Codan Limited (CDA) Earnings Call Transcript & Summary

[Audio Gap] Managing Director and CEO and joining me today is our CFO, Michael Barton. As announced at our half year results, Michael will be retiring at the end of August after more than 22 years for Codan. Over this time, Mike played a pivotal role in shaping Codan's financial discipline, capital allocation framework and acquisition strategy. On behalf of the Board and the broader team, I like to once again since be thanking for his contribution to Codan. I'm also pleased to confirm that Kayi Li, currently our Deputy CFO, will succeed, Michael, at the end of the month. Kayi has also been deeply involved in our financial strategy and operational execution, and we remain confident in our continued seamless transition. I believe Kayi's appointment is a strong demonstration of our succession planning and development processes in place at Codan. Kayi and I look forward to meeting with many of our investors at our results roadshow in the coming weeks. Questions are welcomed throughout today's presentation and will be addressed at the close of the session. coordinated by Sam Wells and NWR. Research analysts can raise their hand by Zoom to ask a live question while all other attendees are encouraged to submit questions using the Q&A function. Before we begin, please take a moment to review our standard notice and disclaimer. Today, we'll begin with full year performance highlights, followed by a detailed review of each of our 3 business units, DTC, Zetron and Minelab. We also highlight some select products that contributed meaningfully during the year, demonstrating how our Greegwide engineering investment is translating into commercial outcomes across business units. We'll then revisit our strategy and near-term priorities before closing with our outlook heading into FY '27. For those newer to Codan, we are a global group of technology businesses focused on critical communications and detection. Our technologies are designed for mission-critical environments, keeping people connected, informed and safe in demanding and offer remote conditions. We operate across defense, public safety, gold detection and recreational markets, supported by global footprint and strong engineering capability. At our core, we focus on reliability, performance and long-term customer relationships, particularly in the environment where failure is not an option. Our strategy to build a stronger Codan remains consistent and disciplined. It is underpinned by sustainable organic growth, targeted and accretive acquisitions, continued engineering investment and strong operational execution. Diversification remains a key strength and is a key part of our results this year with Minelab communications, both delivering excellent performance. Over time, this approach is building a more resilient and diversified earnings base with improved visibility and quality. At a high level, the group's FY '26 performance reflects disciplined execution of our strategic plan. The strength of our differentiated technology and product portfolio and our ability to capitalize on long-term structural growth opportunities across our target markets globally, underpinned our outstanding performance. Our Communications segment continues to deliver high-quality growth with revenue exceeding at the top end of our FY '26 target range. Metal Detection also delivered excellent performance, driven primarily by gold detected demand globally. Our strategy to invest heavily in engineering is what enables these outstanding results. This ongoing investment maintains our product and technical leadership across our businesses and drives our organic growth strategy. Turning to the numbers. At the group level, year-on-year revenue grew 30% to $875 million, reflecting strong organic growth driven by ongoing high demand for unmanned systems and new gold detector products as well as a full year contribution from Kägwerks. EBIT and NPAT increased by 67% and 69%, respectively, demonstrating continued improvement in operating leverage across the group with both measures slightly above the guidance provided to the market on the 29th of April 2026. This reflects both revenue growth and improved product mix, particularly within Minelab and DTC. The Board declared a fully franked final dividend of $0.29 per share taking full year dividends of $0.485 per share, up 70% year-on-year, consistent with our disciplined capital management approach. I'll now hand over to Michael to step through the financial detail.

Thanks, Alf. As highlighted, group revenue increased 30% year-on-year versus FY '25, Strong revenue and profit contribution from both our communications and metal detection segments. Expenses increased during the year, primarily due to targeted investments in strengthening the group's go-to-market resources, product launch costs, systems, processes, and capabilities to further scale the organization and higher performance-related remuneration. NPAT margins improved to 20%, which was up 5% versus FY '25, more than offset the increase in expenses and reflected an improved product mix and a continuing improvement in operating leverage. Overall, the financial results reflect both strong performance and continued investment in capability. Codan finished FY '26 with a very strong balance sheet. Net cash of $36 million, which was an improvement of $124 million versus the net debt position of $88 million as at 31 December '25. This reflected the accelerated growth in revenue throughout the second half and strong cash collections. The group balance sheet is in a very strong position with substantial funding capacity including a $250 million undrawn debt facility and a further $150 million in accordion capacity available subject to bank approval. These facilities provide Codan with financial flexibility to pursue our strategic inorganic growth opportunities. Our balance sheet remains a competitive advantage in executing on our strategy. Engineering investment during the half totaled $78 million, representing approximately 9% of group revenue. This level of investment is consistent with our long-term approach and support product development pipeline across both communications and metal detection. In communications, investment is focused on advanced tactical platforms next-generation radio wave forms and the SALUS integrated command control platform. Within Minelab, investment continues to support product refresh cycles and technology leadership globally. This sustained commitment to innovation underpins our organic growth trajectory. Back to you, Alf, as we take a closer look at our 3 core businesses.

