SDI Limited (SDI.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SDI Limited FY '21 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ms. Samantha Cheetham, Chief Executive Officer.

[Audio Gap] and with me today is John Slaviero, our Chief Financial Officer and Chief Operating Officer. In recent times, we have seen incredible uncertainty with the pandemic taking hold globally. As we move through the financial year, we began to see several key regions emerge from the past lockdowns that affected the dental industry. We initially saw a catch-up in demand that have been put on hold. And then gradually, we began to ramp up production to meet the return of strong demand in most key regions as we exited the financial year. While not uniform, as you will see when we talk through the regions, we have finished the year with strong momentum and are pleased to report a return to growth and a full -- and a record full year profit for the group that is ahead of our guidance provided in May. As I have done previously, I always like to recap on where we have come from, particularly for those that are less familiar with our business. Having been established in 1972, we have built this business into a successful manufacturing company where today, we are exporting to more than 100 countries. Underpinning this success has been our continuing focus on research and development. And through this, we have developed new and innovative products that meet the needs of our customers. Let me now turn to the agenda for today's presentation. I will begin with a summary of the last financial year and then spend some time talking about the product categories and the key geographies we operate in. I will then turn over to John, who will run through the financials before returning to me to talk about our strategy and the outlook for the coming financial year. Let's begin with a summary of financial year 2021. I am now on Slide 4. As mentioned in my opening remarks, this was a record year for the group with net profit after tax up 111% to $8.9 million and ahead of our guidance range of $7.5 million to $8.5 million issued in May this year. Total sales of $81.6 million were up 21.2% on last year, driven by strong sales in key product categories, successful new product releases and the gradual normalizing of most dental markets. Operating expenses increased 1.2% in the year due to careful operating expense management. I will spend some time talking about the product performance on the next slide, but the demand catch-up I spoke about and the impact of new product releases was evident, with Whitening and Aesthetics categories sales up 55.3% and 27.2%, respectively, in local currency. Pleasingly, the Board had rewarded shareholders with a -- sorry, 230% increase in the final ordinary dividend with a fully franked dividend of $0.0165 per share. Let's now turn to the product categories. I'm now on Slide 6 to talk about the product performance. As mentioned, the category highlight for last year was the Whitening category, up 55% in local currency. We saw strong momentum in sales supported by the release of the new Pola Light and Pola Rapid products and the rebranding of the Pola products. Another highlight, although the smallest product category, was Equipment, up 31.1% in local currency, with the ongoing successful traction of the Radii LED curing lights. Aesthetics products sales were -- also rebounded in the second half, with growth of 27.2% in local currency for the full year, assisted by the easing of restrictions on dentistry. In markets where restrictions were progressively eased, Australia, North America and parts of Europe, growth was strong. Finally, the Amalgam products sales were up 3.8% in local currencies, with the North American market offsetting declines seen in other regions. Turning to the geographies. Slide 8 breaks down the sales by business unit, as disclosed in our accounts. Sales by business unit were consistent with the gradual easing of government restrictions, seeing a return to normal operating conditions in many key markets. The European unit sales were up 39.9% in local currency for the year, driven by strong demand in its key markets and assisted by the U.K., where conditions rapidly improved in the second half of the year. The Australian sales - the Australian unit sales, which also captures the Australian direct export market, was up 9.6%, with the domestic sales up an impressive 44.6%. However, this was offset by direct exports, which were down 3.3% over the year, with many of these regions yet to return to normal operating conditions. Brazilian sales decreased 0.2% in Australian dollars, and when adjusted for currency movement, sales increased by 33.4%, reflecting the significantly weaker Brazilian real. As previously indicated, the Brazilian operations review was completed, with the restructure expected to be implemented by December 2021. For a more detailed look on what is going on [indiscernible] let's look at customer behavior by region on Slide 9. This shows [indiscernible] North America [indiscernible]. The performance reflects the return to normal operating conditions, with the gradual easing of restrictions but also the successful release of new products. [Audio Gap] in many of our key regions returning to normal operations. I will now hand over to John to talk through the financials.

