Chemring Group PLC

LSE:CHG

Earnings Call Analysis

Strong order book and revenue growth amidst operational challenges

The company reported an 8% increase in revenue to GBP 223 million despite weather challenges and an FX headwind. Their order book saw a record 39% growth to over GBP 1 billion. Operational issues in Tennessee led to a 22% drop in operating profit. However, the company plans to invest GBP 200 million in expanding its Norwegian facility, supported by GBP 90 million in grants. They maintain a forecast to achieve annual revenues of GBP 1 billion by 2030. The strong cash conversion of 83% and the 2.6p interim dividend, up 13%, underscore robust financial health and confidence in future growth .

Strong Performance Amid Challenges

In the half-year results, the company reported an impressive revenue increase of 8% to GBP 223 million, despite facing challenges such as extreme weather conditions and operational issues. Earnings per share stood at 6.6p, highlighting the company’s resilience amidst these hurdles. Although operating profit decreased by 5% and the operating margin declined by 150 basis points, strong cash conversion improved significantly from 64% to 83%, indicating the underlying cash-generative strength of the business.

Record Order Book Reflects Growth

The company achieved a record order book valued at GBP 1.04 billion, representing a 39% increase year-on-year. This includes 99% coverage of revenue for the second half of the financial year. Notably, order intake in the Energetics sector surged by 48%, showcasing the company's dominance and strong demand for its products. The orders reflect confidence in the defense sector as a result of increased global tensions and governmental reforms, positioning the company for sustained growth.

Investment and Expansion Strategy

The company has embarked on a substantial investment program, increasing its budget for Energetics expansion projects to GBP 200 million, supported by GBP 90 million in grants. This expansion is projected to yield an incremental annual revenue of GBP 100 million and an operating profit increase of GBP 30 million by FY 2028. The facilities in Norway will see a 275% increase in capacity, significantly enhancing productive output and addressing increasing demand.

Focus on Long-Term Growth and Stability

The management highlighted the intention to increase annual revenues to circa GBP 1 billion by 2030, balancing near-term performance with long-term growth. This ambitious target aligns with the trend of increased defense spending, as NATO countries aim at reaching a defense spending target of 2% of GDP. The global geopolitical climate is expected to sustain this demand, reinforcing the company's strategies and objectives.

Dividend and Capital Return

The Board approved an interim dividend of 2.6p, a 13% increase, reflecting the commitment to return capital to shareholders while maintaining a strong balance sheet. The company returned over GBP 40 million through progressive dividends and a GBP 50 million share buyback, signaling confidence in future cash flows and profitability.

Growth Potential in Diverse Markets

The company is witnessing long-term growth opportunities beyond traditional countermeasure products, particularly in areas like space launch systems, cybersecurity, and advanced propulsion systems. The increasing need for tactical capabilities due to conflicts such as those in Ukraine has driven demand for innovative technologies, placing the company in a strong position within these niche sectors.

Management’s Outlook and Guidance

The company maintains an optimistic outlook, forecasting continued growth and performance consistency. The strong order intake and market conditions provide a solid basis for their full-year income expectations. They anticipate ongoing demand, particularly in the Energetics sector, following confirmed long-term contracts with defense primes extending out to 2031.

Key Risks to Monitor

While the outlook remains positive, there are risks including potential disruptions from political changes in the U.S. and U.K., as well as raw material cost fluctuations. These external factors could impact production costs and operational efficiency, necessitating close monitoring to ensure continued stability and performance.

Earnings Call Transcript 2024-Q2

[Michael Ord, executive]

Good morning, everyone, and welcome to the presentation of the company's results for the half year to the 30th of April 2024. I'm delighted to be joined by James Mortensen, our Chief Financial Officer, who started in role on the first of January this year. For this morning's presentation, I'll begin with some of the highlights from the first half of the year and some comments on the company's strong long-term prospects. I'll then hand over to James, who will take us through the financial results in more detail. I will then comment on our market environment and how we're matching our strategy to these significant opportunities for future growth.

Turning now to the first half. There's been heightened activity in both sectors, and we have achieved results in line with our expectations. This is a solid performance given the weather-related challenges that we updated you on in February. Revenue grew by 8%, up to GBP 223 million. Earnings per share was 6.6p and cash conversion improved significantly from 64% to 83% demonstrating the cash-generative nature of the business and our continued focus on productivity improvements and cash management. The standout result is the continued growth in order intake, which is up 2% to GBP 345 million even against our H1 record order intake last year. This has delivered a record order book of GBP 1.04 billion, which is up 13% since the end of FY '23 and up 39% since this time last year.

