Codan Limited (CDA) Earnings Call Transcript

Good morning, everyone, and welcome to Codan's Full Year FY '25 Results Webinar. My name is Sam Wells from NWR, and joining me from Codan today is Managing Director and CEO, Alf Ianniello; as well as CFO and Company Secretary, Michael Barton. Following a brief summary of the results released to the ASX this morning, investors and research analysts will have an opportunity to ask questions. [Operator Instructions] And with that, over to you, Alf and Michael.

Thanks, Sam. Good morning, and welcome everyone to Codan's FY '25 results Presentation. My name is Alf Ianniello, and I'm Codan's Managing Director and CEO. Also joining me today is our CFO and Company Secretary, Michael Barton. Before we proceed, please take note of our standard notice and disclaimer. Today's presentation will take us through some of our key result highlights, detailing the performance of each of Codan's 3 business units. Unique to today's presentation, we want to highlight how our 2 communication businesses are increasingly working together. We walk through 2 case studies, one in defense and in public safety that bring to life the synergies across our ecosystems and show how we're converging into a single stronger communications platform. We will also update you on our current strategy, reiterating some focus areas within each of our 3 business units before tying it all together with some summary comments and key themes for FY '26. For many on today's call, the building a stronger Codan slide should be familiar. The Board and the executive team has spent significant time reviewing our businesses and refining our core organizational values, culture and positive outlook. From this, our leadership team has collectively developed a laser-focused plan to build a stronger Codan, which is underpinned by financial, operational and strategic objectives. At its heart, building a stronger Codan is about sustainable growth, making prudent acquisitions and developing ecosystems across our communication businesses and fundamentally continuing to invest in our people. Importantly, our diversification strategy is a key strength. We have great businesses serving very different markets. Minelab remains an exceptional business, while Communications is positioned for strong long-term growth. Fast forward to today, we believe our financial and operational results are a testament to our strategy. With our disciplined approach and a strengthened balance sheet, Codan is well positioned to pursue future opportunities from a position of confidence. As we look ahead, we remain committed to building a stronger Codan, investing in innovation and broadening our capabilities, and most importantly, delivering long-term value to our shareholders. FY '25 was a year of strong performance for Codan, and we are pleased to report that we achieved significant growth across the Group. In an environment of ongoing global uncertainty, our teams executed on their plans with focus, delivering improved revenue, earnings and cash generation. At a Group level, we delivered over AUD 674 million of revenue, up 22%, reflecting strong organic growth together with the contribution from our Kagwerks acquisition. Net profit after tax grew 27% to AUD 103.5 million. And as the slide illustrates, all profitability metrics increased year-on-year. Notably, this was after expensing some non-recurring acquisition due diligence costs, of which Michael Barden will touch upon on the following slide. Additionally, the Board declared annual dividends of AUD 0.285 fully franked, also up 27% versus last year. I will now pass it over to Michael to run through the financials in more detail.

