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

Thank you for standing by, and welcome to the SDI Limited Annual General Meeting 2023. I would now like to hand the conference over to Mr. Jeffery Cheetham, Chairman. Please go ahead.

Good morning. I'm Jeffery Cheetham, Chairman of the Board of Directors of SDI Limited. Ladies and gentlemen, it's now 10:30, and there being a quorum present in this virtual meeting, I declare the 2023 AGM of SDI Limited open. As the meeting is being conducted entirely online this year, I want to cover some important procedure on technical matters. Details about how shareholders can participate have already been set out in the notice of meeting and the 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 already done 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 on 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 item of business, I'll respond to questions from shareholders. To register to vote and get a voting card, click on the get a voting card box on the top of your screen and enter your shareholder number and postcode or country if you're outside Australia. To vote, click for the for, against or abstain 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 like 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. If we experience any technology issues during the meeting, we may need to take a short break. If there's a significant technological issue and we need to adjourn the meeting to another time or date, please keep an eye on your e-mail inbox and our AGM website for updates and further details. We'll also lodge details with the ASX. I'd now like to introduce my fellow directors: Ms. Samantha Cheetham, our Managing Director and CEO; Mr. John Slaviero, Director of Finance, COO and Company Secretary; and our nonexecutive directors, Dr. Geoffrey Knight, Mr. Gerald Bullon, Mr. Cameron Allen and Mr. Gerard Kennedy. Also present today is Mr. Craig Bryan from the auditors -- company's auditors, Deloitte. Mr. Bryan will be available to answer questions you may have about the conduct of the auditors. The Chairman's and the CEO's speeches have been released to the market this morning, You'll be able to follow the presentation on the website as the presenters speak. I'll now commence my Chairman's address. Over the 2023 financial year, we've made solid progress focusing on successfully growing our key product categories. We achieved record sales of $107.9 million, a fantastic result, and I would like to take the opportunity to thank and acknowledge all the SDI team for their dedication. We worked closely together to get orders out in the manufacturing and warehouse spaces in Bayswater. With production and warehousing capacity tight at Bayswater, we have now relocated our warehousing to the existing warehouse in Montrose, which we renovated throughout 2023 to meet our warehousing needs. As we progress beyond the pandemic years and the challenges COVID presented, we are confident that our pandemic strategy to keep our global warehouses full has seen us increase our market share, contributing to the strong sales growth of 13.4%. The continued focus on Aesthetics and Whitening products is a solid strategy for the future direction of our portfolio. We continue to benefit from 2 of the main amalgam competitors leaving the category, with dentists switching to our brand. Whilst Amalgam was a strong category of growth in 2023, we do expect the Amalgam category moving forward to revert to longer softening trends. Product launches include our new innovative product Stela, a new posterior restorative product that will serve as amalgam replacement. We released Stela in April this year into Australia and many other markets, except Europe. Riva Cem Automix is a resin-based glass ionomer cement is also being rolled out globally. Both Stela and Riva Cem Automix have received excellent early feedback, and we look forward to building on our marketing and education efforts to drive the sales growth. The new European Union Medical Device Regulation, MDR, has been a major focus for our teams over the past 12 months. The teams have committed substantial time on this important project and expect to meet the May '24 application deadline, by which time our key products will qualify for the EU MDR extension out to December 2028. Globally, product registration is becoming more difficult to achieve, adding a significant barrier to entry in our markets. We welcome stringent regulations and are confident we are well equipped to sell all of our products in all major markets around the world. Our new 24,000 square meter property in Montrose will ensure production and warehousing are far more efficient than the current Bayswater location. A new larger warehouse will be built starting 2024, followed by all manufacturing in Bayswater moving in 2027. The full project is currently being refined by consultants. The 2024 financial year will be focused on changing our amalgam customers to Stela, starting the build of our new warehouse and ensuring our European MDR registration is achieved. These are great goals for the year to ensure that the company is well-placed to achieve increased market share for the future. In closing, I would like to thank again the SDI team and our distributors both in Australia and all over the world for their hard work in -- to SDI's global success. I wish to acknowledge the contribution made by the Board of Directors who have served with distinction by advising, encouraging and assisting management. Lastly, I'd like to thank our shareholders for their ongoing support and investment in SDI. I'll now hand over to the CEO, Samantha Cheetham.

