Good morning, everyone, welcome to the Codan Investor Webinar for the half year results ending 31 December 2022, or half year FY 2023. Joining me from the company today is Managing Director and Chief Executive Officer, Alf Ianniello, as well as Chief Financial Officer and Company Secretary, Michael Barton. Following a brief summary of the results released to the ASX this morning, investors and research analysts will have the opportunity to ask questions. There'll be a choice of two options. First, you can submit written questions via the Q&A function at the bottom of your screen. Alternatively, if you raise your hand via Zoom, You can ask a verbal question of the management team. We just kindly ask that you limit your questions to two per person, we'll endeavor to get to all questions. Thank you, over to you, Alf.
Thank you. Good morning. I'd like to welcome everyone to the FY 2023 half year results presentation for Codan. I'm Alf Ianniello, the CEO. Alongside me, I have Michael Barton, CFO and Company Secretary. I'll be presenting the business portion of the presentation, while Michael will present the financial summary. Post the presentation, we'll field any questions that may arise. The group delivered revenues of AUD 212 million, which is towards the upper end of the AGM guided range. Net profit after tax was AUD 30.8 million, which was slightly above our expectations in a challenging macro and geopolitical environment. The results reflect ongoing disruptions in Minelab's African market, offset by strong organic growth in communications.
Pleasingly, communications exceeded revenue guidance, growing the top line at 16% against prior corresponding period, while the forward order book is also growing at 16% versus the 30th June, 2022. As you would appreciate, the strength of the order book is typically a lead indicator in predictability of future revenues. This should be an encouraging sign as the group continues to work hard to provide sustainable and profitable growth for shareholders. This slide shows Codan's recent history since FY 2019. Notably three distinct periods: pre-COVID, the COVID era that defined FY 2021 and FY 2022, and from FY 2023 onwards, what we've termed as a stronger Codan. Pre-COVID, the business was heavily dependent on Minelab, notably our African business, with 70% of revenues coming from the sale of metal detectors. The second period we've defined is the COVID era, where the business experienced unprecedented COVID impacts.
This was characterized by three key factors. Firstly, government stimulus and COVID-related demand, driving significant growth in the rest of the world metal detection sales. Secondly, unprecedented demand for metal detectors in Africa as people temporarily moved away from traditional forms of employment during the crisis. Lastly, we experienced supply chain challenges pushing up inventory. Critically, during this period, Codan paid AUD 174 million in cash to purchase both Zetron and DTC. Two fantastic acquisitions for the Codan group, particularly in terms of the company's future stability and success. That brings us to the final period, where the group is focused on continuing to make this business a stronger Codan. We significantly reduced the reliance on Africa, with the African sales making up less than 10% of our first half sales.
In doing so, the company is now much better balanced between metal detection and communication segments. We are focused on increasing predictability of revenues. The DTC and Zetron acquisitions have significantly increased our addressable markets, and we now operate in several key growth markets. We continue to invest in engineering and increase our products and solutions offering to increase market share, and we are focused on cash generation and individual business unit contribution. With these actions, we are confident that we'll continue to build a stronger and more resilient Codan, which will deliver long-term shareholder value. As many of you are aware, Africa has been Codan's single largest market in prior years. While Africa continues to remain a very important market for us, it can be unstable and therefore a highly unpredictable market.
In order to reduce risk and address our strategic goal of generating more predictable revenues and profitability, it is extremely important for us to reduce our relative dependence on Africa. While we remain committed to maximizing African sales, our goal is also to expand sales into other geographies, bringing with it a greater level of stability and predictability. During the half, Africa's revenue reduced to 8% of group sales and therefore is not currently a significant contributor this financial year. I will now hand over to Michael to take you through the financial section of the presentation.