We've also continued to make good progress on our safety and ESG strategies in line with our commitments to build a safe, inclusive and sustainable company. And from an industry perspective, it was pleasing to read the joint statement issued in April by the treasury and the investment association, which stated that investing in good, high-quality, well-run defense companies is compatible with ESG considerations. With 93% of the 2024 revenue covered by the order book, the Board's expectations for the current financial year are unchanged. And I believe the company is very well positioned to continue to deliver sustainable performance and growth.

Moving to the longer term. I concluded the results presentation in December with a message that the outlook for the defense sector was increasingly robust and that momentum has continued and if anything, may well be increasing. I believe that we are at the beginning of a fundamental defense and re-armament up cycle that will last at least the next decade and likely well beyond. I'd point to the company's record order book as a measure supporting this forecast. Clearly, this presents opportunities for our business operating in the areas of specialist energetic and propellant materials, high-precision devices for space and missile applications, active cyber defense, software engineering, electronic warfare and data science. As you know, these are niches where we hold market-leading and often sole-sourced positions and where there are significant barriers to entry.

Our long-term order book program and contract visibilities, together with the support of grant funding and our customers wanting to move to longer-term partnering arrangements, gives us confidence to invest in additional productive capacity further reinforcing our position as a key supplier to NATO. Against this backdrop, our ambitious goal is to increase the group's annual revenues to circa GBP 1 billion by 2030. This is illustrative of the confidence we have in our ability to deliver against our commitments to balance near-term performance with longer-term growth and value creation.

I'll now hand over to James, who will take you through the financial results.

[James Mortensen, executive]

Thanks, Mick. It's great to be here, and I'm very fortunate to be joining Chemring when we're playing such an important role in the world today. So I've now visited the majority of our sites. So before I dive into the numbers, I'd like to share some initial observations. It's clear there were very strong market fundamentals, which Mick has already touched on. This is reflected in our record order book, giving us growing confidence in the delivery of our plan. I've really enjoyed my time visiting our sites and talking to some of our very talented people. I've learned a massive amount and these are the key things I found.

Number one, demand is long term. Because of the critical nature of our products, customers are pushing us to commit to longer-term contracts on many of our applications, we have to be qualified to get a place on a particular platform. Remember, qualification often takes years, which creates extremely high barriers to entry. And that means we are sole-sourced in over 60% of cases. With our customer programs ramping, they are placing longer-term orders to secure their production schedules.

And so we are seeing long-term demand for the capacity we are building. What I take from this is that the risk to executing our plan relates to building and commissioning additional capacity, not in then selling that capacity to our customers. Number two, Chemring is more than just Countermeasures. The proportion of Countermeasures has fallen from about 45% of revenue 6 years ago to about 30% today because of the growth in space, missiles, active cyber defense, software engineering and data science. Over the next few years, the proportion of those business areas will continue to grow, currently about 45% up from about 30% 6 years ago. In the future, they will make us up a significant proportion of our business. We expect more than 50% and all of this business is high quality in growing end markets and with rich engineering content, the kind of businesses that I saw trade for very high multiples when I was in the M&A team at Smiths

Number three, we have unique manufacturing capabilities. We are specialists in operating facilities in high hazard environments, and these facilities are very hard to replicate a much in demand. As you know, we've recently modernized our facilities to increase safety and automation. And so there's a strong foundation from which to build. What you should take from this is that production is currently limited by our capacity and adding additional capacity takes time and so growth comes later. But once they do come online, they are unique, in demand and highly cash generative. So when I think about the business, it's clear that we are underpinned by the strong cash-generative annuity of our countermeasures business and our programs of record. Roke will continue to deliver near-term growth and our Energetics business will deliver longer-term growth once the capacity we are building comes online with much of that capacity already sold. And so I can see why we have growing confidence in the delivery of the plan and the outlook.

So now on to the half year, where we made good progress with that record order book and strong cash generation. As I said, a record order book of over GBP 1 billion, up 39%. Good momentum in revenue, up 8%, lower operating margin in H1 weighting as we flagged in the trading update with much of that driven by bad weather disruption and operational and legacy contract challenges at our Countermeasures business in Tennessee. EPS, down 11%, impacted by lower profits and higher tax and finance costs, strong cash conversion of 83%. And so the Board has declared an interim dividend of 2.6p. This is up 13%, which continues the progression towards our target of 2.5x cover and is supported by our growing confidence in the outlook for the business. And of course, underpinning that confidence is the strength of our order book. So let's turn to that.