Thanks, Sam. I am now on Slide 11, the profit and loss. As Sam mentioned, sales were up 21.2% in the period, underpinned by strong demand in key regions, with gradual easing of restrictions and successful new product launches. On gross product margins, the positive mix effect during the year from the strong growth in the higher-margin Whitening and Aesthetics product sales were offset by regional factors and the increase in freight and production costs driven by the logistics -- global logistic turmoil. Reflective of this, when adjusted for these movements, the gross margin increased by 1.8% compared to last year. However, in Australian dollars, the gross margin declined by 3.2% to 61.6% compared to 64.8% for the corresponding period last year. Total operating expenses in Australian dollars increased by 1.2% when compared to the previous corresponding period. After adjusting for currency movements and the government assistance programs, underlying operating expenses increased by 8.8% compared to the 2020 year. However, when compared to the pre-pandemic levels in the financial year 2019, operating expenses increased by only 1.4%. The result is evidence of the careful financial management of our operating expenses over this period. Finally, both EBITDA and net debt were up strongly to a record level as we returned to growth in financial year 2021. Turning to the balance sheet on Slide 12. The company's net cash position increased by $5.9 million to $10.6 million for the 12 months. The remaining debt of $1.5 million was paid down. There was further investment in plant and equipment of $2.3 million, and product development expenditure was $1.2 million for the year. Further, we actively increased its inventory by $900,000 to mitigate the continued global freighting delays. Finally, the company has unused bank facilities of $10 million. Turning to the cash flow statement on Slide 13. The increase in cash was driven by strong operating performance of the business over the period, underpinned by the return of strong trading conditions. We received $3.9 million from government assistance programs in the 12 months ending 30th of June 2021. $1.9 million was allocated to operating expenses and $2 million to the manufacturing departments to supplement the company's commitment to keep its global employees employed while the group recovered from the reduced demand caused by the pandemic. The payment of dividend reflects a strong net cash position and the Board's commitment to shareholders. I will now hand back to Sam to run through the strategy and the outlook for the coming financial year.

Thanks, John. Turning to our strategy on Page 15. The company's strategic priorities remain focused on 4 things: one, the key product categories of Aesthetics and Whitening products; number two, further manufacturing efficiencies and driving sales and marketing teams; three, the ongoing investment in research and development; and four, the company's Amalgam replacement product which is on schedule for release in 2023. Finally, as mentioned in February this year, we have undertaken a comprehensive review of our footprint, looking at -- looking to drive efficiencies and to manage future growth, and expect to provide more detail on this in the coming period. Turning to the outlook on Page 16. In managing any global business, there are uncertainties, and SDI is no different. I'm encouraged by the strong rebound in our key markets and see genuine momentum in our business underpinned by the opening of markets and new product releases. In the near term, the challenges we face are with the increased costs and delays of freight, the potential for further lockdowns and the slow opening of the remaining regions we operate in. On balance, we expect another year of growth and look forward to the return of normal operating conditions in most key markets. Thank you for listening to our presentation. I will now turn to the operator to moderate for your questions.

[Operator Instructions] Your first question comes from [ Peter Storrow ], private investor.

Congratulations on a good result. I've got 2 questions. One is regarding the Amalgam replacement product. At this stage, do you have any feel for what the margins are likely to be on that product?

The margins will be in line with our current margins, hopefully a bit more. We haven't really got to the detail on that, but they're usually in line or slightly higher. As we release the Aesthetics products, generally, they're a little bit higher, but it will be definitely at least what we've got.

Okay. And the second question is regarding the strong cash flow and balance sheet. As we get through the COVID period, which hopefully is at the end of this year, are you considering any capital management initiatives given the strong cash balance?

Look, we're always looking to the future. We will invest more in plant and equipment and a bit more in sales and marketing and definitely more in R&D. So that's where our focus is at the moment.

[Operator Instructions] There are no further questions at this time. Pardon me. We do have a follow-up question from [ Michael Burn ] with [ Cayman Equities ].