Thanks, Alf. Good morning, everyone, and thanks again for taking the time to join our call today. As Alf touched upon, we're really proud of these financial results. They underscore our strong operational execution across each of our business segments. First, taking a look at the Communications business. FY '25 revenue grew by 26% to AUD 413 million and we delivered a segment profit of close to AUD 108 million, which was up 34% on FY '24. Within Minelab, revenues also grew double-digit, up 16% to AUD 255 million and segment profit was 26% higher at AUD 98 million. Group NPAT margins increased to above 15% from 14.8% in the prior year. The profitability metrics this year are after expensing around AUD 5 million of pretax non-recurring acquisition pursuit and due diligence costs. That includes our Kagwerks acquisition that we acquired in December and other opportunities we evaluated, but chose not to pursue. As we've said before, our M&A strategy is focused on complementary communications technologies, particularly in North America and across unmanned systems, soldier systems and the public safety sector. We take a disciplined approach. If due diligence doesn't stack up, valuations are stretched or market conditions change, we're comfortable walking away, and that's exactly what you saw this year. Prudent capital allocation with Codan only pursuing those acquisitions that are strategically aligned and which create long-term value. The increase in Group expenses this year reflects the integration of acquired entities into the Group's cost base and higher short-term incentives aligned with the improved performance. Also, we've continued to invest to ensure the successful integration of acquired companies and the implementation of core systems and processes that will provide future scalability. Equally, sales and marketing expenses include greater investment in go-to-market, customer-facing teams and initiatives aimed at delivering further growth across our key markets. We turn to our balance sheet. Net debt finished the year at AUD 78 million, which was up AUD 3 million on June last year, and that's after funding AUD 36 million for acquisitions during the year. Importantly, our second half performance was strong. We reduced net debt by AUD 46 million from December to June. This was driven by cash generation and disciplined working capital management. We took our net debt to EBITDA ratio to below 0.5x. Net working capital reduced by AUD 5 million. This reflects higher inventory to support our growth and also the addition of the Kagwerks business, and that was offset by an increase in our payables. Subsequent to year-end, Codan increased and extended its existing bank facility to AUD 250 million from AUD 170 million and we have a further AUD 150 million in accordion capacity available subject to bank approval. The facility now matures in September 2028. These facilities provide Codan with further financial flexibility to pursue future inorganic growth initiatives. We continue to assess acquisitions that enhance the quality and predictability of our revenues. We have a primary focus on opportunities in the communications markets that complement our technologies, accelerate our product road maps or extend our customer portfolio as well as providing longer-term earnings visibility. As outlined, this slide illustrates the changes to our net debt position throughout the year, noting the key movements we've already touched on in the previous slide. During the year, we have continued our engineering investment across our business units, investing a total of AUD 69 million, approximately 10% of revenues, in line with prior periods. Our engineering spend is increasingly focused on Communications and its key growth markets. Recent acquisitions, including Kagwerks, have added to this with the Kagwerks engineering team contributing AUD 4 million in the 7 months to June '25. We have a global team of highly skilled engineers and research scientists. And through product development, we ensure our competitive position is maintained. Back to you, Alf, as we take a closer look at our 3 businesses.

