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

Thank you for standing by, and welcome to the SDI Limited Annual General Meeting. I would now like to hand the conference over to Mr. Jeffery Cheetham, Chairman. Please go ahead.

Thank you very much. Good morning. I'm Jeffery Cheetham, Chairman of the Board of Directors of SDI Limited. Ladies and gentlemen, it's now 10:30 or thereabouts, and there being a quorum present at this virtual meeting, I declare the 2021 AGM of SDI Limited open. As the meeting is being conducted entirely online, I want to cover some important procedure and technical matters. Details about how shareholders can participate have been set out in the notice of meeting and online virtual meeting guide, which has been made available to you. Both documents are also available to view and download at the bottom of your screen. If you haven't done already, so, you may find it helpful to download the online guide and keep it handy. Voting. Voting in today's virtual meeting will be conducted by a poll by virtue of the virtual voting platform. All polls will remain open until the conclusion of today's meeting. As we move through the items of business, I will respond to questions from shareholders. To the rest [indiscernible] to get a voting card, click on the get a voting card box at the top of your screen and enter your shareholder number and post code or country if you're outside Australia. To vote click on the for, against or abstained voting buttons for the relevant items. Once you have completed your card, click on the submit vote button. You may edit your voting card as many times as you want during the course of the meeting. Questions. [Operator Instructions]. Shareholders, if you do have questions, I encourage you to submit them as soon as possible. We will seek to address your questions during the discussion on the items of business and endeavor to answer as many questions as we can. [Operator Instructions]. If you have also joined the meeting online, we may ask you to mute your computer while you ask your question. If we experience any technology issues during the meeting, we may need to take a short break. If there is a significant technological issue, we may need to adjourn the meeting to another time or date. Please keep an eye on your e-mail box and our AGM website for updates and further details. We'll also be lodging details with the AXS (sic) [ ASX ]. I now would like to introduce my fellow directors who are here at the moment. Samantha Cheetham, our Managing Director and CEO; John Slaviero, Director of Finance, Chief Operating Officer and Company Secretary; and our non-executive directors, Dr. Geoffrey Knight, Mr. Gerald Bullon, Mr. Cameron Allen and Mr. Gerard Kennedy, who is unfortunately unable to attend today due to a family funeral. Also have present members from our management team, Anneke Du Toit from the company's auditor, Deloitte. Ms. Du Toit will be available to answer questions you may have during about the conduct of the orders. The Chairman and CEO speeches have been released to the market this morning. You'll be able to follow the presentation on the webcast as the presenters speak. I will now commence my Chairman's address. The 2021 financial year started with continual challenges of the pandemic causing uncertainty in the markets. The dental industry in many countries began to reopen, resulting in a strong rebound in demand. The company continued to manage its cost and health and safety of its employees. This year's record sales and profit reflect the solid fundamentals of SDI and places the company in a strong position to manage future challenges in its global markets. SDI exported approximately 88% of its products to over 100 countries and being based out of Australia, the global logistics were challenging. With the limited flights and ships in and out of Australia, it is often difficult to get stock to SDI's distributors and to its overseas warehouses, which are located in U.S.A., Germany and Brazil. When product was able to be shipped, seaports and airports globally were either congested sometimes for months and had an additional stock needed to be sent by air or rerouted causing freight costs to be materially higher. The company continues to invest in research and development for the future. Despite a year of lockdowns, there were several new products launched in the whitening and glass ornament range. Dental products are medical devices and there are strict regulations in most countries. Compliance and registration processes have become more complex, adding to the time line of product releases and costs. Company has spent considerable time and resources addressing the U.K. withdrawal from the EU, and the EU change in their medical device directive. Despite these challenges, SDI believes is well positioned to continue to supply into the market. The future is looking positive with the Board's continued confidence in the underlying strength of its business. The directors declared a final dividend of $0.0165 per share, which is in addition to the interim dividend of $0.015 per share. representing a [ 17.3% ] increase in total dividends. In closing, I wish to acknowledge the contribution made by the Board of Directors who have served with discretion by advising, encouraging existing management. Additionally, I wish to express my appreciation to the managers and all staff for their tremendous efforts. SDI is a great Australian manufacturing and exporting company. and we are very confident of continued growth in the business and rewards for shareholders. Thank you for your ongoing support. I'd now like to hand over to the CEO, Samantha Cheetham.