We've got a record order book of over GBP 1 billion, which has grown 39% since the last half year. So we've now got 93% coverage for the remainder of the year. Within Sensors & Information, we've seen strong order intake in National Security and Defense, which Mick will expand on later. The order book grew 3%, and we've now got 83% coverage of H2 revenue. Within Countermeasures & Energetics, we've seen significant growth in order intake with the order book growing 48% and now covering 99% of H2 revenue. To give you a sense of the long-term nature of the order book, we've also got significant coverage in FY '25 and FY '26 and customers are pushing to secure that capacity, giving us great confidence that the capacity we are installing will be sold.

The strong order book is driving solid delivery in the period. Strong momentum continued in Sensors & Information with revenue up 15% and operating profit up 16%. Within that, Roke grew revenue 19%, showing the continued strong momentum there. Operating margin was slightly up at 20.4% despite the continued investment in people, product development and infrastructure to position right well for future growth. Countermeasures & Energetics grew 3%. Growth in niche Energetics was offset by a weaker period for Countermeasures caused by operational issues at our Tennessee business, which I'll cover on the next slide.

So operating profit was down 22% and margin decreased 330 basis points to 10%. Our first half weighting -- sorry, group revenue was up 8% despite an FX headwind of GBP 2 million. Group operating profit was down 5% and operating margin down 150 basis points to 11.2%. Our first half weighting operating profit was around 35% this year, when normally it would have been about 40% in the first half, but we see a clear path to make that up in the second half especially given our 99% H2 coverage in Countermeasures & Energetics.

In the meantime, you can see the operating profit bridge on this next slide. We've seen good momentum across the majority of the business with year-on-year profit growth. Countermeasures & Energetics was held back by our Tennessee business, which was impacted by 3 things: in January, temperatures fell to minus 27 degrees celsius, which meant plant operations had to be halted and the plant winterized for a week, followed by a gradual resumption of operations. We also experienced a slower ramp in production in the new automated facility than expected following the decision to install higher specification pipe work throughout the facility to further reduce electrostatic discharge risk. And we also have a legacy contract from 2016 that has been a drag on profitability. This contract, which is with the DoD will be completed in full in the second half. We've made significant progress resolving the operational issues, and we expect the facility to continue to ramp in the second half.

As you can see, this remains a strongly cash-generative business with cash conversion up 190 basis points in the period to 83%. We're using our strong balance sheet to invest in additional capacity with GBP 24 million spent in the period on the Energetics expansion projects. Mick will go into more detail, but total energetic -- but we're increasing the size of our investment in Norway, taking our total Energetics investment to GBP 200 million. This will be offset by GBP 90 million of grant funding and now I understand about GBP 30 million of this will be received upfront. So we expect that in the second half. Subsequent grant funding will be received annually based on completion of work packages. And this means that net spending on Energetics expansion will be about GBP 10 million this year, GBP 65 million next year and then GBP 30 million and GBP 5 million in '26 and '27, respectively, to which I would add about GBP 20 million to GBP 30 million a year for maintenance CapEx. We've included a detailed guidance in the appendix for this.

We have also returned over GBP 40 million to shareholders through our progressive dividend and the GBP 50 million buyback. We have GBP 13 million remaining. And if the share buyback hasn't completed by July, the Board intends to extend the completion date of this previously announced buyback to the announcement of our full year results in December. We had closing net debt of GBP 75 million, well within our GBP 166 million headroom and below 1x leverage. We forecast a moderate reduction in net debt in the second half upon receipt of GBP 30 million of grant funding offset by continued investment in Energetics expansion. Next, I wanted to set out how we think about capital allocation. Overall, we want to maintain a resilient balance sheet, will target leverage of less than 1.5x.

First, we see lots of opportunity to invest in the business, to increase capacity, to meet demand or to introduce automation. Second, we'll continue to target an annual dividend cover of 2.5x. Third, we intend continuing to execute focused M&A within our core or close adjacencies, in particular, Roke and U.S.-based missiles. We'll remain disciplined, and I've seen a healthy pipeline of opportunity. We recently signed an asset purchase agreement for the sale of our explosive hazard detection business, which is now subject to CFIUS approval. And finally, we will return surplus share capital -- surplus capital to shareholders.