Thanks, Michael. So we'll now move into the business unit summaries. For any of you who are more recent to our story, our Communications business designs and manufactures mission-critical communication solutions for global military, public safety and commercial applications. In FY '25, Communications revenue grew 26% to AUD 413.5 million, driven primarily by organic growth of 19%, well above our targeted 10% to 15% range. Revenue from defense customers now represents 38% of total Communications revenue, and this vertical is a long-term target market. Communications segment profit increased by 34% to AUD 107.9 million, while segment profit margins, excluding Kagwerks, expanded to 27%, up from 25% in the prior corresponding period, reflecting operating leverage as the business continues to scale. The company remains focused on achieving additional operating leverage, targeting a 30% Communications segment profit margin by the end of FY '27, while we continue to invest in product development to support longer-term growth. Lastly, our Communications order book grew AUD 253 million as at the 30th of June, 2025, plus 28% versus 30th of June, 2024. This provides a great foundation heading into FY '26. DTC, formerly Tactical Communications, delivered an exceptionally strong result in FY '25, underpinned by growing global defense expenditure, particularly in unmanned systems and continued momentum in law enforcement verticals. The business continues to benefit from its leading MESH radio technology and solutions, which offers robust high-performance communication in harsh and contested environments. Specifically, DTC's compact, lightweight and power-efficient solutions remain well suited to mission-critical use cases where size, weight and power are critical to operational performance. This is particularly relevant in unmanned systems, where DTC delivered approximately AUD 100 million in revenue during FY '25, more than doubling the prior year's result. As global defense budgets increase, DTC's presence in the U.K., U.S. and Australia provides a strategic advantage in capturing long-term communications programs across North America, the Five Eyes alliances and other NATO-aligned markets. We have a strong pipeline of opportunities underpinning our continuing investment in the DTC platform. In December 2024, Codan acquired Kagwerks, a U.S. leader in operator-worn communication systems. Kagwerks provides a lightweight soldier-worn network dock that integrates multiple tactical technologies into a single user-friendly platform. This acquisition has strengthened Codan's position in the global military communications market by expanding its presence in the U.S. defense ecosystem. And it provides access to the funded Nett Warrior Program of Record. Kagwerks delivered AUD 24 million in revenue in our 7 months of ownership during FY '25. In the short term, revenue timing will depend on the Nett Warrior program given the project-based nature of the business. Importantly, integration into DTC is progressing well. We've made new senior hires to strengthen the sales teams, which is enabling expansion into DTC's broader North American customer base and driving further adoption into international markets. Moving on to Zetron. Zetron EMEA and Asia Pacific performed strongly in FY '25, delivering growth within our targeted 10% to 15% range. Key highlights include a 10-year AUD 14 million nationwide public safety contract in Australasia, alongside several smaller wins such as ACOM adoption by a major U.K. airline and a CallTouch deployment on a key rail corridor linking London to South Wales. We're encouraged by Zetron's enhanced scale and presence within EMEA following the integration of acquired and legacy businesses. Within the United States market, while growing revenues versus FY '24, growth was adversely impacted by ongoing government reviews and delays in funding for government-funded agency opportunities. This moderated our second half performance and near-term momentum. Despite this, Zetron recently secured a 10-year AUD 19 million contract with one of the largest utilities on the U.S. East Coast, servicing 3.3 million customers. Additionally, the business secured an AUD 11 million ACOM system contract with a large Atlanta-based airline. The business continues its focus on innovation and customer-driven solutions with ongoing R&D investment to deliver seamless integrated user experiences. Again, for anyone new to the Codan story, Minelab is the world leader in the handheld metal detection industry for recreational, gold prospecting and demining markets. During FY '25, Minelab achieved full year revenue of AUD 254.8 million, up 16% versus FY '24. Pleasingly, segment profit margin increased to 39%, up from 35%, driven by the benefits of scale and supported by a revenue mix of higher-margin products, particularly from a higher portion of gold detector products sold. Minelab Africa delivered a strong full year performance with revenue of approximately AUD 115 million, up both year-on-year and half-on-half by 64% and 54%, respectively. This result reflects demand from across the region, excluding Sudan, and it's underpinned by further business development initiatives to grow our presence across new and existing markets. While we haven't historically linked gold detected demand directly to gold price movements, we suspect the current elevated gold price is creating supportive demand in key artisanal markets. Minelab's Rest of the World business maintained revenues versus the PCP, which we consider to be a great outcome in what remains quite a challenging consumer conditions. This performance reflects our focus on growing both physical and e-commerce channels and leveraging Minelab's leadership. Minelab continues to invest in growing market share through the ongoing investment in its product road maps, new technology platforms and expansion of its retail footprint in the U.S. and Europe. These positions -- these initiatives position us well for future growth with 4 new products scheduled for release in FY '26. The moderation of humanitarian aid by the U.S. government administration resulted in lower sales of Minelab's countermine products in FY '25. In response, the business is undergoing a strategic shift to reposition towards more military base applications for which there is a growing need. So the first of the new product launches, Minelab has recently soft launched the Gold Monster 2000 as illustrated on the slide. This new gold detector retailing at approximately twice the price of the Gold Monster 1000 is positioned as a premium entry-level product and will be released to customers in Q1 of FY '26. As a result, we're expecting it to contribute to Minelab's growth in FY '26. So before we move into the case studies, we just wanted to provide a bit of a background that as Codan has through product development and acquisition, the public safety and the defense ecosystems have become quite relevant. And our products within those acquisitions have become quite relevant to the point where they are fundamental to creating situational awareness. So as we move into each of the ecosystem diagrams, the Codan or DTC Zetron products are highlighted in green. So in the defense ecosystem, our software-defined radio MESH products connect soldiers, uncrewed systems, sensors, vehicles, ships and coalition partners. It is low latency, resilient. And if one link drops out, the network simply reroutes around it. Kagwerks brings that MESH right down to the operator. Radios and soldier-worn devices are pulled straight into the picture. When satellites are degraded or denied, HF keeps the traffic moving. HF is harder to jam across wide areas and works without fixed infrastructure. That makes it critical to carrying essential voice and tactical information traffic when the other communication paths are constrained. Codan's strength is its ability to build sovereign multi-waveform networks such as MeshUltra and MeshUltra-X that interoperate by design and keep working when conditions are at their worst. This positions us as the trusted backbone for our partners. In the public safety area, Zetron offers mission-critical communication solutions. Its dispatch, telephony, computer-aided dispatch and land mobile radio solutions enable critical communications around the world from airports and train systems to police, fire and ambulance services. Given the importance of uninterrupted communications, Zetron uses additional technologies to provide networks on demand for disaster recovery and tactical deployment. The same advantages DTC provides in the defense sector can also be applied to public safety, especially with the emergence as drones as first responders. When a disaster occurs, public wireless networks are often degraded or unavailable. DTC radios can provide a deployable bridge right from the disaster area to the control room. Additionally, there are indoor areas with no satellite or wireless coverage. DTC solutions can provide the critical link right from the underground car park to the network outside. Combined, this allows both the control operator and the person in the field to be connected at any time. This crossover between DTC's field networking and Zetron's control systems is a deliberate outcome of our acquisition strategy and product development strategy. We are not running separate businesses in silos. We are creating integrated interoperable solutions that expand our addressable markets and deepen our customer relationships and positions Codan as a leader in both defense and public safety communications. The case studies highlight how our core technologies from DTC, Zetron and Kagwerks work together in defense and public safety ecosystems. I'll now pass back over to Michael to take you through the strategy and ESG updates.