Thank you very much, Jeff. I'd also like to thank all attendees for joining us virtually at our Annual General Meeting for 2021. As part of my presentation, I will run through SDI's financial performance for the year. Share the highlights, update you on the strong start we have made to the new financial year and provide some commentary on how we see the remaining part of the year unfolding. As I remarked last year, these last few years have been some of the most challenging periods we have experienced as a business. Our immediate concerns were with the health and well-being of our staff around the globe. I've been impressed by their willingness to take on the challenges we face. And together, we have been able to continue to focus on our strategic goals. The overall result reflects the strength of our business with most regions now operating in conditions that are close to normal. The start to the new financial year, as I will share later, has been very strong. However, there are still some external challenges we and many other businesses face who move goods around the globe. Turning to the highlights for FY '21. Financial year 2021 was a record for SDI with the momentum we saw in the first half continuing into the second as many of our operating regions slowly began to return to normal operating conditions. Sales were up 21.2% for the year to June 30 underpinned by a combination of new product releases and the return of normal activity levels. The restrictions imposed by governments in our key markets seen in the previous financial year were gradually lifted with dentists returning to work in most regions. In this period, as we have demonstrated in the previous year, operating expenses were carefully managed with a combination of strong sales and good cost control leading to a record EBITDA of $16.8 million for the year. Included in this figure is government support of $2.4 million for employee benefits and $1.7 million to subsidized inventory costs. However, importantly, all staff were attained during this period, ensuring that we are able to match the inevitable return of demand. Cash flow remains strong, and the group has no debt. We're in a strong financial position and are able to continue to invest in our business. Directors have declared fully franked dividends for the year of $0.0315 per share and approximately a 42% payout ratio. The Brazilian restructure was completed and soon to be fully implemented. And as I'll discuss later, trading strongly in the new financial year. Finally, the important study was released following a trial with children using our patented Riva Star product, showing that it stops decay and for this group, avoided the more common treatment of tooth extraction under general anesthetic. This product is now being sold in many countries and is further evidence of the commitment to research and development by our scientists. Let's now turn to the product category. We had some very strong category results, including Whitening, up 55.3% in local currency with this category representing nearly 1/3 of all sales. This performance was underpinned by the easing of operating conditions, but importantly, driven by new product releases and the effective rebranding undertaken in the year. Other success stories included our largest product category Aesthetics, which was up 27.2% in local currency, as normal operating conditions returned to most of the markets we operate in. Equipment, the smallest product category, rebounding strongly, up 31.1% in local currency, once again reflecting the normalizing of the operating environment. Finally, Amalgam, our second smallest product category was up 3.8% in local currency with some regional differences evident and once again reflecting the operating conditions. Turning to the full product pipeline. As we have shared previously at SDI, we typically release 1 to 2 new products each year seeing this critical to the ongoing development of the business. This year, we are working on an Amalgam replacement. The product will have strong characteristics of the old Amalgam product, but without the challenges this type of product has had with consumers. The product is tooth-colored and stronger than the more commonly used solutions in the market today. This research collaboration is expected to conclude in 2022, '23, with release into the market to follow shortly afterwards. Like other dental manufacturers working on similar products, we are confident that our product will be very competitive in the global market space. Finally, we expect the release of 2 new composite products in the early part of next year with the upgrade of the Luna composite line and the addition of the Luna flowable composite range. Turning now to an operational update. As we shared at the full year results, we have begun exploring the possibility of a new manufacturing site for the group. This potential move is both transformational to the business but also an important step in the company's ongoing development. We are contemplating nearly doubling the size of our manufacturing footprint to meet our expectations of future growth opportunities and expect this will drive significant efficiencies for the overall business. Our approach to this exercise is conservative, and we have engaged an external consultant to assist us in this exercise. Turning to our trading update. We have begun this new financial year with continued strong momentum with many of our markets returning to normal operating conditions. Almost all regions are now close to normal with the U.K., the largest European market for SDI and the Australian export markets, the most recent region to return to growth. Highlights include the U.K. up 135% as we saw evidence of strong pent-up demand with dentists beginning to return to work. Australian exports were up 59%, once again reflecting the return to more normal operating conditions. Europe, excluding the U.K., was up 34%, continuing the strong performance we have seen in the last financial year. North American sales were up 5%. Brazil was up 36%. And the Australian domestic sales were down 25%, [ albeit ], coming off a very strong comparable period and in part reflecting lockdowns in the last 2 -- in the 2 largest states, New South Wales and Victoria in the period. Finally, on earnings, along with many in the market, experienced inflated logistics costs in the period with gross product margins expected to decline by 11%. However, excluding these one-off costs, gross product margins are broadly in line with the prior period. Finally, I want to discuss our outlook for the coming year. Looking ahead, we expect the '22 financial results will follow similar trends to previous years, highlighting strong growth in both Aesthetic and Whitening products underpinned by improving market conditions and new product development. Inflated logistics continue to be a challenge, where possible we are increasing selling prices to partially offset costs. We have made a strong start to the financial year with the U.K. and Australian direct exports [ but ] the final pillars and expect -- as the final pillars to recover and expect this momentum to continue, leading to another year of growth. That concludes my presentation. Back to you, Chairman.