Thanks, Michael. We'll now move on to the business units. Communications revenue grew 22% to $506.2 million, slightly above the top end of the targeted FY '26 15% to 20% range, driven primarily by strong demand for unmanned systems. The revenue from defense customers represented 58% of total communications revenue, up from 38% in FY '25, underscoring the importance of this vertical to Codan and reflecting the global tailwinds of sovereignty and increased defense spending commitments. Communications segment profit increased by 45% to $156 million with segment profit margins expanding to 31%, up from 26% in FY '25. This reflects strong revenue growth, product sales mix and operating leverage. Pleasingly, the Communications segment exceeded the achievement of 30% profit margin by 18 months. Order book increased by 50% year-on-year and by 29% versus December 2025 to $380 million at 30th of June, driven by a strong uplift in order intake across both DTC and Zetron and providing strong revenue visibility into FY '27. DTC delivered another exceptional result in FY '26, underpinned by defense and unmanned systems applications demand across all geographies. Revenue from the high-growth unmanned sector more than doubled to approximately $215 million. Throughout the second half, we saw continued acceleration in unmanned revenue across both conflict regions and nonconflict defense and security programs in the U.S. and Europe. Within DTC, product innovation included ongoing development, multi-waveform radios, along with enhancements to the existing Blue SDR range, aimed at offering improved network visibility, spectrum monitoring software and alternative antenna solutions. This innovation led to DTC securing its first orders for the sale of radios into multiple programs of records for the U.S. military initiatives to drive sovereignty. Lastly, at the end of July, Codan completed the acquisition of Adaptive Dynamics, which we'll elaborate on in a couple of slides. We include on the next slide, an overview of the Blue SCR family of products. DTC's Blue SCR radios are suitable for a huge range of unmanned platform in all domains across air, land and sea. In the air domain, which is by far the largest volume of units sold. The Blue SCR range finds applications on platforms on small motor drones through to much larger strategic surveillance platforms. The U.S. Department of War drying categorization system consists of 5 broad groups from Group 1, the smallest and typically the lowest cost tactical drones through the Group 5 large multimillion-dollar strategic platforms often deployed at ranges of thousands of miles. DTC sweet spot today stretches from the high end of Group 1 through to group 3. The acquisition of Adaptive Dynamics will help us to compete with very high-end and high-priced military radios, typically deployed in this space by delivering increased resistance to jamming and interference. Our Blue SCR radios have been proven to be highly effective in both conflict and nonconflict defense environments for their secure and resilient waveforms and their ability to withstand the harshest field conditions. Turning to the acquisition of Adaptive Dynamics, which was first announced in May. ADI is a U.S.-based engineering company specializing in the development, anti-jamming and interference mitigation technologies, critical to the resilience of tactical communications. A highly strategic acquisitions for DTC. ADI meaningfully enhances DTC's U.S.-based technical capabilities in unmanned systems and strengthens its ability to compete for the next-generation U.S. and allied defense programs, which require secure communications, electronic warfare resilience and AI-enabled integration in contested electromagnetic environments. ADI also provides us with a strong team of people and capability, which will continue to be integrated into our DTC North American team. We also anticipate the ability to cross-sell in time into public safety markets. We look forward to updating the market further as we continue to integrate this business. In the first half of FY '26, Zetron was impacted by a temporary slowdown in federal procurement and contracting cycles in the United States. Second half revenue was broadly in line with the first half as guided in the trading update we released on the ASX on the 29th of April. Positively, order intake strengthened towards the end of the second half. resulting in a 25% increase in Zetron's order book as of the 30th of June 2026 versus the 30th of June 2025. Key wins included a $19 million contract with 1 of the largest utilities on the East