So let me tell you how I see the rest of the year. You've seen the good progress we've made in H1, which was in line with our previous expectations. The market conditions and record order book gives us continued confidence in our full year outlook. There are some external factors, including the strengthening of sterling, the U.K. U.S. potential government transitions and increased raw material costs we are seeking to recover from the U.S. DoD. And so that means we see no basis to change our full year outlook.

And so with that, thank you. I'll hand back to Mick.

[Michael Ord, executive]

Thanks, James. I'll now look at the broader market environment. Our strategy is aligned with current and future trends and some of the opportunities we are seeking to capture and deliver. Turning first to the market environment. Whether it's the ongoing conflict in Ukraine, the conflict between Israel and Hamas in the Middle East or an increasingly assert of China in the Asia Pacific region, the elevated levels of geopolitical uncertainty intention is prompting governments to reassess their defense and national security assumptions and spending plans. The U.K., the U.S. and European allies are increasing spending on defense and our increasing sovereign industrial manufacturing capacities to fill their elevated stockpile and readiness levels and to an extent, provide military aid to Ukraine.

All NATO countries are moving towards the target threshold of 2% GDP spend on defense. And 18 member nations will reach that level in 2024. Also in 2024, European NATO allies will invest a total of $380 billion in defense which is the first time -- which for the first time, amounts to 2% of their combined GDPs. Against this heightened threat environment, we will drive a fundamental -- which will drive a fundamental re-armament up cycle over at least the next decade. The company's diverse and niche technologies and manufacturing capabilities position us well to support our customers' growing critical needs. As a key supplier to NATO, we are seeing increasing long-term demand for our Countermeasures & Energetics products and engineering capabilities. This is particularly prevalent in our 3 Energetics businesses where we are seeing unprecedented demand for specialist energetic and propellant materials and high-precision devices for space and missile applications.

Our customers are moving to longer-term contracting arrangements to secure their supply chains and in parallel, some governments are providing grant funding to bolster their sovereign manufacturing capabilities. As evidenced by the GBP 57 million award from the European Commission and the GBP 32 million award from the government of Norway to boost production levels of energetic materials at our Norwegian facility. Also maintaining strategic advantage against adversaries and an increasingly digitized defense and security environment will depend -- will demand rapid, large-scale data exploitation and multi-domain integration. This provides increased demand for Roke's cutting-edge technologies. We also continue to maintain and build upon our world-leading position in the addressable air and naval Countermeasures market with robust and steady demand expected over the coming years. This was evidenced by GBP 94 million of order intake by our Countermeasures businesses in the first half of the year.

Absent of force deployment, we anticipate this market may remain broadly flat with low to single-digit growth. In summary, the changes we see and customer budget priorities are presenting significant long-term opportunities for the group. As you would expect, with this market environment, we've evolved our strategic framework to recognize, improved visibility and increased opportunities available to the group. However, our approach remains evolution, not revolution, and therefore, our core values of safety, excellence and innovation remain the company's foundations along with the management fundamental of balancing near-term performance with longer-term growth and value creation. Our strategy has 3 imperatives: the first is to grow the company by investing in our businesses and the development of our people, our intellectual property and our infrastructure. Central to this is our investment in increasing the capacity of our Energetics businesses and our investment in Roke's portfolio of products, services and intellectual property.

The second imperative is to seek opportunities where we can to accelerate growth through bolt-on acquisitions to the group. As James has already mentioned, we will continue to focus our attentions on bolt-on acquisitions to grow Roke and our Chicago business in the U.S. space and missiles market. And our third imperative is to protect and strengthen our sole source and market-leading positions with a rigorous focus on safety, operational excellence and the development of new products that meet our customers' ever-evolving critical needs. If we deliver these 3 imperatives, we will be our customers' preferred supplier across the niche sectors in which we operate. As I outlined earlier, our ambitious goal is to increase the group's annual revenues to circa GBP 1 billion by 2030. This makes certain assumptions regarding growth rates, and it does include some bolt-on acquisitions.