Thank you, Sam. I'll now turn to the formal business of the meeting. The notice of meeting dated October 15, 2021, was circulated to members. Now I will take the notice of meeting as being read. The 2021 annual report contains the financial report, director's report and the independent auditor's report. A copy of the annual report was made available on the company's website and was sent to those shareholders who requested it. The financial statements have been approved by directors and auditors by Deloitte. Please ask any questions that you have of our auditor on the virtual meeting platform. I'll first take telephone questions, followed by written questions submitted via the virtual meeting platform. Voting is not required as this is a discussion only. Are there question -- are there any telephone questions on SDI?

There are no telephone questions, Chairman.

Thank you. Are there any other further questions?

There are no additional questions, Mr. Chairman.

Thank you. Are there any written questions on SDI?

Ladies and gentlemen, this is the conference operator. Please hold the conference will recommence shortly.

I'll repeat, Resolution 1. This resolution is for the reelection of Gerard Kennedy as a Director of the company. The Directors with Mr. Kennedy abstain unanimously recommends shareholders' vote in favor of the reelection of Mr. Kennedy as Director of SDI Limited. I'll first take questions on this item. Are there any telephone questions on this item?

There are no telephone questions, Chairman.

Thank you. Are there any written questions on this item?

There are no written questions, Chairman.

With no further questions, the details of the total valid proxies for this item are displayed. I'll be casting the undirected proxies given to me as Chair in favor of the resolution. The directors recommend shareholders to vote in favor of this resolution. I will now move to the next item of business, which is resolution 2. This resolution is for the reelection of Cameron Allen as a director of this company. The directors with Mr. Allen abstaining, unanimously recommend shareholders vote in favor of the reelection of Mr. Allen as a Director of SDI Limited. I will take questions on this item. Are there any telephone questions on this item?

There are no telephone questions, Chairman.

Thank you. Are there any written questions on this item.

There are no written questions, Chairman.