Thank you, Alf. While this slide may look familiar, it is slightly different from what we've presented previously. Specifically, we're focused on identifying where we've executed against our 3 key strategic pillars: investing in ourselves, strengthening our core business and disciplined capital allocation, all of which to drive long-term value across the organization. And we're providing specific FY '25 achievements, and I'll just mention a few of them. Firstly, we've recently appointed a new Group COO for Codan, Pieter Guichelaar, and we've welcomed him to our leadership team. We're excited with what Pieter can bring to Codan and he is already driving efforts to strengthen our operational execution and the alignment across our business units, also helping us build the scalability that we need for future growth. Under his leadership, we're investing further in IT and AI capabilities to improve efficiency, unlock insights and support a more integrated Codan. We've also expanded commercial capability across defense, unmanned and public safety markets as well as strengthening our product suite, helping to secure a strong forward order book, which includes AUD 155 million of revenue that is scheduled for delivery in FY '26. Lastly, we've acquired Kagwerks to further enhance our solutions offering and drive long-term revenues through the Nett Warrior Program of Record. Beyond this, we continue to seek strategically aligned opportunities, while maintaining a strong balance sheet. Our near-term objectives are focused on executing key initiatives across each business. In DTC, we're shifting to be a full solutions provider. We're launching a multi-waveform radio in the second half of FY '26 through our Trellisware partnership. And we're integrating Kagwerks to strengthen soldier systems and connected edge capabilities. For Zetron, we're building market share in public safety and increasing the predictability of reoccurring revenues, including the launch of our service-based emergency response platform and a next-generation CAD solution in the U.K. In Minelab, we'll release 4 next-generation detectors across recreational, gold and countermine markets. And we'll expand our retail footprint in North America and Europe and continue to strengthen our e-commerce and channel engagement. Alongside delivering strong financial results, we continue to make meaningful contributions in our communities and to our sustainability agenda. On the social side, we've supported education, innovation and community initiatives from long-standing programs like our 36 years of Variety Bash sponsorship to expanding STEM opportunities, cultural scholarships and global cleanup efforts. On climate, our priority has been building a strong system to measure and capture data across Scope 1, 2 and 3 emissions. This ensures that when we set targets, they're not just ambitious, but are also credible based on reliable and consistent information. We've made significant progress in this area and it positions us well to both set and track future climate targets with confidence. And now Alf will close with our summary and outlook.

