Chemring Plans Overhaul as Profit Plunges in Tough Market

Chemring Group Plc (CHG), the defense- equipment maker that failed to complete takeover talks last year with Carlyle Group LP (CG), said it will restructure units after profit fell 79 percent last year.

Steps to improve business performance include reducing costs, integrating similar operations and chasing non-defense business, the Fareham-based company said in a statement today. “This program of work is going to take us 24 months to fully implement,” Chief Executive Officer Mark Papworth said in a telephone interview.

Papworth took the role in November and is trying to rebuild a company whose shares have fallen 25 percent in the past 12 months on two profit warnings, the ouster of his predecessor David Price, and failed talks to sell the business to Carlyle Group. Net income for the year ended Oct. 31 declined to 15.3 million pounds ($24 million) from 73.9 million pounds.

The process of integrating businesses and finding efficiencies after several years of acquisitions has begun in order to cut costs and achieve economies of scale, Papworth said. Those efforts will be expanded across the company, he said, without specifying how many jobs may be cut.

Chemring shares rose as much as 4.5 percent and were up 2.7 percent at 290 pence as of 8:57 a.m. in London.

Order Intake

Order intake dropped 17 percent to 660.2 million pounds last year amid difficulties including defense spending pressures in the U.S., a delay in the receipt of a Middle East order and technical problems with a countermeasure product. Delays with Middle East contracts continue, Papworth said.

It “was a particularly disappointing year for the business, characterized by uncertainty in our markets and a number of factors that disrupted our operational performance,” Chairman Peter Hickson said in today’s statement. “Difficult market conditions are expected to remain in place in 2013.”

Benefits from the measures to improve efficiency won’t appear in this year’s results, Chemring said.

“Fiscal 2014 is likely to be the year that the improvement is more fully seen,” Andrew Gollan, a London-based analyst for Investec Securities with a buy recommendation on the stock, said in a note.

Strategic Review

A strategic review to examine “the long-term fit of businesses within the group” is planned, Papworth said. That process hasn’t started and the focus is on making operational improvements, he said.

Papworth said he isn’t seeking a buyer for Chemring and is concentrating on turning around the company rather than reviving takeover talks with Washington-based Carlyle.

Continued uncertainty over U.S. defense spending is expected to slow purchase decisions and the prospects for new U.K. military business are also weak, Chemring said.

Papworth said sales prospects outside defense include applying switching technology to cellular networks, valve products to commercial aircraft programs, and actuators to the oil and gas industry. “I am not going to suggest they are a silver bullet, but they are areas of obvious self-help,” he said.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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