Thank you. With no further questions the details of the total valid proxies for this item are displayed. I'll be casting the undirected proxies given to me as Chair of the meeting in favor of the resolution. The directors recommend shareholders to vote in favor of this resolution. I will now move to the next item of business. Resolution 3, the remuneration report. I'm sorry, I'll jump on. Resolution 3. This resolution is for the reelection of John Slaviero as a Director of the company. The Directors with Mr. Slaviero abstaining unanimously recommends shareholders vote in favor of the reelection of Mr. Slaviero as a Director of SDI Limited. I will first take questions on this item. Are there any telephone questions on this item?

Are no telephone questions, Chairman.

Thank you. And are there any written questions on this item?

There are no written questions, Chairman.

Thank you. With no further questions, the details of the total valid proxies for the item are displayed. I'll be casting the undirected proxies given to me as Chair of the meeting in favor of the resolution. The directors recommend shareholders vote in favor of the resolution. I will now move to the next item of business, which is resolution 3, the remuneration report. I'll first take questions on this item. Are there any telephone questions on this item?

There are no telephone questions, Chairman.

Are there any further questions?

There are no written questions, Mr. Chairman.

Thank you. With no further questions, the details of the total valid proxies for this item are displayed, I will be casting the undirected proxies given to me as Chair of the meeting in favor of Resolution 4. The directors recommend shareholders to vote in favor of this resolution. This concludes the formal business of the meeting. However, we are happy to take any questions that have yet to be addressed. Are there any telephone questions on this item?

There are no telephone questions, Chairman.

Any written questions?

Mr. Jim, we have a number of written questions. First question from [ Michael Burn ]. Prior to COVID, our company had demonstrated a trend of growing dividends over several years, given the Board's confidence in the outlook for the business, can you please comment on the Board's inclination to commit to a progressive dividend policy, assuming normalized trading conditions post COVID?

Thank you, Michael. It's Jeff here. I think it's difficult to predict what's going to happen in the future. We've got, for example, our logistics problems, which all Australian manufacturers and exporters have. It's not resolved yet. We're hoping it will get better, and it should get better as time goes on. It's -- it would be the Board's intention to increase the dividend as time goes on, providing we can provide funding for our expansions, which will be necessary later on as the company grows. I think that would be the answer to my question.

Mr. Chairman, we have another question from [ Michael Burn ]. Sales growth financial year-to-date is clearly very strong. Offsetting this is pressure on the gross profit margin. Two arising questions. One, has the marketing team got a pricing strategy optimized? And two, is there any sign of relief in terms of the logistics challenges being faced over the past 18 months?

I'll ask Samantha, the CEO of the company to respond to that question.

So for the pricing, absolutely, we do regular pricing and we -- with all the markets, Mike. And we have had quite aggressive increases recently, and we will be reviewing it in the new year again.

So the second part of the question was, is there any sign of relief in terms of logistics challenges being faced over the past 18 months.

Not yet, but we certainly, in terms of the whole stock in our global markets, we have more stock over there. So it's not as bad, but we -- until globally is all fixed, SDI is still affected by it.

So Mr. Chairman, we have another question from [ Michael Burn ]. Can there be some comment on the extent to which the price increases implemented to counter logistics cost inflation have been received by customers?

I'll ask Samantha, CEO, to respond to that.

No customer likes a price increase. However, they're all being understanding of this. And they've been -- some of the American distributors have tried to push it back to us. However, the market -- and they've done it to other manufacturers as well. They have accepted our price increases in the end. And I believe future ones will be also accepted.

So Mr. Chairman, there are no further written questions.

Thank you. As there are no further questions, I declare that the poll for all items will be closed in 5 minutes. Please note that a 5-minute countdown will be displayed on the top of the virtual meeting screen. As soon as the poll will be released to the ASX as soon as possible -- sorry, I'll repeat. The results of the poll will be released to the ASX as soon as possible, which is expected to be this afternoon. Thank you, ladies and gentlemen, for your participation at today's meeting. I now declare this annual meeting of AGM of SDI limited closed.