TIDMCHG
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 profit(1) could be reduced by approximately
GBP16 million to approximately GBP33 million
-- Order book at 30 September 2015 of GBP606.3 million; GBP344.6
million for delivery in FY16, representing more than 75% of
expected FY16 revenue of GBP450 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 GBP90
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 GBP344.6m 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 GBP90 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 GBP100 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 GBP12
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 GBP16
million to approximately GBP33 million.
The net interest expense for FY15 is expected to be
approximately GBP15 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 GBP30 million, principally comprising
GBP17 million relating to the amortisation of acquired intangibles
and gains/losses on the movement in the fair value of derivative
financial instruments, and GBP13 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 GBP155-GBP165 million.
The Group's GBP70.0 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 GBP167.5 million ($244.6 million and GBP8.1
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 GBP90 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 GBP606.3
million. Of this, GBP344.6 million is currently expected to be
recognised as revenue in FY16, representing more than 75% of
expected FY16 revenue of GBP450 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.
(MORE TO FOLLOW) Dow Jones Newswires
October 27, 2015 03:00 ET (07:00 GMT)
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 +44
(0)20 3128 8100 / chemring@mhpc.com to obtain the dial-in details.
A replay facility will be available for seven days. To access the
replay facility, dial +44 (0) 20 3426 2807 and enter the PIN
663771#.
-ENDS-
For further information:
Group Chief Executive,
Michael Flowers Chemring Group PLC 01794 833901
Group Finance Director,
Steve Bowers Chemring Group PLC 01794 833901
Group Director of Communications
and Investor Relations,
Rupert Pittman Chemring Group PLC 01794 833901
+44 (0) 20
Andrew Jaques MHP Communications 3128 8100
John Olsen
James White
John Deans Rothschild (Financial +44 (0) 20
Richard Sedlacek Adviser) 7820 5000
Keith Anderson Investec Bank PLC (Joint +44 (0) 20
Chris Baird Corporate Broker) 7597 4000
Robert Constant JP Morgan Cazenove (Joint +44 (0) 20
Laurene Danon Corporate Broker) 7742 4000
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.
(MORE TO FOLLOW) Dow Jones Newswires
October 27, 2015 03:00 ET (07:00 GMT)
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