Coast, $11 million mission-critical services contract with the U.K. Emergency Services Network, and an $8 million radio communications modernization contract for a major provider of the underground transport services in London. Zetron also continued to receive strong order intake from its hosted services Iowa contract, which now services more than 80% of all public safety answering points across the state. Looking forward, Product development activity remains focused on sales, which is designed to provide a unified cloud-based software and services platforms at Zetron's command control applications. On the next slide, we include further detail regarding the features of the SALUS platform. At its core, SALUS is designed to provide a unified interface and experience for the control room personnel. We believe this will enable the most optimal responses to be made during the most stressful events and emergencies. Providing a unified control room service in the form of a modular application maintains Zetron market-leading interoperability while minimizing the time it takes to respond to a call. Customers will be able to choose when and how they move to SALUS, either on-premise, via the cloud or a hybrid approach. Customers will be able to choose when and how they move to SALUS. either on premise, wider cloud or a hybrid solution. Customers can also receive expanded and enhanced services and support from a managed services or life cycle solutions frameworks. We believe SALUS will generate meaningful value for Zetron across multiple dimensions. These include: growing recurring revenue by hosting and managed services solutions achieving high customer lifetime value through cross-selling opportunities and margin expansion by our software-led model and scalable cost base. Additionally, we are confident that SALUS were enabled Zetron to equally serve Tier 4 through the Tier 1 customers, leading to a substantial expansion in our obtainable market. Turning to Minelab. Minelab's full year results were exceptional with revenue up 42% to $362 million and segment profit of $162.4 million, up 65% versus FY '25. As guided in the trading update, Minelab delivered a stronger second half with 15% revenue growth in H2 FY '26 when compared with H1 FY '26, supported by successful product releases. Segment profit margin increased to 45%, up from 39% driven by revenue growth, product mix and operating leverage. Minelab successfully launched 4 new products in FY '26 in the gold, recreational and countermine markets, including the new flagship GPZ7000 gold detector the Gold Monster 2000, the Vanquish 60 and Counter mine MDS 20 detector. These launches reflect Minelab's global technology leadership across its detection platform. Minelab's rest of the World achieved significant growth, increasing revenue by 32%, driven by the strong uptake of the GPZ8000 as well as the Gold Monster 2000. Substantial growth in the Vanquish range and a meaningful expansion in distribution footprint and retail presence in Australia and North America with additional in-store placement across key retail channel partners. Minelab Africa delivered another outstanding performance with revenue increasing in all regions to approximately $184 million, up 60% versus FY '25. The Gold Monster 2000 was launched successfully exceeding business case expectations. A key near-term priority is driving adoption of the GPZ8000 across Africa with training and grassroots activation activities continuing in FY '27 as market awareness and adoption builds. This slide describes the GPZ8000 in more detail, including key features and enhancements relative to the 7000 model. resounding customer feedback for the GPZ8000 is that it represents a significant advancement in performance, particularly in highly challenging ground conditions. Minelab continues to invest in product innovation and engineering to reinforce its leading position in recreational and specialist detection markets. Now I'd like to move on to the strategy update section of today's presentation. Our strategy remains anchored in 3 core pillars: first, investing in ourselves, strengthening systems, processes, people and product innovation. Second, strengthening our core businesses, expanding addressable markets, improving revenue quality and increasing recurring revenue components. And thirdly, disciplined capital allocation, pursuing strategically aligned and accretive acquisitions that enhanced capability, scale and market penetration. Together, these pillars support sustainable, diversified earnings growth, we made significant price press against each of these strategic