Thanks, Alf. Just as a general statement on the financials, back in October at our AGM, we gave quite detailed guidance around revenue and profitability for each business unit and overall. We confirmed two weeks ago that we had achieved all of those targets or exceeded them. As I go through the financials this morning, I'll just
Hit on the most important points. On the profit and loss performance, as Alf has already highlighted, the reduction in group revenue and profits against the prior period really due to the ongoing disruptions in Minelab's African market. We delivered a net profit after tax of AUD 30.8 million, which was above the top of the guidance range that we provided at the AGM. Our effective tax rate was 22%, which was lower than prior periods, as a result of a greater proportion of our profits coming from our communications business and primarily out of our U.K. operations, with the U.K. having a 19% tax rate. We have noted in the presentation that that U.K. tax rate will increase to 25% later in 2023.
We delivered an NPAT margin of 15%, which was in line with our guidance. The five year chart on this slide shows that FY 2023 is performing in line with the pre-COVID era of Codan. These charts show that historically, Codan has had stronger second half performance, and that seasonality was driven by Minelab's African business. Given the change in that market, that seasonality factor is no longer relevant going forward for Codan. We turn to the balance sheet. In the half, we had an increase in working capital, primarily as a result of an investment in inventory, which increased AUD 11.8 million.
This was due to two factors, one being the investment in new products, specifically the MANTICORE and the EQUINOX 700 and 900 metal detection products, which Alf will touch on later in the presentation. In addition to that, incoming inventory commitments for orders that were placed some 12-18 months ago during the height of the supply chain shortages that many companies faced. The company has scaled back production of our overstocked gold detectors, and therefore we expect this inventory to decline over the remainder of FY 2023 and FY 2024, releasing some of this working capital balance. As announced at the AGM, we expected to end the half with a net debt of circa AUD 70 million. Pleasantly, we achieved a greater reduction than anticipated, and we reported a AUD 61 million debt number.
This was a result of an ongoing focus on working capital management, with both debtors and creditors being well controlled. We expect to be a cash flow positive in the second half of this year. Capital management. Options continue to be evaluated by our board. The company is very focused on maintaining the balance sheet in a strong position. There's an ongoing focus on improving operating cash flow. Cash will be used to enhance and optimize the existing businesses and their product development pipelines and to retire debt when appropriate. Cash will also be used to invest in growth opportunities, as we announced this morning with the GeoConex acquisition, when that's deemed to be the best use of capital by the board.
As mentioned at the AGM in October 2022, an on-market share buyback remains under consideration, and the company has no intention to change its dividend policy. I have a slide that just shows the change in our net debt position over the half. Which shows operating cash flows of circa AUD 31 million after allowing for the investment in inventory. With key investment in CapEx engineering, as mentioned, and inventory, net debt did increase to AUD 61 million at December. As we work through this excess inventory over the next 12 months- 18 months, we'd expect positive cash generation at a reduction in net debt. During the half, we continued critical investment of AUD 23 million into engineering, which further strengthened the pipeline of products and solutions that we have.
It represents about 10% of our revenues that have been reinvested back into product development and innovation. Investing in product development remains a key strategic initiative for Codan. Our technology roadmaps support short, medium, and long-term growth opportunities. Codan has a really robust product development process, which has proven to be a key strength of Codan's. Our willingness to invest and innovate is being successfully replicated now in our, in our major acquisitions of DTC and Zetron, so that we can continue to deliver great products to the markets that we serve. Importantly, our engineering investment is well distributed right across our key businesses and all of their growth markets. I'm gonna hand back to Alf to take us through the business units and the outlook section of the presentation.
Thanks, Michael. Each of our three business units, Minelab, Tactical Communications, and Zetron, have in-depth thousand-day strategic plans. This slide summarizes some of the key near-term objectives. Minelab continues to focus on promoting the recently launched new products, increasing sales through e-commerce, and expanding geographically. This is in conjunction with rebuilding and maximizing sales in the African market. Tactical Communications continues to enhance their offering as a full solutions provider and penetrate key adjacent markets. We continue to invest in go-to-market sales capability within this business with dedicated resources across all key growth markets. Our strategy to invest in product development will allow us to serve large addressable markets and have the opportunity to participate in large multi-year programs, as such, create sustainable revenues into the future. Lastly, Zetron is focused on expanding and growing their system solution and support contracts.