Samantha, John, I thought that was quite a big statement, the Amalgam replacement product statement, which sort of -- could you expand more on the R&D behind that, what the product looks like, how it's going to replace Amalgam? I'd like to sort of obtain more color on that. It sounds like a bigger deal than just one sentence in the slide suggests and obviously recognizing the commercial sensitivities around it.

Sure. Well, it's basically the idea of Amalgam goes in the back teeth, and this is a product for the back teeth. It's very, very strong. It looks tooth-colored. This is a product that we have been in collaboration with universities of New South Wales, Sydney and Wollongong. And it's where we got the government -- the $3 million government grant a few years ago. So we've been working in conjunction with their teams. And it's a new type of product. It's very strong. It looks like a tooth. And it's nearly coming to fruition. We're getting -- we're testing it at the moment. So exciting, [ Mike ], yes, very exciting.

And if I'm still on line, can I ask a question relating to some accounting questions? I think it's probably meant for John. It relates to the R&D spend that has been accounted for through the P&L. In this result, it was quite a big number, $1.3 million in the half compared to half year run rate normally of around about $800,000 or more -- $800,000. Is that -- does that reflect a change in an accounting treatment of R&D spend? Or is that project-specific?

No, there's no accounting treatment change. It's -- we were very conscious and throughout the year and probably the previous year that our R&D wasn't slowed down. And if anything, we invested a bit more into it. So it was purposeful.

Okay. And then the -- Mr. [ Storrow's ] question, the first question about the -- what's perceived to be a surplus capital in the company. I know that there was some talk or there seemed to be a pattern of a progressive dividend established before COVID struck, which is obviously very shareholder value-accretive. Is there any -- the Board have articulated the dividend strategy as being a progressive dividend. But is that still desirable to repeat that pattern? Is that still in the forefront of mind?

Yes, absolutely. We're very committed to increasing the dividend, and we're being conservative at the moment. We -- it's an increase in 2019 by 10%, and the Board is pleased with that.

I think, [ Mike ], we've talked about in Q4 the Board are very tightly focused on ensuring that the dividend is maintained, and if not maintained, increased [indiscernible] certainly be included in [indiscernible].

[Operator Instructions] Your next question comes from Mark Topy with Select Equities.

Sam and John, I suppose my first question is, can you give us a little more context of result [indiscernible] there's a bit of a catch-up in terms of dental [indiscernible]. And I'm just kind of interested in the comment, it's about forward momentum, how do you see it? Or do you think this is a normal level of activity?

Look, it [ sounds ] that sort of since starting to operate in other [indiscernible] because we're dealing with 100 markets and countries and some are ahead, some are behind. And hopefully, by this current plan, where most markets will be back on track. But it's because we don't know what the [indiscernible] most markets [indiscernible] normal, but we just don't know what [indiscernible].

[indiscernible] conditions are happening in the market, there is some lockdown.

Yes. I guess, I was thinking also was there some catch-up, like people had been delaying treatments or things -- do you get earnings for that? Or...

Yes, absolutely. For example, this lockdown in Melbourne right now that we're having or all over Australia, I guess, on most key regions, patients can't go to their dentists. So therefore, dentists [indiscernible]. So the minute it opens up, the core dentists will be in overdrive just to catch up. Because most of the time, the dental problems for a patient don't go away. So it's not lost business or anything like that. But there's -- in all the markets, that's sort of what we've been seeing.

Cool. And I suppose on the positive side, looking at the wobbly Australian dollar, how are you kind of perceiving the benefit in this next financial year from that beneficial depreciation?

Yes. Well, Mark, there's been a braver man than me to try and predict what's going to happen in the currency, because I think probably around 6 months ago, many people were forecasting the Aussie dollar would be about $0.80, and now it's down to about $0.72, $0.73. Look, it's difficult. We just have to ride through it. They're very turbulent times that clearly you have to be a brave man to try and predict any sort of currency forecast, I would say.

But are you getting some net benefit though? Or how do you...

Yes, there is. We get benefits on our margin and -- but we lose a bit on the expenses, on the operating expenses.

