Strategy & Operations » Business Partnering » Chemring’s FD Andrew Lewis reveals art to rebooting defence tech player

When you have a previous history of delivering a turnaround you might just be the finance chief to help another company through its transition to profitability.

Andrew Lewis, finance director of FTSE 250 technology group Chemring, which delivers a range of products to the aerospace, defence and security industry, is just that person-having survived a major crisis at his previous employer which he then helped to lead to positive territory.

Lewis’s first senior role was as financial controller of Rotork, a producer of industrial flow equipment based in his hometown of Bath. He was determined to develop his career in the manufacturing sector after working his way up through PwC.

But he received a “massive baptism of fire” at his next role- his first as finance director when joining Avon Rubber, a maker of products for various industries including gas masks for the defence sector.

Arriving a week before the collapse of Lehman Brothers, at the height of the global financial crisis, he found a giant problem- zero EBITDA and £25m of debt.

The FTSE Small-Cap constituent had overstretched on borrowings, resulting in “a massive turnaround job to do”. He quickly helped implement a restructuring that involved cutting a third of the 250 UK jobs at the group he left in 2016- that now has 800 UK staff.

He arrived at Chemring, “after three cycles of turnaround” at Avon, after which he figured it was “time to move on”. Chemring, which is best known for its countermeasure devices was just starting to come out of the bottom of the U in its turnaround story, says Lewis-as strong demand during the Afghanistan and Iraq conflicts had tailed off.

The company’s main client, America’s Department of Defense, and the UK’s Ministry of Defence that had stockpiled the devices were now running down demand- so the group needed to rapidly change tack.

Lewis say Chemring’s CEO Michael Flowers, who’d joined in 2014 and already begun a process of restoring the group to health, recognised his previous experience was ideal for Chemring’s turnaround phase “which was all about organic investment and a degree of self-help, paying down debt, sorting working capital, and doing the basics well”.

In the journey the group is still on, Lewis says he has added “a culture of no surprises, realistic forecasting, realistic budgeting and working with business units, as opposed to adding things up at the end- I think all of those have been improved in the last year,” he says.

The group has also implemented a business model weighted towards its main clients the US, UK, Australia, Canada being less involved in wartime- but where countermeasures are still used in training. “The business model needs to have a surge capability to ramp up if necessary,” he adds.

It’s a good line in business for obvious reasons- no aircraft or ship will enter a hostile area without the ability to deter heat-seeking guided missiles that any regime can source relatively easily. As military technology is upgraded, such as with the deployment of the UK’s new F-35 combat aircraft, additional countermeasure equipment is required.

Another segment in the group is its detection and sensors business, featuring equipment designed to tackle improvised explosive devices (IEDs), which were a high priority in Iraq and Afghanistan. A third arm is chemical and biological warfare agents detection-where much of the group’s R&D is focused.

Although the US is the main market for Chemring, Lewis says President Trump’s vow to boost military spending doesn’t automatically translate rapidly into profits. “I think it creates a positive environment for defence, but there’s a long path between a tweet and the potential for actual spend,” he suggests.

Another line is the group’s energetics business, where components such as exploding nuts in Elon Musk’s SpaceX rocket and explosive components for aircraft ejector seats are made by Chemring. In addition there’s a wider portfolio mix of products Lewis describes as “ammunition, illumination, smokes, flashes, bangs and minefield clearing devices” that adds to the total portfolio of products sold to around 70 countries.

In January Chemring revealed full revenues were up 11% at £547.5m, which would have been 15% without currency fluctuations, while pre-tax halved to £4m resulting from restructurings in the US and write downs on technology. On an underlying basis, pre-tax profit was up 30% at £44.1m.

When it comes to which countries to trade with, Lewis informs: “We take our lead from UK and US government export guidelines, and if those governments say a country is good to trade with, then we’ll trade with it. If a government says no, then we won’t. The usual suspects being on the list you don’t trade with have always been there,” he says.

Regarding Saudi Arabia, on Chemring’s client list, where a debate at the highest levels of the UK government has focused on concerns about the use of British exports in the Yemeni civil war, Lewis says: “You keep your eye on those things. Pre-empting the decisions of politicians is always a dangerous game, so we tend to wait and see what they decide. That means having contingency plans and scenarios,” he adds.

Lewis says that because the group is mainly involved in protection devices it is not likely to be subject to brand reputation issues that some other exporters of equipment might be.

Chemring is being investigated by the Serious Fraud Office (SFO) investigation into bribery, corruption and money laundering that the group announced in January. Lewis says the issues relate to a contract at an acquired subsidiary that the group self-reported to the SFO. He says: “We take the processes and systems within the group around compliance very seriously.”

When it comes to risks, Lewis says British technology and engineering companies can continue to thrive in the post-Brexit environment, and is supportive of the education framework and infrastructure in the UK.

He is questioning of the move from principles-based accounting standards to a rules-based system enshrined in IFRS. “The dangers of a rules-based system are that you can comply with a rule but miss what’s staring you in the face,” says Lewis.

“A lot of the corporate failures complied with the rules,” says Lewis. “There have been a number of companies in the support services sector- Carillion being the last of them- where the accountants will obviously get looked at, but by and large they will probably find they complied with the rules,” he adds.

On Carillion he is scathing about the company’s efforts to fund acquisitions with far too much debt. “That only works when the market continues to run in your favour,” says Lewis. “Eventually the business will be cyclical and those cycles tend to come round once every few years,” he says.

To be an effective finance director, Lewis says it’s extremely important to ensure you understand what is going on around an organisation. “The finance role should be about being a business partner to the CEO, not just a number-crunching, spreadsheet monkey,” says Lewis.

“People look at finance people and often see calculators and spreadsheets, but actually being an integral part of a cultural change programme means you have to bring everybody with you. If you don’t bring everybody with you, you won’t succeed,” says Lewis.

“I think it’s about people starting to trust you, being honest,” he says taking off his jumper to reveal a Chemring polo shirt, rather than a suit and tie. It’s an appearance that he says is important to being seen as part of the team. “When you walk onto the shop floor and there’s 200 people working machines, they’re not wearing suits,” he says.

“If you walk out in a suit, they see the suit as a barrier and they don’t talk to you, as they don’t trust you. But if you start dressing a little bit like them, going to the canteen and getting rid of executive dining rooms and chauffeur-driven cars, you find out what’s really happening in a business,” says Lewis.