dividend in respect of the 2023 financial year of 2.3p per ordinary share which will be paid on 8 September 2023 to shareholders on the register on 18 August 2023.

Board of Directors

On 23 January 2023 the Group announced that after six years as Chief Financial Officer and a director of the Company, Andrew Lewis had informed the Board of his intention to retire following the completion of his 12 months notice period. A process to find a successor was immediately launched.

On 24 May 2023, the Group announced the appointment of James Mortensen as Chief Financial Officer. He has held various senior roles at Smiths Group PLC, the FTSE 100 diversified engineering business, including having been Chief Financial Officer of Smith Medical Division. His current role at Smiths is Group Head of Corporate Development. The Group is working with James to agree the date on which he will join Chemring. A further announcement will be made in due course.

Markets

Russia's illegal invasion of Ukraine has reset the defence and security environment in Europe with several European countries renewing their defence spending commitments and announcing budget increases of varying degrees. The perceived threat from China is driving a strong US defence modernisation programme as well as the strengthening of US military alliances across the Asia-Pacific region.

The US continues to be the largest defence and security market in the world and remains opportunity-rich for the Group's capabilities. The FY24 Budget Request from the Biden-Harris Administration for the US Department of Defense ("US DoD") is US$842bn and has a strong focus on strengthened cooperation with allies, modernisation procurements to maintain full spectrum dominance and the largest ever investment in Research and Development ("R&D"). Group capabilities in cyber, space, hypersonics and advanced weapons, electronic warfare ("EW") and chem/bio security give us the opportunity to address many of these needs. International sales of the F-35 stealth multirole combat aircraft continue to be strong, with Germany placing an order for 35 F-35A in December 2022 and Canada ordering 88 of the same aircraft in January 2023. As a provider of countermeasures for this fifth-generation fighter, these programmes will contribute to us sustaining our leadership position in the addressable air countermeasures market.

In the UK, the March 2023 Integrated Review Refresh ("IRR23") reconfirmed the strong foundations of our market position that was described in the 2021 Integrated Review of Defence, Security and Foreign Policy ("IR21"). IRR23 addresses the rapid and unexpected intensification of the threat environment following Russia's illegal invasion of Ukraine, and our broad-based business portfolio with differentiated capabilities in Countermeasures & Energetics, and Sensors & Information position us well to respond to the confirmed customer demands. National resilience in product areas such as countermeasures, munitions, and complex weapons - all of which require energetic components, will be achieved through new customer investment in enlarged stockpiles and industrial capacity. The digitalisation of defence, the crucial role of deterring, defending and competing in cyberspace, as well as the focus on artificial intelligence as a priority technology area will drive ever increasing demand for Roke's world-class expertise.

European allies (both NATO and non-NATO members) have plans in place to boost defence investment to address the replacement of defence capabilities provided to Ukraine (circa EUR30 billion), remove capability gaps, and enhance stockpile and readiness levels. Chemring is well placed to benefit from elements of this demand.

Outlook

The Board's full year expectations are unchanged, supported by order coverage at 30 April 2023 of 90% of the expected H2 revenue.

The market backdrop for defence is increasingly positive. With customers needing to re-equip and modernise their defence capabilities, and with the increasing trend of customers looking for long-term partnering agreements providing increased visibility, Chemring's long-term prospects remain strong. The Group will continue to focus on cash generation and maintaining a robust and deployable balance sheet to enable opportunities for further growth.

With market-leading innovative technologies and services that are critical to our customers the Board is confident that Chemring will continue to deliver both robust organic and inorganic growth, balancing near-term performance with long-term value creation.

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By order of the Board

 
 Michael Ord             Andrew Lewis 
 Group Chief Executive   Group Chief Financial Officer 
 6 June 2023             6 June 2023

CONDENSED CONSOLIDATED INCOME STATEMENT