Doing difficult things well for Chamberlin PLC
“…firms don’t survive for as long as Chamberlin without a fierce will to survive. Not for the first time in its history it is working hard to reinvent itself…”
Chamberlin Plc (AIM:CMH), the Midlands-based precision engineering group, takes pride in a 130 year history in which is has sought to apply a philosophy of ‘doing difficult things well’. That credo has been severely tested in the past two years, as the company has faced the ultimate task of securing its survival after being battered by a series of blows.
Chamberlin was established in 1890 as a Walsall foundry casting money boxes, toffee hammers and decorative door stops. It floated on the main London market in 1946 before moving to AIM 15 years ago. The company offers specialist casting and industrial lighting services to companies such as Siemens, Howden, CAT, JCB and Tata Steel. It is has considerable exposure to international markets, direct exports to Europe, America and Asia accounting for around a third of its output, and relies on its accumulated skill and experience to retain a competitive edge over overseas producers.
The group’s casting services are organised into two divisions. It retains a base in Walsall in the form of Chamberlin & Hill Castings, a foundry producing smaller castings of up to approximately 30kg in weight. In recent years it has specialised in the automative and hydraulics sectors, making castings for turbocharger components, brake calipers, exhaust manifolds, brake discs, suspension components, earth moving equipment, plant vehicles, and fork lift trucks. It also produces civil castings for road studs, cats eyes, crane and lifting gear and industrial machinery, and engineering castings for pipework and flanges, heating elements and radiators, valve mechanisms, covers and blanking plates. Chamberlin’s Scunthorpe foundry, Russell Ductile Castings Ltd, produces heavier casts weighing from 10kg to 7,000kg, suitable for the power and renewable energy sectors, civil engineering and construction, fluid processing and control, mineral processing and mining, and specialist off road vehicles. The group also has a precision engineering division, Petrel Ltd, located near Birmingham, which produces lighting products for use in hazardous environments such as petrochemical production facilities, a range of control gear and electrical installation products, and cable management products.
Until its recent troubles Chamberlin found a lucrative niche supplying castings for turbochargers – which allow petrol engines to run more efficiently – to vehicle manufacturers under pressure to meet increasingly stringent emissions regulations. A 2017 Financial Times profile noted that the ‘board’s strategy revolves around the growth in turbochargers’. At that time the company was producing about three million small bearing housing castings for turbochargers a year, which accounted for a fifth of its sales.
Troubled waters
But that strategy has been blown off course by the repeated storms that have threatened to overwhelm the company over the past two years. Like other British manufacturers Chamberlin was hit hard by Covid, but the group’s income was already sliding going into the pandemic. Revenue for the year to 31 March 2020 was down 21pc from £33m to £26.1m , the company recording a loss before tax of £2.3m. Demand for its castings and lighting products had been impacted by a slowdown in European car production, troubles at British Steel, and the postponement of construction projects due to Brexit uncertainties. Its focus on turbochargers had been somewhat exposed by prolonged lack of clarity over future tariffs on trade with the EU, which had disturbed car production supply chains.
The chilling effect of the pandemic was followed by an existential threat last December, when the company received unexpected notice of the early termination of its contracts with its major customer, turbo systems producer BorgWarner. The news plunged Chamberlin into crisis, obliging it to suspend trading in January as it sought finance to remain solvent and ramp up a restructuring programme that was already underway.
The company raised some £3.5m in March, announced plans for more than 100 redundancies, and made board changes, including the appointment of a new CEO Kevin Price, who had previously held senior positions within the company. By April Chamberlin was able to publish interim results for the six months to 30 September 2020 – published concurrently with its annual report which had been delayed by the pandemic’s impact on the audit process – which painted a brightening picture.
Turning towards retail
Though the loss of the BorgWarner contract was a wound that would take some time to heal the company reported that ‘the market outlook is more positive, with all businesses enjoying sales levels above those of the prior year in recent months’. It expected ‘growth from all business units and a return to profitability and cash generation post … restructuring’. The company was buoyed by the successful negotiation of several new non-automotive contracts facilitated by the clarification of the UK’s trading arrangements with the EU.
The lifting of the AIM trading suspension was followed by a May operations update announcing the completion of the restructuring process, which had consolidated staff and physical assets, and the award of new contracts. Chamberlin & Hill Castings had won a three-year contract to supply components for diesel engine generators commencing in July 2021, and an existing customer had engaged the division on a five year programme to manufacture turbocharger bearing housings for a leading luxury sports car manufacturer. Russell Ductile Castings had actually expanded its workforce by a third as it continued to win work in the rail, renewables, water and power sectors. Petrel had also taken on new staff to support an expansion of development and production capacity, having successfully completed a Ministry of Defence contract to supply specialist lighting for installation on a flagship vessel for the Royal Navy, which the division says puts it in a favourable position for the award of further contracts.
