Codan Limited (CDA) Earnings Call Transcript & Summary

Welcome to the Codan Limited FY '21 Half Year Earnings Call Presentation. [Operator Instructions] If any participant has difficulty hearing the presentation, the webcast will be made available on the Codan website shortly after its completion. I would now like to hand the conference over to Mr. Donald McGurk, Managing Director and CEO. Please go ahead.

Good morning. Thank you for joining our call. We have had another exceptional half year complicated by the fact that we've announced an acquisition also on Tuesday. So this is a very full call. We've got a full presentation deck, and I'm also joined by Paul Sangster, the President of our Tactical Communications division; and by Michael Barton, our CFO. So I'll get straight into it. We have a half year summary slide, which shows a record sales for the half at $194.5 million, which translated into a record EBITDA and NPAT, and an earnings per share of $0.228. So we are feeling very, very pleased with the start that we have had to this financial year. And that's allowed us to pay an interim dividend of $0.105 fully franked. So you can see on the next slide the dividend progression that we are showing is pleasing. We've held a little bit back. We're not paying out exactly 50% of our profits, but we will pay out 50% at the full year of the total profits. As flagged earlier, the business is really -- it's a story of 2 divisions. The Communications division has really been impacted most by COVID. So that's seen a severe retraction in their performance vis-à-vis last year. Some of that was impacted by the fact that we shipped a large project in the period last year. And that will translate into a strong start for the second half once the other African order that we have now shipped during the first half of February, $13 million. The star of the show again has been Minelab. Minelab has shown exceptional growth. We'll talk about what these growth drivers have been a bit later in the presentation. We'll go into a little bit more detail. But we've also had a very strong start to the second half, which is very pleasing. I wanted to try and take the opportunity at this presentation to really talk about our strategy and where we think we're headed. This is made more applicable by the fact that we have, in fact, executed on a significant acquisition. But I'm going to take you through the 4 panels. This is a slide that you haven't seen before. We've talked about the components of our strategic growth strategy, but I'm trying to articulate it now in a manner that might be more palatable to the market, might be more understandable. And it really is made up of 2 panels. We have an organic growth section, which is really the core of our growth strategy. And that includes things like investing in ourselves, which is where we spend a significant amount of money each year developing new products to develop unique and protectable IP. That strategy has been absolutely sensational for us over the last 3 or 4 years and I think, marked by the performance in Minelab. Minelab, if we go back 3 years ago, was really heavily dependent on gold with 1 product into 3 African markets. Today, we have a product lineup that is much, much more significant. So we have 3 major gold platforms selling into dozens of countries in Africa and around the world. With respect to our consumer business, I think I've been quoted previously as saying that the consumer business over time, we think, has the potential to overtake our gold business. And you can see some signs of that happening already. If you go back 3 years, we were doing about between $2 million and $3 million a month in consumer. By making the massive investment that we've made over the last 3 to 5 years, we now have world-leading products at every price category in the consumer market. And our consumer business is now a circa $8 million to $10 million a month business. So significant growth in the last 3 years, which has really helped offset some of the perceived risks that the market had around gold. So we have a much, much more balanced portfolio and we're seeing the benefits of that now in a much, much more stable and growing Metal Detection business. The same can be said of Tactical Communications. Paul has put in place a strategy over the last 3 years to move us into a bigger, a more lucrative market segment called military. And whilst we still maintain a very, very strong market share affinity with our customers... [Technical Difficulty]

Thank you. Please standby. We've temporarily lost connection with the speaker line. We'll recommence in just a moment. Thank you, we've recommenced now.

Okay. Thank you. Sorry for that, we had a technical problem at our end that seems to be okay now. I'll continue back on with the strategic growth plan. I've spoken about the invest in ourselves panel. The strength in the core part is about really the Minelab part of the strategy. So it's about geographic footprint expansion, moving from products to solutions and also going from voice to data to video. I think I mentioned that Paul, in this Tactical Communications division, have really pioneered this strategy going back 2 to 3 years ago. And the acquisition that we've just made that we will talk about in a minute, really just cements on where we're moving from a products and solutions business right across the board in our Communications area. I'll move then to leveraging existing technologies. That really is about the technology council. We spoke about trying to set up a legacy of unique and protectable IP that is organically developed within the company. So we have some fantastic technology in tracking, sensing, communications, and we're now looking to see whether we can apply that in different and more diversified markets. The last piece is the acquisition. And I think we've changed our view on acquisition over the last couple of years. I think on previous calls, we were looking to make an acquisition that was substantial, diversified and take us into having a proper fourth division of the business. I think having spent more time in the market looking for acquisitions and understanding where our relative strengths are, we've aligned ourselves in a strategy that is to try and look at an acquisition in an adjacent market space, with products and technology we understand and to customers and markets that we understand. And I think that's what we've achieved with the DTC acquisition. Moving into Tactical Communications. We have a slide here, which really articulates, again, the strategy that Paul has put in place. What I'll do at this stage in the call is turn you over to Paul to try and explain that strategy and also take you through the recent acquisition over the next few slides. Paul?