As per the announcement this morning, the team will be focused on successfully integrating GeoConex with Zetron. While we are still relatively early on in our sustainability journey, we have a dedicated sustainability council, and we are currently applying globally accepted principles and frameworks. The sustainability council has several initiatives across each ESG pillar. For example, we are committed to reducing our carbon footprint, and this year we have engaged consultants to help facilitate this process. We look forward to reporting our progress when we publish our fourth sustainability report in Q3 of this calendar year. Minelab's revenue of AUD 74 million for H1 FY 2023 was just below the range provided at the AGM, which was AUD 75 million-AUD 80 million. Minelab's segment profit margin of 31% was consistent with the AGM guidance.
In Africa, Minelab's personnel are actively promoting and educating artisanal miners on Minelab detectors. The company believes the market represents a medium-term rebuild opportunity within Africa. Elsewhere, our rest of the world revenue was AUD 61 million, representing a decrease of AUD 8 million on the prior corresponding period after adjusting for the ceased Russian market sales. Most of the reduction relates to the timing of project wins in Countermine. Pleasingly, despite the three distinct periods within Codan's recent history, the sale of metal detectors into recreational markets have remained remarkably resilient. These sales are performing at a consistent rate with prior periods, which were fueled by government stimulus and COVID-related demand. Consistent with our growth strategy, Minelab has introduced three detectors that are specific to the rest of the world recreational sales being the MANTICORE, EQUINOX 700, and EQUINOX 900.
The first shipments of these products took place in December, feedback from the customers so far has been very positive. To elaborate on these products, MANTICORE is the first high-end coin and treasure detector we have launched in 10 years. This product operates with improved depth and discrimination. With fast recovery speeds, the MANTICORE also locates and discriminates closely spaced targets. While two-dimensional discrimination provides improved identification of targets. Since the product has been made available for sale, the feedback has been very positive and is exceeding our internal expectation at this point in the release cycle. Moving on to EQUINOX 700 and 900 . This is the next generation of our existing Equinox products, which also has improved depth and discrimination. Another key feature is its collapsible carbon shafts, providing the customer a lighter weight product that packs considerably smaller than previous models.
Again, these products are the direct result and output of prior engineering investment to drive innovation, a core feature of the Minelab business. Turning now to Codan Communications. In a really pleasing result, this segment delivered a strong first half, with revenues increasing by 16% to AUD 136.6 million, with both Tactical and Zetron contributing to this growth. First half revenues not only exceeded guidance that was provided at the AGM, but also exceeded internal expectations. To reiterate, the key reason for the AGM guidance revenue range was the lack of certainty regarding the shipment of product for the large communications project announced in October 2021. Despite only partially shipping against this specific project during the half, we still managed to exceed this range. H1 FY 2023 communications segment profit margin was 25% versus 21% prior corresponding period.
A pleasing result as the company continues to target long-term communication segment profit margins of 30%. As previously mentioned, communications is supporting the company's objective to continue to grow revenues with greater predictability. A tangible achievement during this half was not only growing communications revenues by 16% But also growing the forward order book by 16% to AUD 173 million from the 30th June, 2022. As a lead indicator of future revenue, this provides us with confidence heading into the second half. Tactical Communications experienced a very strong first half, driven by growth in revenue, orders and opportunities across all key growth markets being unmanned systems, military, law enforcement and broadcast. Tactical Communications has also succeeded in its strategy to diversify revenue across these adjacent markets.
A specific example of this is the size, weight and power of our Tactical Comms software-defined radio. A differentiating feature of our technology suite with direct application within unmanned systems markets. In this market specifically, we have seen an increased demand due to the ongoing Ukraine conflict. Again, a consistent feature across our entire group. This business will continue to invest in its product and technology roadmap across all key growth markets. As a result, we eagerly anticipate new radios currently under development, which will provide future growth opportunities. Zetron also achieved a very strong first half as this business continues to realize the advantages and synergies of the integrated Zetron business. We have seen increased demand for our complete command and control solutions, and as we increase installations, we also increase the number of support contracts, typically a more reoccurring source of revenue.