Most of our sales are invoiced in U.S. dollars except pretty much in Australia and a few export customers. But the overseas offices are in -- they've got the expenses in those currencies.

So certainly, margin, we gain a bit of -- sorry, we gain a bit on margin, and we lose some on the expenses, yes.

And in terms of selling to the dentists, I suppose this is the other part to the -- a confidence is coming back. Or how is this process of expanding, for instance, the Whitening sales product, going with dentists? How do you see this going to go in this current year? Will you be able to conduct more face-to-face sort of meetings overseas with dentists? Or...

Yes, yes. It seems to be getting more and more face-to-face meetings. Generally, our sales teams, they haven't been going -- and this is overseas, they haven't been going door-to-door to dentists like they would normally. And there's a lot more appointments happening, so the dentist is prepared for them, but it's definitely increasing. And the businesses overseas seem to be getting back to more normalized levels where the countries are just dealing with COVID, not -- and not even talking about it sometimes. They're just business as usual. Whereas here, we talk about it. And with every increased case, it seems to be a big thing. So definitely more face-to-face. But it's been great. With the whole change with Zoom, we're definitely getting more efficient, and there's more Zoom calls happening. So our teams don't always have to go and fly to a customer.

Right. Okay. That's good. And just an update, perhaps in terms of the [ planned ] move. Anything to add there in terms of your progression of that project, if you like?

No, not at this stage. We probably can't update. We're looking at every single function in our footprint here. It's a big job to get to the end of that process. So yes, we don't have any further update on that at this time, Mark.

There are no further questions at this time. I'll now hand back to Ms. Cheetham for closing remarks. Pardon me, we do have a follow-up question from [ Michael Burn ] with [ Cayman Equities ].

John, we talked of the logistics and supply chain pressures and the cost of getting stuff around, how much of that had the impact on the reduction in the gross margin in the second half, specifically?

In the second half, I don't have that figure, [ Mike ], in front of me. But overall, yes...

Order of magnitude, are we talking about 100 basis points? 50 basis points? Do you have any feel for that?

It's probably close to 100, yes. It was quite significant. The issue we've got was not just the cost of freight but was the delay in freight. So for example, we had a 40-foot container, totally full that arrived in the U.S. in February, and that didn't go into our warehouse until June. So in the meantime, we had to do air freighting to supplement them. So it put enormous pressure on our factories. It's not the efficient way to manufacture goods. We're flying more and more of that. And at the moment, the -- what we've seen on freighting is containers have been delayed. For example, at the moment, we've got 3 40-foot containers sitting here that should be picked up this week, and we're being told it could be up to a month's delay. So if that happens, then we have to supplement it with air freights. So it's a tough environment out there only -- which doesn't help to our production efficiencies. It's very difficult to plan. But it was substantial, and I can take that on notice, [ Michael ]. And I just don't have the figures in front of me.

Well, you're not alone in that regard. There are a lot of companies that -- around the world are suffering on that. And then I guess, my one question which I'm sure you'd be very disappointed if no one asked, Brazil. The Brazil result was quite a startling result. It was very strong. Now I'm assuming, number one, we shouldn't annualize that number. I'm talking about the half year number. We shouldn't annualize that. But what's driving that? Is that an outworking of the restructuring process that's underway?

No, the growth over there, it's worked out very well for our team. We have cut out a lot of sales people and office people there. And -- but the sales growth -- from the growth in the market and also just very good relationships with the distributors.

It's good quality growth. It sounds like it's good quality organic growth as opposed to...

Yes, and of course, our new product releases as well.

Okay. So to my next question, can I annualize the second half number?

No, I wouldn't [indiscernible] very, very [indiscernible]. I mean -- sorry, [indiscernible] market come out of this pent up [indiscernible].

Sure. I mean, is that -- I know you've pulled capital out of that business or you've rationed capital to that business, but if I look at -- and it's hard to know. There's no -- you're just seeing a snapshot of the accounts, but we've got assets of X and liabilities of Y, so there's negative net assets in that business. Has it got enough capital to support its growth?

