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Chemring Promises the Overhaul That Carlyle Passed On

Chemring Group Plc’s Mark Papworth, three weeks into the role of chief executive, pledged to undertake the overhaul of the British defense-equipment maker that one-time suitor Carlyle Group LP balked at.

Results in 2012 were “extremely disappointing” and Chemring needs to adapt and better equip itself to meet market challenges, it said today. The revamp follows a 13 percent drop in orders to 760 million pounds ($1.2 billion) in the year through October, with sales in line with analysts’ estimates at 740 million pounds. Chemring rose 4.8 percent to 241 pence as of 9:22 a.m.

“Admission of weak operational performance and poor expectation management is the first step to recovery,” Ben Bourne, London-based analyst at Liberum Capital said. “The investment case now hinges on what can be done by the new CEO to limit the effects of cyclical decline and improve cash generation.”

U.S. private equity firm Carlyle on Nov. 7 ended protracted takeover talks that first became public on Aug. 17 after Chemring revised its earnings outlook twice and ousted CEO David Price last month. Chemring earnings have fallen short as delays on programs and export licenses damped sales.

The company blamed its poor performance on “a failure to anticipate the likely impact of the changing market dynamics” and “failures in performance at several of our businesses.”

Cash Conversion

“There is much we have to do to improve things,” Chairman Peter Hickson said on a call with analysts. “We need to take a critical look at our operations and seek to run them more efficiently and cost effectively.”

One of the challenges facing Papworth, who took over on Nov. 5, will be improving cash conversion that lags behind peers, Edward Stacey, London-based analyst for Espirito Santo, said in advance of the company report. Details of the overhaul plan are due on Jan. 24.

“Fundamentally this is a good business but with significant challenges, internally, in the market place and in terms of its reputation,” Papworth said on the call. After a cycle of acquisition-driven growth, he said there are opportunities to simplify the operation and gain efficiencies.

Net debt at the end of the financial year was 250 million pounds. To reduce that level the company in 2013 will have a “tighter rein” on fixed asset expenditure, Chief Financial Officer Nigel Young said.

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