pillars in FY '26 as outlined in the slide. Our near-term objectives are focused on executing key initiatives across each business. In DTC, we are focused on the integration of Adaptive Dynamics electronics warfare capabilities, ongoing investment in a dismounted soldier ecosystem and continued investment in our next-generation and multi-waveform strategy. In Zetron, we are seeking to complete the launch of our end-to-end services-based emergency response platform, expand market share by Zetron's next-generation computer-aided dispatch solution in the U.K. and completing and advancing the development of our sales cloud-based platform. In Minelab, we are focused on accelerating market growth by the 4 new detector launches in FY '26, advancing North America and European retail expansion and targeting e-commerce and channel engagement strategies. All these initiatives support both near-term performance and long-term structural improvement. This year, as guided by Codan's core values, we introduced quarterly value awards, a chance to formally recognize people across the business who are living our values today. It's been a great addition to our culture. On community, we've continued our long-standing support for a range of organizations, variety, youth opportunities, Kickstart for Kids, Hutch Street Center and Catherine House. These are partnerships we're generally proud of. From an education perspective, we've deepened our investment in STEM through university scholarships, student mentoring and industry engagement. And this year, we are awarded the inaugural Codan Founders PhD scholarship, which is a significant milestone for us, and we also continued our support for Ilari and indigenous education scholarships. And on the environmental side, Minelab's Clean Sweep campaign has been a real standout using our detector community to help the environmental stewardship. It's a great example of what our products can do beyond their primary purpose. Underpinning all of this are our 4 values you see at the bottom of the slide, customer-driven, trust and integrity, high performing and can do. These aren't just words on the wall, they shape how we run the business every day. Next, I'd like to turn to our outlook section, looking at our view into FY '27. The group continues to deliver on the strategy of building a stronger Codan. Our strategic pillars of investing in people and systems, product development, strengthening Codan's position in core markets expanding in new geographies and disciplined capital allocation will continue to guide our focus in FY '27. Market conditions remain positive across both comps and metal detection. Elevated defense spending and ongoing geopolitical tensions globally continue to generate strong demand for unmanned systems, while mine lab benefits from demand for its market-leading products and a favorable gold price. Some constraints are emerging across certain parts of the global electronic supply chain, which we are monitoring for any impact to co-own operations. The communications business targets long-term sales growth of between 10% to 15% per annum. And as demonstrated over FY '24 to '26, this target growth range can be exceeded. As a result of unprecedented levels of demand we are experiencing, primarily in unmanned systems, we expect the first half of FY '27 to significantly exceed the first half of FY '26. Given the strong start to the year, subject to related supply chain constraints resulting from ongoing order momentum, we are currently targeting full year FY '27 revenue growth in the order of 20%. Minelab is well positioned for FY '27 with a full 12-month contribution from recently launched products. Early first half market conditions have been positive, with strong demand, in particular for the new GPZ8000 and Gold monster 2000 detectors. As a result, both Africa and rest of the world are currently tracking broadly in line with H2 of FY '26 revenue run rates. Overall, Minelab H2 FY '26 average monthly run rate was approximately $32 million, 15% higher than H1 FY '26. With a strong balance sheet and disciplined approach to capital allocation, the group remains well positioned to continue to invest in product innovation and capability and to pursue future acquisitions that fit our product and technology road maps, enhance the quality, resilience and the diversification of our earnings. We look forward to providing a further update at the Annual General Meeting on the 20th of October 2026 and with that, this draws us to the end of our formal presentation session. We can now move to Q&A session with Sam. Thank you very much.