Pleasingly, the first half support contracts made up approximately 30% of revenues, again, providing enhanced predictability of future revenues. Zetron is focused on increasing the proportion of support contract revenues in the future, targeting over 50% over the medium term. As announced this morning, Zetron acquired 100% of GeoConex shares. GeoConex technology portfolio consists of computer-aided dispatch and mapping solution. These systems are utilized by dispatchers, call takers and phone operators in emergency call centers to prioritize and record incident calls, identify the status and location of responders in the field, and effectively dispatch responder personnel. Importantly, Zetron has had a long standing relationship with GeoConex, spanning across 13 years.
This acquisition is consistent with Codan's strategy to diversify and grow the Zetron business with bolt-on acquisitions that enhance the solutions we can offer to the public safety sector. This acquisition is critical to Zetron's technology roadmap and will position the business to maximize the opportunity for the next generation 911 U.S. government funding to upgrade the suite of emergency response communications. This slide illustrates key products and markets, and the boxes highlighted in green is where GeoConex technology forms part of the Zetron solutions offering. Why did Codan acquire GeoConex? CAD is the largest and fastest growing segment of the public safety control room market. The tier three and tier four public safety market is fragmented. Zetron's competitive advantage is that it is a full solution provider. Therefore, it was important that we controlled the IP.
Further to this, CAD is a critical component in our next generations of products, and any in-house development would have taken significant time. The GeoConex technology is absolutely core to our technology roadmap, and we are very pleased to own this IP. In terms of the remainder of FY 2023, when we consider the second half of FY 2023, there are a few key factors to note. Rest of the world metal detection second half revenues are expected to exceed first half, primarily driven by the new product releases. The African gold detector market is likely to remain soft. The company expects full year communications sales to grow between 10%-15% versus prior corresponding period. We will closely monitor global geopolitical and macroeconomic conditions.
In light of these considerations, the board is not in a position to provide full year guidance, but we will continue to keep shareholders updated as the year progresses. In closing, I'd like to recap a couple of key points highlighted within today's presentation, particularly as we strive to become a stronger Codan and generate sustainable value for shareholders. We have a more diverse earnings base across our business. We have significantly reduced our reliance on Africa as we continue to lay the foundations to achieve more predictable revenue streams. We have grown segment profit margins across our communications segment. We continue to invest heavily into product development, which will have us well placed for the future. We seek to further strengthen the balance sheet with a focus on working capital and flexibility. Codan's focus is to deliver sustainable revenue and profitability growth.
We are confident that these strategic initiatives currently in place will position Codan to not only grow market share, but also expand our products and solution to serve new and adjacent markets. Thank you very much for taking the time today. Sam, I'll hand back over to you.
Thanks very much, Alf. All right, audience, we'll now move to our question and answer session. The first question we have is from Elijah Mayr at De La Salle. Elijah, please go ahead.
Good morning, guys. Can you hear me okay?
Yes.
Yes.
Perfect. Just the first one from me, maybe just looking at comms. Are you able to break out how much over has contributed in the first half, 2023, and how much it's expected to contribute in the second half? I think my memory was going to be AUD 25 million still to come through in FY 2023.
Yeah, there's really no significant difference half one, half two, Elijah.
It should be split, sort of yeah, 12.5 each.
Yeah. Ball park.
Maybe just secondly on comms. Are you able to sort of break out, I guess, the assumptions that go into the 10% growth or the 15% growth for the full year? Obviously you got sort of 16% in the first half 2023. Can you sort of just maybe give some color on what will drive that guidance range?
I think we've been consistent, when we talk about comms and its future outlook, that over a full year, we would like to see a 10%-15% growth rate. Due to some of the projects timing in and out, we thought we would provide that guidance for that range of 10%-15% to exit the year on.
No problem. Conscious I've had my two questions. I'll pass it on. Thanks, guys.
Thanks, Elijah. All right. Just as a reminder for the audience, you can ask questions either via raising your hand or submit questions through the Q&A function. Next question, submitted question from Jason Palmer at Taylor Collison. You've called out rest of world, Minelab sales expectations to be larger in the second half versus first half, due to new product releases. Are you expecting this to come from discounting or promotional activity impacting margins?