But the overall point is clear. It underlines the confidence that we have in our ability to deliver growth and value creation over the longer term. So now let's turn to the actions we are taking to deliver some of that growth. In December, I said that the demand for propellants, energetic materials and mission-critical components was continuing to grow with many governments and customers seeking to increase their capacity and resilience of sovereign industrial supply chains and nothing in that sentiment has changed in the past 6 months which is reinforced by an H1 order intake across our Energetics businesses being up 3% to GBP 155 million. Clearly, this gives us excellent medium and longer-term visibility for planning and investment decision-making. A key highlight in the first half was in March when the European Commission and the government of Norway awarded grants totaling GBP 90 million to boost production at our Norway facility.

Given this grant funding and the ever-growing demand for energetic materials, we have decided to invest a further GBP 80 million, increasing the capacity of our Norwegian business. Our overall CapEx investment plan for these 3 businesses therefore, rises from GBP 120 million we announced in December to GBP 200 million. This investment is expected to deliver incremental revenues of GBP 100 million per annum and increment in operating profit of GBP 30 million per annum in FY '28. With almost half of this CapEx being grant funded, the return on invested capital is compelling and will deliver strong returns to our shareholders once these manufacturing facilities are built and commissioned. Good progress has been made by our Energetics businesses during the first half of the year. In Norway, the business is operating at full capacity, while in parallel delivering expansion programs, which when complete will increased site productive capacity by circa 275%.

As a reminder, this business supplies HMX, RDX, NTO and MCX materials to prime contractors on both sides of the Atlantic. In our Chicago business, the acquisition and expansion of manufacturing operations into an adjacent facility has progressed well with the new facility fitted out and operations are already up and running. This new facility significantly enhances our ability to maintain continuous flow manufacturing operations, which is essential in delivering against customer program requirements and is a key enabler of future growth ambitions. And in Scotland, construction of our new propellants manufacturing facility is progressing to plan. Concrete pours have been completed on most buildings and steel work and frames are also installed. This new facility will provide increased capacity and throughput in a safe and modern environment.

Turning now to Roke which continues its track record with another period of strong performance. Order intake and customer demand across all of Roke's markets remains robust, driven by the global threat environment. There has been sustained demand for Roke's core capabilities in support of our national security customers. Orders totaling GBP 33 million were received under framework agreements in the first half demonstrating the sustained demand we see from these customers. In line with our focus on increasing revenue from the product side of Roke, we have seen growing interest in a range -- in our range of defense capabilities where the Ukraine conflict has reinforced the need for tactical electronic warfare, information advantage, autonomy and counter drone technologies. The request for quotation pipeline for defense products is now in excess of GBP 200 million, and Roke remains very well positioned to win several multiyear orders.

We have continued to win new electronic warfare customers, most notably securing an order in Japan, the first into the East Asia region. And Roke also received a GBP 10 million increase to the project Zodiac award received in September last year. In total, Roke's Zodiac contract awards now stand at GBP 50 million which will be delivered over the next 2 years and future phases of Zodiac could be in excess of GBP 100 million, presenting a significant opportunity to Roke as the incumbent supplier. Current conflicts, especially in Ukraine, are demonstrating the operational effectiveness of unmanned air systems and presents an opportunity for Roke. The acquisition of Cubica in 2021 provided unique technology that when combined with Roke's existing capabilities, delivered a software platform on which to build advanced AI capabilities deliver an autonomy in the battlefield. This includes the autonomous supervision of intelligent sensors, drones and counter drone systems.

Roke is currently working with MODs around the world in the development of sensor and disruptive technologies that can be integrated onto unmanned air systems to both counter the threat and provide invaluable surveillance and tracking capabilities. With all of this, Roke will continue to focus on growing all areas of its business, and we remain on track to organically grow revenue to GBP 250 million per annum by 2028. Across the group, we have over 1,000 engineers, scientists and subject matter experts. And as a specific insight, Roke has over 100 artificial intelligence, scientists and engineers actively engaged in cutting-edge programs for a number of customers as well as a number of our internal R&D programs. Group-wide, we continue to invest in research and development to ensure our products, services and technologies remain highly relevant to the ever-evolving threats faced by our customers.

To provide perspective, we spent circa GBP 115 million a year on R&D through a combination of self and customer-funded programs. One area that I thought I'd spend a few moments on is our work in the support of the strong demand we see in the space launch market. Having for many years, been the sole supplier to NASA for their NASA standard initiator we have leveraged this pedigree with other space launch providers, including the United Launch Alliance, SpaceX and Blue Origin. As an example being that following a competitive tender process, we were selected to provide the Blue Origin standard initiator. And our Chicago business is now the sole provider for these mission-critical devices, which will become common to all Blue Origin launch vehicles including the upcoming New Glenn. Our Chicago business is also a key supplier to ULA, United Launch Alliance, supporting both Atlas and Vulcan heavy launch vehicles, and by the end of 2025, ULA plans to launch of Vulcan every other week to meet U.S. government and commercial launch demands.