So this strategy has been a strategy, which we've outlined and articulated for the last 3 years. And if we go back a little bit in history, about 4 to 5 years ago, we had effectively a black box commercial-grade HF radio, which we served many government agencies around the world, with a strong focus on aid and humanitarian and various NGOs. We recognized that, that market, because of other infrastructure, be it cellular and satellite, et cetera, was really eating away into the HF market, particularly in the commercial space with increased infrastructure being built, particularly in Africa. So we made the decision to repurpose the mechanical aspects of our software-defined radio to move into a much larger market in the military communications market. Upon doing that, we recognized some -- and appreciated some very early success, but we also learned many lessons. And some of those lessons are around becoming a full solutions provider for the military market. As such, we went out to do either licensing or partnership agreements around interoperability and VHF products that were best-of-breed and world-class to offer more of a full solution to the developing world militaries. As we matured through that process and recognized some success, certainly up until COVID, we learned a lot of lessons around the traditional voice requirements moving to more data and video-driven requirements for our customers where they could have higher bandwidth and various types of ranges for situational awareness. As such, we have recently acquired DTC Communications, who is one of the leading providers in MIMO Mesh. So that allows us to round out our strategy from a full solutions provider. The exciting part about Domo Tactical Communications is they operate predominantly in the first world militaries. So it's very complementary, where our traditional strengths are in the developing world -- in the developing nations, while DTC is very strong in the developed world. So there's a lot of complementary synergies, if you will, amongst the 2 organizations. [Technical Difficulty]

Please standby. We temporarily lost the speaker. We'll recommence in just a moment. Thank you. The conference has recommenced.

Apologies for the technical difficulties as there's been an Optus outage here in Australia. Continuing on with DTC. DTC, with 3 strong locations in the United States, the U.K. and Denmark, has over 140 employees, most of which are on the engineering and development side. They've got a very strong reputation in first world militaries, which, as I said earlier, complements Codan's current routes to market and where we're well established. So the technology will allow us to offer even further greater solutions to both the developing and the developed world militaries. The addressable market, as we've seen and as we show here, we've taken a very conservative approach to this. There's a lot of macro data around military communications and the most attractive part and the most attractive growth area for this acquisition is in the video surveillance and MIMO Mesh area, where you can have independent networks where you're not reliant on cellular or satellite. So in a law enforcement and national security and broadcast and commercial market, there is a tremendous amount of demand for this type of technology as we continue to move forward. Under Codan's ownership, we are targeting EBITDA of $14 million in year 1, and we've taken a conservative view of what the addressable market is. When we look at the products and solutions that DTC offers, we first look at their traditional video market that they have, which serves the law enforcement, broadcast market and in particular, live sports. While COVID has had a major impact on the broadcast market as people cannot congregate around various venues, we see an opportunity in uptick once life gets back to normal post COVID. Next, we look at what we call the MIMO Mesh, which addresses challenges in similar environments in the military that we operate in and the environments in first world military. So we see existing customers such as the U.S. Army, U.K. MoDs and various military and defense organizations globally. So the MIMO Mesh is very well-established in your Tier 1 or Five Eyes community and across Europe. The exciting part about the MIMO Mesh is that as we look at the demand for unmanned systems, both on the ground with and in the air with , DTC's MIMO Mesh transmitters allow for video transmission for situational awareness. And with the uptick and demand in unmanned systems, we see this as also an area of growth. Next, we look at the Spectronic piece, and that's a sub-brand of DTC. And Spectronic is an organization that's been around for over 50 years. We look at the surveillance market. And without diving into the details of the specific products, they have audio and video capabilities that support law enforcement and national security, primarily in the developed worlds. Lastly, there is a command and control software suite, which is predominantly used in the law enforcement, national security and defense arena within the United States. We have plans to expand that further out into the developed worlds as we go forward. The great part about this is that we hope we properly identify and articulate that this product suite from DTC offers a very diverse portfolio for Codan as it has traditionally been focused on a very niche market in HF. So with the expansion of our strategy into interoperability, VHF and now MIMO Mesh, video, command and control, it will allow us to have a stronger run rate business, which will be less dependent our revenue profile on project base.