Thanks for the question, Jason. No, we will not be discounting products. The growth in the rest of the world is predominantly driven by the demand that's been generated by MANTICORE, EQUINOX 700 and 900. That's our expectation.
All right. Next question from Jason is on Minelab Africa. Since the top over the USD gold price and USD movements have become tailwinds for artisanal miners, can you talk to African metal detectors, and how the sales were spread over the first half and any second half feedback on pull-through demand at the dealer level?
Yeah. Thanks for the question, Jason. Really, in terms of how our sales performed over H1, largely consistent. There's no pattern that has backended those sales or anything like that. The sales were relatively consistent Q1- Q2. As we've called out in the presentation, we think that market remains soft in H2. Really the start of our trade in that market for the second half, consistent with what we saw in the first.
All right. Thank you. All right, next question come from, Cameron Bell at Canaccord. Please go ahead. Cameron, please go ahead with your question.
Apologies. Sorry about that. Can you hear me now, guys?
Yes.
Yeah.
Great. Thanks. Yeah, I was gonna ask about Africa going from sort of 69 down to 13, but you've kind of answered that just then. I'll have two other questions if I may. The first one, just on your the comms margins, getting to 30%, you know, when do you think that can happen? Are we expecting much of an improvement in second half?
I think when we talk about the 30% over the last 12 months, that 30% is all driven by operating leverage. If we continue the growth rates we're at, I would suggest within 12 months-18 months, we would be at closer to a 30% contribution margin.
Okay, sure. You guided to that 10%-15% growth. Do you think it's reasonable for us to use that as a, I suppose, a base case, longer term growth rate for the division?
Like I mentioned, when we answered the question for Elijah, we have strong expectation that it's double digit growth, and that's why we bought the two acquisitions. I think there is a good assumption that it'll be double digits moving forward.
Okay, great. Thanks.
Thanks, Cameron. Next question submitted from James Lennon at Petra Capital. Do you have a timeframe or revenue figure that the 30% margin will be delivered from, communications?
I think we just answered that question. Just to put some color around that. You know, we've created a lot of discipline around order book, management and pipeline management moving forward. That's really our foundational work we're doing to ensure we're achieving these double-digit growth rates. That just puts a bit of color that we've created significant discipline to push this forward. I think we've answered that question previously.
Okay. Thank you. Next question from James at Petra. Is there a debt figure that needs to be attained before capital management initiatives will be enacted?
I think that some of the capital management initiatives are really driven by events like acquisitions such as GeoConex, being able to execute on acquisitions such as that. At the moment, we're looking to have a positive second half in terms of cash generation, and continue to look for acquisitions. The timing of those will sort of drive any other decisions the board might make around capital management. There's not a set number as such.
All right. Thank you. I think we've got another question on the line from Jason Palmer. Jason, please go ahead. Your line is open. Jason, please go ahead with your question.
You're on mute, Jason.
Okay, we'll come back to Jason's question. Just on the GeoConex acquisition announced this morning, can you elaborate on the long working history of GeoConex and why now is the right time to execute this acquisition?
Yeah. I think the history, there is a long partnership between Zetron and GeoConex. You know, we've only acquired the Zetron business some 18 months ago. These transactions take some time to come to fruition. And, yeah, we're very happy that we've concluded it now some 18 months after we acquired Zetron.
Okay, great. Thank you. Just the final question today, unless anyone else has any other questions, is on the new products, how significant a milestone are the release of these new products, and what other products do you have in the pipeline that you can talk about?
Okay. I think when you talk about significance and new products, I think these new products again has reestablished why Minelab is the leader in metal detection. They continue to create a significant technology gap to the competitor base, so that's extremely positive. Bringing in the new products after a significant amount of time of that 10-year period really has excited the market again in that in that specific field of recreational detectors, hence creating an uptick in revenue. We have further detectors coming out in H2 and with Minelab's pedigree, we have significant products in the roadmaps going into FY 2024 and FY 2025. Definitely the products have been extremely well received in market.