On every launch, we supply multiple products, including solid rocket booster separators, rocket motor initiators and self-destruct safety devices. With Chemring providing significant content for every launch, this is illustrative of the significant opportunity that we see in the growing space and missiles market. So in conclusion, we've continued to make good progress in the first half of the year as we continue to strengthen our high-quality and resilient business and as we invest for future growth. Current geopolitical uncertainty has highlighted the need for increased defense expenditure particularly across NATO. And more broadly, it has highlighted the need for countries to reequip and modernize their defense capabilities to meet the threat of peer-on-peer competition and conflict. This has led to a record H1 order intake and the highest order book in the group's history.

With 93% of our expected H2 revenue in the order book, the Board's expectations for the full year are unchanged. Looking to the medium and longer term, the outlook for the group is increasingly robust. Strong growth is expected in the areas of specialist energetic and propellent materials, space and missile devices and across Roke. Our investments in these areas will deliver significant returns, particularly when the new manufacturing capacity expansion projects come online. With market-leading products, technologies and services that are critical to our customers, and with a strong and deployable balance sheet that enables us to consider inorganic opportunities. I am confident that Chemring will continue to deliver on our commitment to balance near-term performance with longer-term growth and value creation.

So that gets us to the end of the presentation. If anyone has any questions, we'll be happy to take them now. Could I please ask that you state your name and the organization that you represent before asking questions. I know we've got people in the room, and then we've got people online. So why don't we take the questions in the room first, and then we'll go to any questions that have been submitted online.

[Michael Ord, executive]

So Mel, I think you've got the roving mic. Does anyone have any questions in the room?

[George Mcwhirter, analyst]

It's George Mcwhirter from Berenberg. You flagged on H2, some headwinds, including the U.S. and the U.K. election and also raw material costs as well. Can you just provide a bit more context on what that means for your business, please?

[Michael Ord, executive]

Yes. Well, obviously, we all know the political climate on both sides of the Atlantic. And actually, I think if you take a more broader view of that. I think defense is a little bit boring really in both of those election cycles because it's probably the only area that you have bipartisan support on both sides of the Atlantic with regards to the increasingly volatile and uncertain and dangerous nature of the geopolitical environment. And therefore, you're seeing both parties on this side of the Atlantic committing to a 2.5% target for defense spending and on the other side of the Atlantic, both presidential candidates are very strongly supported, very similar defense agenda.

So actually, when we look forward, we don't see in election either way on either side of the Atlantic, really to turbine or significantly changing the overall environment. Now clearly, if you have changes of administration on either side of the Atlantic, you might get some short-term disruption as you get new officials coming into office and whatever, and we've seen that before, and that's something that might be a speed bump or 2, but we'll navigate our way through that. And then what was the second part of the question?

[George Mcwhirter, analyst]

On the raw material costs as well.

[Michael Ord, executive]

Raw materials are -- so there's certain raw materials that go into our MTV Countermeasures that we manufacture in the U.S. and the U.S. DoD mandates that we use certain suppliers for those raw materials. One of those suppliers saw a disruption and discontinuity in their supplies. So we source from an alternative supplier. And we're in discussion with the USD with regards to recovering those excess costs. Are there any more questions in the room?

[Henry Carver, analyst]

It's Henry Carver from Davy. Just one around -- you talked about the sort of longer-term contracts, which presumably is a good thing. But I know order consistency behind that is probably more useful. Is there any change with regard to that and your ability, therefore, to plan better and deliver better? Or is that still the same?

[Michael Ord, executive]

So we are seeing a trend, especially in the energetic material and propellants world, where I think as we've spoken previously, that the unprecedented growth in demand as I identified the structural undersizing of the supply chain, and therefore, prime contractors on both sides of the Atlantic are seeking to supply the -- secure their position in supply chains for the longer term. So as an example where our Norwegian business is in very advanced discussions with one of the big U.S. primes around signing an agreement to secure their supply out to 2031.