Okay. So we now have a video to show. And we're conscious of the fact that we're throwing a lot of technology out to you guys. So we're going to try and make it simple, we'll hand it over. [ Presentation ] Okay. Thank you. Paul, just finish off your slides on safe cities.

Yes. So this is 1 case study of a large surveillance. There's a large demand in redundant communications, particularly in the law enforcement and national security areas in the developed world. So DTC's portfolio of products allow us to support law enforcement and various government agencies to ensure high reliability communication, especially in areas that have denied surveillance locations and it -- as well, if it's an independent network. So it's not relying on cellular infrastructure in the event that there's an interruption to that service. It is also a real-time video so it allows for safety of the officers who may require to have video on the -- as a body-worn device.

Okay. I'll take you through this last slide. I mean one of the questions that we've had over the last few days is why Codan? Why is Codan the right owner for this business? I think some of the narrative that Paul's given would make that a bit more obvious. I mean that's 4 real segments that we think fit for us being the logical owner of this business. One is it is a strategic fit. It's an adjacent space into our military market and it offers us the ability to be a full solutions provider and be able to prime large defense solutions product orders. The routes are complementary. These guys are predominantly developed world, we are predominantly developing world. So it's a match made in heaven in terms of the way this movie rolls out over the next few years. It also fills a significant capability gap that customers are looking for in our portfolio. And based on the significant amount of due diligence that we've done over the last 4 or 5 months and having inside knowledge of the business because people understand the industry and the players, we believe it's a strong cultural fit for this company. I'll move pace now on to Critical Communications. Really in Critical Communications, we've gotten off to a good start for the year. So we had a strong first half, and that will continue. We'll finish the half at around about $28 million or $30 million in revenue, which is a great improvement on what we've seen in previous years. So we're just about at the stage where we're completing CASCADE. And for us, it's now all about transitioning from a product business to a solutions business, similar to what's happening in our tactical communications markets. And in the future, we're always open to assessing opportunities to continue to expand customer value, and we can talk more about that in time. We have a couple of slides on Metal Detection. One of the things that we want to try and answer today was, where has the growth come from and how sustainable will that growth be? There's really 4 areas. The first one we've spoken about already, which is really the money that we've poured into developing new products and really taking our competitors to task at every price level and every market and in every product segment. We've also focused on geographic expansion. We now have offices in Dubai. We've recently opened offices in Brazil and... [Technical Difficulty]

Please standby, we'll recommence the conference shortly.

Okay. Thank you. Apologies, we've changed methods. And now hopefully, this will be the last of the interruptions. Not sure where I got cut off so I'll go quickly through this slide again. Product innovation, we've spoken about. Geographic expansion and mass market reach, we believe, are elements of our growth strategy that are sustainable going into the future and why we think that this growth is a sustainable growth. So we have more products going into more markets through more channels. We have a customer engagement strategy, which supports that. And that really is about our online and social media presence. And that really is starting to give us a lot of confidence and a lot of customer feedback, which is allowing us to be very agile in the way that we throw our growth strategy out. The GPZ -- GPX 6000, rather, is a brand-new product that will be revolutionary, we believe, in high-end gold detecting. It's a product that's been purpose-built for the African market. It's plug and play. It's simple to use, lightweight, collapsible, waterproof and at a price point that sits below the GPZ but is still very attractive for us. We will launch that product -- we have launched that product, that we will see meaningful volume come through in Q4. With respect to Minetec. I think we're strengthening our partnership with Caterpillar. And as each day goes by, we're beginning to operate more seamlessly. Caterpillar is taking us into markets and customers that we have not had the ability to access previously. And so whilst it's been slower than all of us would have hoped, we think there's some light at the end of the tunnel with respect to some profitability in the first half. And we expect to try and continue to grow this business during the second half. We now have the financial results panel, which I will hand over to Michael to quickly step us through.