Okay, thanks. We've just got a few more questions coming in. We might pass to Mitchell Sonogan at Macquarie. Mitch, please go ahead.
Yeah. Good morning, guys. Can you hear me?
Yes. Thanks, Mitch.
Yeah. All right. Just a couple of quick ones from me. Just in metal detection, you've also been expanding your distribution into more retail channels. Just keen to get a little bit of color on how you're seeing that or how you're progressing from a regional perspective. Just following on from that, have you seen any headwinds starting to come through from any potential consumer softness in any regions? It looks like hopefully, I guess, the consumer is holding up better than what was expected six months ago. Just keen to see what you guys are seeing or feeling on the ground. Thank you.
In terms of the ongoing distribution of Minelab, consistent with what we've talked about previously, Mitch, the business is doing very well in Central and Latin America. We've opened our footprint in India, so we continue with that geographic expansion. There's nothing that's changed significantly since we would have spoken last calendar year. It's been more of the same. The second part of your question was around have we seen the impact on our business of the changing economic conditions? So far our business has been quite resilient. The sales in the first half comparable with the prior corresponding period in that part of our market, which has been pleasing.
I think we've got the unique position where we've got some really exciting new products that are coming out and going to market, and that's gonna help us weather some of the uncertainty around the general global economic conditions. We did mention in the announcement that we continue to closely watch the impact of, you know, the economic slowdown and how that may impact our business. We're watching that closely. At this point, we think the new products will offset that.
Yeah. Great. Very clear. Just a quick one on the comms forward order book, growing 16% to AUD 173 million. Are you able to just provide some insights in terms of the expected time of delivery? I guess I'm just wondering how much of that second half growth that you got into in the 10%-15% is coming from the order book as opposed to, I guess, shorter term purchases across the customer base as well. Thank you.
Yeah, Mitch. The order book does represent multiple years of orders. Certainly with a business like Zetron that has sort of 30% of its revenues through support contracts, that means we've got multiple years in that order book number, so it doesn't all translate into revenue in H2. It'd be fair to say both of our communications businesses still have book and ship numbers that they need to achieve in the second half, consistent with where we'd normally be positioned at this time of the year. You know, not really anything different from where we were 6 or 12 months ago.
All right. We've just got a couple more written submitted questions. Can you please speak around what you have seen in the past around coin and treasure metal detector releases and the types of evaluated demand you get from these? Including size of the MANTICORE or NOKTA order books, if possible.
Yeah. We haven't quoted an order book for product releases. Minelab's not normally a business where an order book is relevant. I think the only commentary that we've given is, so far, all of the feedback and the commentary we're getting from our customers has been very positive. You know, time will tell about how successful we are over H2 with that product. Right for now, it's still relatively early in that cycle.
Okay. Thank you. Next question. Can you talk through the Countermine division, how you expect it to perform in H2 and FY 2024?
I think Countermine has a extensive list of opportunities in front of it. One of the key points with Countermine, it's dealing with governments or departments of defense and it's all timely. Countermine will continue to be roughly the same size it's always been. You don't sell significant amount of units, but the value of the units are considerable. The geopolitical environment that's across the globe at the moment is definitely helping that part of our business. With everything, when you actually get a inquiry for a Countermine, then you need to do demonstrations, the technical due. I think Countermine, as it's been in the past, will be a consistent contributor moving forward.
Okay, great. I think that, wraps it up for the question and answer session today. Maybe I'll just pass it back to you, Alf and Michael, for any closing comments.
Nothing from me. Okay, thanks, Sam. I would just like to reiterate that, you know, Codan is confident in its disciplined approach to achieving its strategic initiatives in the near and long term. With this, creating a stronger Codan, but more importantly, a great global technology business. You know, we're quite positive about the future. It's been a busy morning here, considering we had getting the GeoConex acquisition over the line. Clearly demonstrates through the presentation and through our actions that, you know, we're continuing down our strategic plan. And yeah, things are coming together. I'd just like to thank everyone for their time today and their interest in Codan.
Okay. Thank you very much for joining today's Codan H1 FY 2023 Investor Webinar. Enjoy the rest of your day. Thank you and goodbye.