And then it set a companion discussions, which take that potentially for a decade even further. So that's the nature and the length of the contracts. And that gives us, obviously, great planning visibility for that. With regards to order consistency, we see very high confidence in an annual drumbeat of volumes, which allows us to plan capacity going forward. So I think it's a very positive development. And I think it's something that we'll continue to see on both sides of the Atlantic.

[Henry Carver, analyst]

That's great. And then just secondly, on the M&A, just a piece to get to your $1 billion revenues by 2030. Just a query around the pipeline now. Presumably, there are enough opportunities in there to get to that number? Or just any sort of color around that.

[Michael Ord, executive]

So I think we see a healthy pipeline of opportunity that we've talked about. We're not talking about something massive. We're just talking about bolt-ons within our core and close adjacencies. We're looking at opportunities adjacent to Roke. We're looking at other opportunities, mainly in U.S. space and missiles. And now I think it's not a step change in what we've been doing. We've had a good recent track record of doing M&A, and I think it's kind of continuing that if you think about the capital that we have available to do it, I mean, we easily have like GBP 50 million a year, say, to spend on M&A. That's not to say that that's our kind of target to spend it or anything like that, but it's just the capacity and if you are spending that each year, you can see you'd easily get to quite a big number. So it's -- yes, it's part of the plan, but it's not reliant on it.

[David Richard Farrell, analyst]

David Farrell from Jefferies. A couple of questions around the GBP 1 billion target -- or sorry, ambition, ambition in 2030. Obviously, Energetics will be kind of a significant driver of this over the kind of medium to long term. Can you kind of explain, I guess, more from the Roke side, what your expectations are with regarding those kind of 3, 4 divisions that you set out? Are they all expected to grow at a similar growth rate? Or what are those kind of particularly attractive and kind of funnel some incremental growth beyond the GBP 250 million in 2028 that you're alluding to.

[Michael Ord, executive]

Do you want to take that?

[James Mortensen, executive]

So I think -- so specifically within Roke, obviously, we've got the target out there and it is a target more actually GBP 250 million by FY '28. And I think within that, we're seeing good growth within National Security. I think it's defense where we're seeing lots of opportunity as well. We talked about this request for a tender of GBP 200 million for that product side of it. And really, we see really good opportunity in the product side of it as well within defense to accelerate the growth.

[David Richard Farrell, analyst]

And then just on the energetic build-out. Can you kind of the erection of kind of facilities is fairly straightforward in terms of steels, et cetera. What are the risks though in terms of time lines of actually getting it on stream by 2028. Is it access to the machines? Is it access to people? What are the critical elements that we have to watch out for?

[Michael Ord, executive]

Well, I'll pass that on to the teams in Norway and Scotland that are building and that's pretty straightforward. Last time I had a wonder around 18-inch thick blast reinforce walls look pretty complicated. So and actually, the -- a lot of these projects is in the civil engineering and the planning and construction of those. And then in the licensing and commissioning of those, obviously, these are high hazard facilities and we are taking this opportunity to automate as much as we possibly can. So I think it's kind of the critical path through these programs is probably a due critical path of getting through the civil construction of what are very complex facilities.

And then the plant and equipment that goes in them now none of what we're installing is as in cutting-edge, state-of-the-art have to invent a new paradigm. These technologies are out there, but it's probably the integration of those in the new automated facilities that will be our largest area of focus. That's probably more relevant in Scotland, where we are building a whole new propellant facility. In Norway, the Norway plant is basically a chemicals processing plant which is all around nitration of assets, et cetera, and crystallization of assets. And therefore, it's a very typical chemical engineering plant that you would go to anywhere but obviously, with the elements of -- we synthesizing explosives at the end of it. So that's a lot of tanks and distillation columns and reactive vessels, et cetera.

[David Richard Farrell, analyst]

And a final question, if I can, just about Roke U.S.A. and kind of are any of the RFQs of GBP 200 million in the U.S. DoD opportunity?

[Michael Ord, executive]

We have a number of opportunities with the U.S. DoD, but I would say that the greatest weight is from a Roke U.K. perspective. In Roke USA, we are working very closely with the U.S. DoD exploring some very interesting opportunities with regards to the use of technologies such as software-defined radios and some very advanced electronic warfare applications. Now this is a very early R&D stage at the moment, but we are generating good traction with the DoD and DARPA and other agencies such as that. So it's a very interesting prospect for us.