The group also reported on a major new push to diversify its customer base beyond the provision of services to industry. Chamberlin & Hill Castings had begun producing a range of home and commercial gym equipment, including kettlebells, weight plates, and precision machined ‘indestructible’ dumbbells, through a new online outlet called Iron Foundry Weights. The division had signed an endorsement agreement with British Powerlifting Champion Lauren Recci, and was showcasing its new product range at sports festivals.
A July trading update announced new developments regarding the company’s change of focus, reporting that it was drawing on its 130 year design archive to produce the ‘Emba Cookware Range’, a ‘premium quality cast iron cookware’ with a ‘retro’ aesthetic. Chamberlin expects to launch its Emba range online before the end of the year, with ambitions to reach the wider European market. Petrel is also broadening its scope, expanding to offer product hire and support services for new and existing safety lighting installations.
This autumn the company said it was planning to publish its audited accounts for the 14 month period ended 31 May 2021 later this month. It expects to report a loss of ‘not less than £4m’ on turnover for the period of £26m. This will include sales of £7.5m to BorgWarner prior to loss of the BorgWarner contract, a figure that highlights how important the arrangement was to the group. But Chamberlin said that although the pandemic continues to complicate trading conditions, it expects sales for the remainder of the first half of the current financial year ending 30 November 2021 ‘to be at least in line with management’s expectations’ and anticipates ‘stronger levels of sales growth and profitability in the second half of the year’. Net debt, a long time issue for the group in part due to pension obligations, had been reduced to £3m at 31 August 2021, down from £4.6m at September last year, and current cash headroom at £1.1m is ‘comfortably in line with management expectations’.
The update also reported continued progress on the company’s process of self reinvention. The group is reviewing how it might take advantage of its ‘substantial’ property assets to provide further income. And it further elaborated its new strategy, stating a medium term aim ‘to replace the majority of the group’s traditional, low margin contract-based production, with much higher margin, premium consumer products in markets with a strong opportunity for growth.’ Further innovations at Petrel include the commencement of a new venture into specialist lighting hire, making the division the only UK manufacturer of hazardous area lighting to offer a direct-to-market hire service. Chamberlin’s shift of focus towards retail was highlighted by a September BBC Midlands feature.
The rise and rise of electric vehicles
The company’s reorientation is timely, coming as the rapid rise of the electric vehicle (EV) market cuts into industry demand for turbochargers, a combustion engine technology. A Financial Times report last month noted that ‘Every now and then, a slow-burning shift in the way the world works suddenly starts to gather pace at a rapid rate … In a relatively short space of time, the transformation in the auto industry has gone from first gear to fifth.’
Sales of EVs have been supercharged by the pandemic, obliging manufacturers to clarify their priorities and double down on the long term trend towards clean vehicles. Sales in Europe have soared from from under 200,000 in 2018 to an expected 1.17m this year. One in 12 cars sold across the continent between April and June ran on batteries alone, and a third were hybrids. BloombergNEF predicts that within four years, one quarter of new cars bought in China and nearly 40pc of those purchased in Germany will be electric. Global sales of EVs are forecast to reach 10.7m within in the next five years and 28.2m by 2030. The pace of change is also being driven by tougher regulations and increasing state investment in EV infrastructure. The UK intends to end the sale of petrol and diesel cars altogether by 2035, and the EU is proposing a similar ban. Several cities, including London, are pricing older cars off the roads with clean air zones. Governments are stepping up the rollout of the charging points necessary to facilitate a tipping point in consumer demand. Although there is still a window for petrol vehicles – if half of the market will be pure electric by 2030 that implies that half will not – it is rapidly closing.
Outlook
Chamberlin’s turbulent passage over the past few years has been mirrored in its share price, which has fallen all the way from 160p back in the summer of 2017 to less than 7p today. Though it has been around for a long time it has never been a large company, but its market cap is now down to less than £5m.
But firms don’t survive for as long as Chamberlin without a fierce will to survive. Not for the first time in its history it is working hard to reinvent itself, reorientating towards the retail market. And its wider business is set to benefit from better conditions, with the clarification of the UK’s trading relationship with the continent, and pandemic restrictions gradually easing, or at least getting no worse.
The group has much work to do. Chamberlin’s communications portray an honest, reliable company committed to quality. But it will need to sharpen its marketing to make inroads into a fiercely competitive retail sector. With the new Emba and Iron Foundry Weights brands it is moving in this direction. The metal castings business may lack glamour, but Chamberlin’s story over the past few years has not been short of drama. It’s one that investors interested in backing a long standing British company might want to follow, as the company seeks to renew itself once more.