Thank you very much, Alf, and thank you, Michael. As a reminder, the audience may ask questions of the management team. [Operator Instructions] Firstly, we'll start with a couple of presubmitted questions. On unmanned revenue split in the first half of '26, you stated that unmanned revenue was approximately 50-50 between conflict and non-conflict. Can you just state what the split was for the full year FY '26, please?

Yes. Thanks, Sam. I think both parts of the business have grown really strongly, both conflict nonconflict doubled over FY '26. .

Okay. Great. And just on supply constraints, you referenced a potential supply constraint from ongoing order momentum. Can you elaborate here? Excuse me...

Yes, sorry, Sam.

Sorry. And are you witnessing this already? Or what level of growth could possibly constraints kick in?

I guess when you look at businesses like Minelab and DTC, where we're fundamentally making assumptions on forecast 6, 12, 18 months ago. So the demand we've seen has really outpaced our original forecast, which have been continually updated. So the outperformance in demand, really when we're looking forward, probably into H2, we're sort of seeing that we need just to continue to upgrade our forecast. And that's always a lag in time. So we haven't seen any impact at the moment. All we're saying is from a constrained supply -- electronic supply chain environment globally, not really specific to Codan. We're just monitoring those forward forecasts and ensuring that we've got the right supply of components.

Thank you. Next question comes from Josh Kannourakis at Barrenjoey. Josh, please unmute your line and go ahead.

Congrats on the result. First things first, just on following on from the questions on man. Can we talk a little bit in terms of markets and some of the opportunity you see in front of you now, specifically interested in U.S. and U.S. defense. I know there's quite a few hoops to start jumping through to be considered within that market. Where are you in terms of that journey? And if you can give us any more context around maybe some of the broader geographic specs in terms of how you're seeing the outlook.

Yes. So when -- as Michael mentioned, our unmanned market in conflict and nonconflict areas has limitedly doubled previous statements in the past. So DTC's performance over the last 3 years and very solid performance in market. That reputation has drifted into the U.S. into the Asian area as well. We're on blue list at the moment in the U.S. So it really positions us well with a lot of the sovereignty projects that the U.S. are currently working on in unmanned systems. So we have received first orders for some of those sovereignty projects in the U.S., which is a pretty -- it's a significant milestone for DTC. And it also backs up our investment in the U.S. with expanding our staff there and our capabilities on the ground. So -- and secondly to that, obviously, we've entered into some R&D projects with some countries in Asia to actually also progress their sovereignty when it talks about unmanned systems.

That's perfect. Exactly what I was looking for. And then just in terms of, I guess, the Adaptive Dynamics acquisition, that certainly looks obviously, they've got a really strong research background. They've got some product and IP market. When you sort of look at what the future of unmanned looks like going forward, how -- can you maybe just talk to us a little bit more about how that plays into it? And I guess, where you think that could position you versus some of the other key competitors, for example, like Silvus in the market longer term?

Yes. When you look at the acquisition of Dated Dynamics and you look at what we fundamentally do. And I thought that the slide we had on the types of drone is powerful where we've really gravitated from a type 1 drone common supply to type 2 and type 3. And in the missions that we are performing with those unmanned systems, your fundamental reason for being is to ensure that you can transmit data and comms, ADI, Adaptive Dynamics fundamentally gives us reassurance that really contested environments like electronic welfare environments. We will have the capability to continue to transmit I'm not a technical expert on the servers radio anti-jamming features, but I am confident that the products we have today in DTC and the inclusion of Adaptive Dynamics ensures that robustness in communications in [indiscernible].

Next question comes from Elijah Mayr at Goldman Sachs.

Congrats on the result cracker result. Just following on, I guess, from unmanned. As you sit now, how much forward visibility do you have on unmanned? And is that starting to lengthen as the industry develops?

I think you need to -- in some markets, you probably have 4- to 6-month visibility in some markets, you would have less -- I always say at a maximum, it's a 4- to 6-month visibility market. You're really backing into other people's forecast, and they may vary. So that would be my sort of time frame on it, Elijah.

Yes. And then just maybe on a margin guidance perspective for comms, you previously talked about you've reached and exceeded that. Looking forward and with the 20% comms growth guidance, what should we think about for FY '27 or maybe on a medium-term basis, just noting that we should expect some reinvestment back into the segment. How do you think about those margins expanding now? And will you put sort of some targets on a medium-term basis for that comm segment?

I think we set the target a number of years ago at 30%. So we're really pleased to get there in FY '26, Elijah. We're not resetting that target range. This is a business that is growing really strongly, and we need to keep reinvesting in it, both in our go-to-market and in our engineering resources. So -- if we keep growing at 20%, we would expect some incremental improvement, whereas we achieved a step change in improvement in FY '26. So we're probably we would hope this business is in that low 30% range.

Next question comes from Mitch Sonogan at Macquarie.

Congratulations on good results. Just on to the unmanned segment, just in terms of that revenue, $215 million, correct me if I'm wrong, that's somewhere around $140 million in the second half, but you've also seen an acceleration of revenue through that second half and talk to the first half '27, significantly exceeding that period. So -- can you give us any sense of what we should be expecting into that first half, noting you've talked about a 4- to 6-month period of visibility?

Yes. I think the best way to think about it, we have given some targets for the full year, circa 20% growth for FY '27. This is not a seasonal business that has a normal H1-H2 split. It really is driven by projects and opportunities and where they -- what quarter are they landing or what half they land in. So I think you will see some significant improvement H1 on H1 of the but I wouldn't be building in seasonality in FY '27. .