Thanks, Michael. Tying today's presentation together, the Group continues to deliver on the strategy of building a stronger Codan. Our strategic pillars, as outlined earlier, will continue to guide and focus and continue to guide our focus moving forward. Looking ahead to FY '26, our Communications business continues to target long-term sales growth of 10% to 15% per year. As we've shown in FY '24 and '25, this range can be exceeded. With around AUD 155 million of FY '26 revenue already secured in the order book, increased defense spending and continued growth in unmanned systems and a first full year of Kagwerks, we're well positioned to deliver growth in the 15% to 20% range in FY '26. Minelab enters FY '26 in a strong position, building on the momentum of excellent growth delivered in FY '25. FY '26 is shaping up to be an exciting year with 4 new product releases scheduled across the recreational gold and countermine product ranges. These launches, combined with current favorable macroeconomic conditions in key regions such as West Africa, positions the business to capture further demand and deliver continued growth. We believe Codan is well positioned for sustained growth and supported by current favorable market conditions for our defense-related communication products and our gold detectors, we expect to continue to grow the revenue and profitability of our high-performing businesses and deliver long-term value to shareholders. With a strong balance sheet and a disciplined approach to capital allocation, the Group remains well placed to execute on strategic acquisitions. The recently renewed $250 million debt facility provides increased flexibility and funding capacity to support future inorganic growth initiatives. We look forward to providing our next business update at the Annual General Meeting on the 22nd of October, 2025. And with that, this draws us to an end of our presentation, and I'll pass back to Sam for Q&A. Thank you.

Great. Thank you, Alf, and thank you, Mike. [Operator Instructions] A couple of pre-submitted questions first. On Communications margin, what's required to hit the 30% Communications segment profit margin by the end of FY '27? And is there upside or will you reinvest for growth above that level?

Yes. Good question. Thanks, Sam. I think it's a fine balance. I think what's required is our continual growth rates are required. And we have, as mentioned in the presentation, we have a path forward on that. And also the continued release of market-leading products and the sound acquisitions we've made to create more platform and solution-based offerings for our customers. So we've had the 2% increase year-on-year. And I think if you put acquisitions, product releases and continued organic growth, that will bode us well for the increase in margin.

Great. And just on unmanned, can you give us any color as to the composition of the AUD 100 million you referenced? How has this strong growth in unmanned influenced your defense strategy, if at all, in FY '26?

Yes. The unmanned space, either air, ground or sea, is definitely an emerging space, both in defense and public safety. It's a market that is growing at 30%, 35% CAGR globally away from what Codan is doing. So when you look at our strategic intent, obviously, it is influencing our product development road maps for DTC, which is important in the software-defined radio programs. And then when we're looking at acquisition road maps, we are heavily focused in how we actually complement that unmanned space with our products and other products. So it's definitely front of mind. And having a product as DTC has, has enabled us to double that revenue over the last 12 months.

Great. And just on comms forward order book, while it was up I think 28% year-on-year, it's only modestly up versus December. How should we think about this?

Yes. And order books are a point in time. If we actually did the order book 5 days later, we would have booked the AUD 20 million order in the U.S. and that would have changed the metric significantly. So the order book struck on June 30. When you look at the order book, as said in the presentation, it gives us a lot of confidence going into FY '26. It's a strong order book. So yes, a couple of days here or there, that number would have been far larger.

Great. And we'll maybe move now to Mitch Sonogan at Macquarie.

Just following on from the unmanned there, the revenue pretty much doubling or doubling year-on-year. Can you maybe just give any more color in terms of overall demand trends that you're seeing there? What visibility do you have looking into FY '26? And maybe just any broader discussions you might be having outside of the existing customer base?