Yes. Thanks, Donald. I think in a half where we've had record sales and record profits, we'll step through this relatively quickly. Donald's already mentioned that the growth in sales really came from the recreation and the gold parts of our business, and we've stated the growth rates in the slide deck. So very strong performance. We've maintained our gross margins in the business, and that's despite incurring some significantly higher freight costs due to COVID. So pleasing that we've held margins. And our profitability margins at the EBITDA and the EBIT level will increase quite significantly as we achieve higher sales and being able to leverage our cost base. And Donald has mentioned, we've kicked off H2 in a similar vein. So we're -- we've had a fantastic result. And that looks to continue into the second half. On the engineering side, these charts, similar to what we've presented to the market previously. We continue to invest at record levels in our business. We've got more engineers than ever before. Some of the slight reduction in dollar value of spend in this half was really just due to the timing of our projects and not having as much external cost in our business over the half year. But still investing at very strong levels and have quite a strong pipeline of projects about to come to the market like the GPX 6000 that Donald's mentioned. Our cash generation also has been excellent. Codan has got a long history of converting its profits into cash. H1 was no different. We seek to continue to invest in inventory in the second half. We think that's an investment that we need to make in our business. So hopefully, when we get to the end of June, you'll see that we have invested some additional inventory into the business.

Okay. We'll finish off now with the outlook for FY '21. I think you've seen the flavor of this presentation is that we are well positioned for this financial year. We have a record first half and we've got a very strong start for the second half. January was a record month for us. That's in the history of the 63 years of Codan's operation. We are launching our GPX 6000 in Q4. We'll have meaningful sales in Q4. Communications will have a better second half. There's a strong backorder in excess of $40 million as we entered the period. And we just shipped the large African contract, which is $13 million in February. We just made the announcement that we bought DTC. Now DTC still has a couple of things required for us to go through from a U.S. government statutory requirement, something like foreign ownership and ITAR, which is International Traffic in Arms Regulations. These are really tick boxes. We are a Five Eyes country. We've already been told that this is really something that just will take time for the government to assess and give us the approvals. And so we're expecting that to happen by the end of April, in which case we will settle the deal and commence ownership and operation of this business. So we'll continue to keep the market updated, particularly given the moving parts that you see in front of you there as and when things unfold. But suffice it to say that we have a high degree of confidence that we will finish the year in a very strong position. That brings us to end of our presentation. So I'll give it back over to the moderator.

[Operator Instructions] The first phone question comes from Aaron Muller from Canaccord Genuity.

You hear me okay?

Yes, Aaron, thank you.

Congratulations on a great result. Look, I just wanted to touch on the $35 million in Metal Detection sales in January. Can you maybe just talk a little bit about the split between gold and consumer? And any particular geographies that you're seeing strong demand, obviously, outside of Africa? And then I know you've mentioned that the launch of the GPX 6000 isn't going to be until the fourth quarter where you expect meaningful sales. But does the $35 million include any sort of forward orders at all? Yes, that's probably it.

Okay. Thank you. No problem. No forward orders. This is orders that we have taken and shipped. So they're not been shipped to warehouses either. So this is real demand in the market. And the split was interesting. It was about $12 million in consumer, which was the highest we've done in consumer. And the balance in gold with a little bit of countermine but not a lot of countermine. So really, high sales across the gold market and split reasonably well across the developed and developing world. So we're seeing most of these sales probably take place into about 8 or 9 African countries, but very, very strongly supported by gold sales into places like Central and Latin America and other parts of Asia Pacific.

Okay. And in terms of the -- I mean, obviously, it's a big jump on the average for the first half, which I think was about $26 million a month. I mean were there any trends in the first half that sort of led you to the $35 million, i.e., did it sort of start in July, let's call it, $20 million and then finish at $30 million in December? Or has it been a gradual increase in demand?

I look at you and call it a linear conversation. So the conversation has been, we've done, on average, $26 million, and that's moved around during the 6-month period. So we've had months that have been less than that and months that have been stronger. So you can't really draw a linear conclusion from what we've seen. But certainly, what we're seeing now is the second half is certainly biased to being stronger. And of course, we were a bit nervous having seen the strength of our first half, and if that second half skew would, in fact, take place. It does look like it's starting strongly. We've had a good start to February also. So at this stage, so far, so good.

So do you think that could be similar to January?

I wouldn't speculate at this stage. We're halfway through the month. And remember, our lead time is like 3 days on orders. So that really just depends on the consumption of our market and the rate at which they order from here, that bill gets conceivable. But at this stage, it's steady as she goes and very strong, which is good.

The next phone question comes from Elijah Mayr from CLSA.

Congrats on the great results. Just a quick follow-up from the sales guidance in January. I'm conscious that there is a second half skew with the sales in metal detectors. Is there any sort of weighting -- particular weighting across the months? Like, historically, is January a particularly strong month? Or is that sort of considered standard during the second half?