Yes, it does have, [ Mike ], because most of the capital -- the growth is supported by [indiscernible] in Australia. So it's not -- what we're seeing with that real growth in our own currency, we're finding that margin is improving and the cash flow returning back to Australia. Yes.

What's changed there? Because it's been like calling of a broken glass for many years, suddenly there seems to be something -- has anything structurally changed? Does it -- it just seems to be a very good number in the context of history.

Yes.

Yes. Look, I think that it's a very buoyant market for sure. Our Whitening products are doing very well. Our Aesthetics products are doing well. We've got a great team over there. And very committed team because it's not been easy for them seeing the results each year, and they're very dedicated. And as I think we've mentioned before, we've moved our office down to the -- sorry, our warehouse down to the south. We've closed the office. And it's a -- it's all going very well. So there's -- and another thing is that the dentists are operating pretty much fully. We're attending trade shows, the big trade shows scheduled for February. We've got hands on happening everywhere. So it's almost like business as usual there. The market growth is good.

Okay. Well, congratulations. Long may it last.

Yes, we're very happy about it, [ Mike ].

[Operator Instructions] Your next question is another follow-up from [ Peter Storrow ], private investor.

Just a follow-up question on the manufacturing, and this is probably something I should know, is all of the manufacturing carried out in-house in Australia, including the equipment? Or is some of it contracted out?

No, all of it's done here in the headquarter. And sorry, there's a little bit in Brazil, but that's actually -- we send them raw material -- sorry, semi-finished good, and they pack into packages.

Your next question is a follow-up from Mark Topy with Select Equities.

I just want to follow up just on the cash flow and the government assistance payments in the current financial year shown in the cash flow there. Could you just maybe clarify, does any of that go through the P&L? Or what's the breakdown of it?

Yes. I think I maybe stated in one of the announcements, in the commentary that about $2 million went to operating expenses -- or sorry, it might be the other way around. Just let me find it, Mark.

[indiscernible] or...

It's more than JobKeeper. It's also some U.S. government assistance, so it's more than just JobKeeper. The $1.9 million went through the operating expenses, and $2 million went to manufacturing partners, all mainly around the first half because our manufacturing was not back at full bore. It really started to come online quite strongly in the second half. And the way we see that is supplementing people's salaries, which is wages, which is that's what it was there for. Otherwise, they'd be short-paid. So in the U.S., what that subsidy was about or systems was about, because the U.S. hadn't -- was not back on track in that first half and also part in the second half. Under those -- provided those, to get that subsidy, you had to keep the people employed full time, and you couldn't terminate any people. So it's basically -- it's a difficult one because if we haven't got it, we probably would have taken a different road in our expenses, but the PPE -- sorry, they call it the American one, the PPP and JobKeeper, we would have had to take a different course with employees. So it probably did what it was meant to do, I would say.

Okay, okay. So when we think about '22, how do we think in terms of...

I think you could look at when you -- that's why I've sort of tried to compare to the 2019. I think you'd probably look at a more normalized expenditure level, especially in the second half of this year, of the 2021 year.

So yes, just to be clear on it. So you don't think there'll be any more government assistance, is that what you're saying?

No, the -- no. We wouldn't -- at this point in time, I'd very much doubt if we can qualify for any government systems anywhere.

So I guess, your salaries and the expenses will increase, but you've got the revenue.

Yes.

Back closer to the normal, if you like.

Yes.

There are no further questions at this time. I'll now hand back to Ms. Cheetham for closing remarks.

Thank you very much, everyone, for listening, and thank you for your questions. Just in summary, we're -- I'm -- John and I are very pleased with the results. And thanks to all our sales teams, office, manufacturing teams all around the world. Everyone has contributed to our results in a very, very tough year. And it's been a really great outcome. And the future is looking rosy. We are very excited about our Amalgam replacement, but that's in a couple of years, and a very positive outlook for the year. So thank you very much to everyone for listening.

That does conclude our conference for today. Thank you for participating. You may now disconnect.