Yes. When you look at unmanned, a lot of our unmanned solutions go into drone solutions. When we look at visibility, we have visibility probably out for H1 of order book. And when you look at the diverse customers, one of the key aspects of unmanned for us is that our technology has been used in contested environments, and it's worked. So the ability for us to gain technical reputation, as I would say, to then push that into other markets has been probably one of the key positives from this. So definitely, it's a growing market. Definitely, we've got the right product. We have evolved the product from all the lessons learned we've had over the last 12 months. And we have -- and we are working with new partners globally. We have representation of sales across the globe for unmanned systems.

Yes, great. Final question, which is just a sneaky 2-parter there. But obviously, with Africa doing very well in Minelab, yes, just keen to understand if that segment margin in the high-30s. Is that what we should expect in FY -- sorry, FY '26? And then just for Michael, just on the unallocated costs, up pretty materially. Obviously, you talked to some of that throughout the presentation, but just keen to understand what we should be expecting in FY '26 as well? Congrats on the result.

No worries, Mitch.

Yes, on Minelab, the margin they achieved in FY '25 was excellent in the high-30s. And some of that improvement does come from the gold detectors that we do sell into Africa. So you're right, Mitch, we've had an uplift as a result of that mix in products. So that continues. We'll continue to see Minelab post really strong margin results like they achieved in FY '25. In terms of the administration costs, yes, we've called out a higher level of due diligence, acquisition-related costs. We've had those costs in the last few years given the acquisitions that we've made. And I think all those cost, history is probably the best guide, Mitch, just to the cost base that we currently have in the organization. So we'd expect those numbers to be consistent going forward, albeit we did call out that AUD 5 million that's larger than what it's been historically. So there might be some normalization in relation to that component. But the rest of the costs they're really the run rate going forward into FY '26.

Next question comes from Elijah at Goldman Sachs.

Congratulations on the results. Just a couple for me. Maybe just starting with Kagwerks. Can you sort of talk to, I guess, if that original guidance for calendar year '25 revenue of AUD 49 million to AUD 57 million is in play and if that ties into the FY '26 comms growth guidance?

So Part A of that question, as mentioned in the presentation, the guidance for the first 12 months is heavily predicated on the release of orders by the Nett Warrior Program offers, which we believe those orders will be seen in the next probably a month or so and then they'll provide a building schedule for the next -- for the remainder of the financial year. And then that will come down to whether we can actually ramp up the supply chain in a quick enough fashion to actually deliver and generate that range. So we just need to review that over the next 4 weeks. But in saying that the orders are there, it's a timing issue for a release of orders. The second question about the guidance of 15% to 20%, that does include Kagwerks.

I might just squeeze one in on just acquisitions. Balance sheet, obviously, very well set up, and you've talked to opportunities for a while. Can you maybe sort of talk to, I guess, what you're seeing on the ground? Like is it quite harder with the valuation rerate across the sector? And maybe talk to some of the opportunities you sort of walked away from?

Yes. I think when you look at our acquisition strategies, if you look at the Zetron sort of strategy, it's either we're increasing our seats. So looking at alternate Zetrons or adding value to the seat, so looking for more bolt-ons. So I guess that gives you a bit of color of things that we would be looking at in the Zetron space. When you're looking at DTC, we were heavily focused on creating a presence in defense market in the U.S. That still remains an aim. We're heavily focused on looking at the appropriate integration solutions to our solutions for unmanned systems. So that fundamentally paints a picture for the DTC world. And on the question of things that we had looked at or looking at, they all are part of that sort of environment.

Next question from Evan at UBS.

Yes. There we go. Okay. Just 3 questions, if I can. DTC, 2 on DTC. First one, I'm just keen to hear your thoughts, Alf, just around the potential, I guess, changing competitive dynamics with Motorola coming into the market, taking over Silvers, especially, I guess, in relation to how a very U.S. recognized business is being perceived in the EU, sorry, just how that's all playing out?