[Richard Paige, analyst]

Rich Paige from Deutsche-Numis, there we go. Just on the -- coming back on the Energetics again, my original understanding that the site in Norway was very physically constrained. So where have you managed to squeeze 275% capacity expansion from? Is it a change in rules or legislation that have cleared that? Or is this some very special.

[Michael Ord, executive]

It's a good question. So you're right, it is geographically constrained. So we've got the Oslo field on one side. And we've got not a mountain, but a very rocky hill on the other side, which actually acts as our blast curtain from a safety perspective on the site. So when we look at the explosives limits for that site, we believe that there's sufficient capacity in that overall load limit to be able to do this 275% expansion. Now one of the key elements associated with that is, is that we are also building offsite somewhere else by 30 or 40 kilometers away, a off-site storage magazine, so that all of the finished goods which are 1.1 high explosives are stored off site, which means that if you say your storing, I don't know, 50 or 100 metric tons of high explosives in your magazines on site waiting for customer collection. That's 100, say, metric tons that can't be put through the plant as part of productive output.

We store that off-site that immediately gives us an uplift with regards to productive flow through the site. So when you look at that and you look at how we position the new facilities within that geography, we see a clear route to get to the 275% expansion. Now the question that comes after that is what do you do beyond that when you've maximized your capacity in that site. And we are exploring options of if we were to expand. If you look at the unprecedented level of demand, how you expand beyond that? If you were to set up a second site, where would you do that? How would you do that? Which country would you do that in? Clearly, the market demand is out there for at least one further site.

[Richard Paige, analyst]

I mean immediately begs the question, do you know what competitors are doing on OPA, you've got sites in the U.S., sites in France isn't there as well.

[Michael Ord, executive]

Yes. We've got a good understanding of the Energetics market on both sides of the Atlantic. I think our primary focus is very much around European NATO and when you look at the drive -- and there's 2 real drives going on from a European NATO perspective, clearly, governments want -- have recognized and the Ukraine conflict has been a very brutal lesson for everyone that levels of stockpile and readiness need to be orders of magnitude greater than they previously were.

And that's obviously a strategic concern for all European NATO allies, but also they recognized as well is that the soldier on the battlefield has to have a logistics chain that eventually comes back to an industrial base that has the capacity to be able to support high-intensity conflicts. And many European NATO countries want to ensure that they have got sovereign capacity on their soil to be able to give that full line of sight from an industrial base through logistic chain to a soldier on the front line. Hence, we're in discussions with a number of interested customer nations of talking about how could that be done?

[Richard Paige, analyst]

And we've naturally focused elsewhere, but the detection business, I think you were quite confident there will be some domestic opportunity security there. Any progress on that front?

[Michael Ord, executive]

The biological.

[Richard Paige, analyst]

The biological detection in the U.S.

[James Mortensen, executive]

Yes. So we're in continuous discussion with the U.S. Department of Health and we have an ongoing program with them. And so yes, we'll see how that goes.

[Michael Ord, executive]

I think the interest in development and biological detection over the last 6 months has been that obviously, we've got the EMBD program, which is in full rate production. And now JBTDS is in LRIP with a clear line of sight to getting into full-line, full rate production and the U.S. Army is talking about 3,600 systems or something from an FRP perspective. And we always said that once we have that line of sight to FRP, then that would potentially be a catalyst for other European -- sorry, other NATO allies to look at their biological detection capability and maybe, therefore, export opportunities come from that if this is going to be the U.S. Army's system of reference. And those conversations have now started in the last 6 months, which is kind of what we thought would happen.

We don't have any more questions in the room. Were there any questions online, Rupert?

[Rupert Pittman, executive]

Mick, just the one question from Charlotte Keyworth at Barclays. Given the geopolitical backdrop has created surge demand, has this impacted pricing discussions at all, particularly in Energetics.

[James Mortensen, executive]

So to a certain extent, yes, it certainly has. So what we're seeing is customers are willing to make prepayments to us to get on the production schedule. I think to a certain extent, our pricing is limited, these are often sole-source programs that we're on. And so sometimes, there's not that much that we can do. But yes, it's certainly a conversation that we're having.

[Michael Ord, executive]

Anything else online? Last time for anyone in the room. Okay. So if that's it. So I think we'll close the meeting. Thank you very much for joining us today, and we look forward to presenting the full year results to you in December. Thank you.

[James Mortensen, executive]

Yes. Thank you.