Thank you, Jeffery. I'm now on Slide 5, the CEO's address. Thank you very much, and good morning, everyone. I too would like to thank all attendees for joining us today at the Annual General Meeting for 2023. I'm very pleased with the progress we have made delivering world-class products into a highly competitive market and gaining market share. Our winning strategy is underpinned by the reliable supply of high-quality dental products to our customers. In the last financial year, it was a record year of sales with $107.9 million or up 13.4% on FY '22. This was a terrific result against a challenging backdrop, including persistent COVID-related cost pressures and increasingly uncertain economic conditions. I'd like to thank the entire SDI team and our customers and suppliers, both in Australia and all over the world, for their hard work throughout the year, delivering a fantastic result and continuing to maintain a high level of energy as we enter the next financial year of 2024. We have delivered on our FY '23 objectives and continue to focus on our winning strategy. I'd also like to thank our loyal shareholders for your ongoing support and investment in SDI. Let's start with an award recently received. So that's Slide 6. Before I take you through the FY's financial and operational highlights, I'd like to start by highlighting an award SDI recently won at the 2023 Governor of Victoria Export Awards. SDI won the award under the international health category the second year running. This was a fantastic achievement, with the award recognizing SDI as the state's most innovative, resilient and successful exporter in its category. Not only is this an outstanding level of recognition for our company and our people, but validates that our strategy and progress is among Australia's most progressive businesses. Turning to the FY '23 performance highlights, Slide 7. The company has achieved many milestones this year. FY '23 was a record sales year for the group with total sales of $107.9 million, up 13.4% on FY '22. This was driven by strong growth in all product categories in most regions with an increase in market share for many of our product categories. Gross profit margin increased 100 basis points to 56.8%, reflecting price increases and some relief from moderating logistic costs. EBITDA increased 9.6% to $16.2 million, a strong result with the growth in sales and product margins partly offset by increases in our operating expenses. As we return to normal conditions, traveling and marketing costs increase and some inflationary pressures were seen across the cost base. A final dividend of 1.75% -- sorry, $0.0175 per share was declared, which is in line with the previous financial year. In terms of business updates, we have upgraded the warehouse at the new Montrose site and successfully relocated our warehousing. I'll provide more details later in the presentation on our plans for Montrose. Our strategy -- sorry, our strategic priority of ongoing product development continued with the launch of Stela and Riva Cem Automix, both part of the Aesthetics product category. Both products, whilst early in the market, are receiving positive feedback and market uptake. Let's now turn to sales by business unit, Slide 8. As I mentioned, FY '23 was another year of record sales. The strong business unit sales performance reflects the return to normal operating conditions across the globe. In Australian unit sales, which also captures the Australian direct export markets, was up 11.4% in FY '23. Australian direct exports increased by 7.1% when adjusted for local currency movements. Direct exports growth was driven by tenders in the Middle East and strong growth in the Asian region. Australian domestic sales were up 1.7%, with growth moderating following an elevated base from prior periods. The North American market was up 7.3% in local currency, reflecting the strong increase in Amalgam sales driven by the exit of 2 major competitors in the amalgam market. Aesthetics grew by 12.8% in the U.S., showing the gradual transition to Aesthetics products with new products in the market gaining traction. The European unit sales were up 10.9% in local currencies, driven by the strong demand in the U.K., where conditions have normal -- have returned to normal operating conditions. Brazilian sales increased 13.7% in local currencies, reflecting overall market growth and aesthetics products gaining traction. Turning to the category overview, Slide 9. In local currencies, Aesthetics sales continued to show strong growth of 13% in FY '23, increasing across 4 business units. Growth in Aesthetics was largely driven by market share gains supported by the release of new products in prior periods gaining momentum in the market. Modest growth in Whitening products of 1.2% was driven by increases in sales across all markets, apart from Europe. Equipment, which is largely a complementary product, decreased 10.7% in local currency across all markets, except for Australia. As a mainly complementary product, Equipment represents only 6% of our total sales. Finally, Amalgam showed strong increases due to increased market share. Increases in the European market were led by increased demand in the U.K. The demand for Amalgam in North America continues to be strong, representing 30.1% of its total sales. Although there is very little focus -- sales focus on Amalgam, the category increased by 17.8% in local currencies on prior calendar year -- prior corresponding period and now represents 17.6% or $18.9 million of total sales. This result was also driven by the successful government tenders in the Middle East. Turning to the operational update, Slide 10. We achieved many operational milestones in FY '23 and have seen this continue in the first quarter of FY '24. Most recently, and underpinning our long-term strategic plan, we have relocated our warehouse to the new Montrose site. During FY 2023, we invested $2.5 million, upgrading the 4,000 square meter warehouse to medical device standards. This has been a fantastic transformation for our current manufacturing site, providing additional manufacturing space that will work perfectly to allow us to continue to grow whilst we carefully plan and execute on the longer-term project of transitioning our manufacturing to Montrose. As I've highlighted, we continue to invest in automation to improve manufacturing efficiencies and capacity. The table on this slide details the machines we have invested in. All machines have a remarkable short estimated payback period. We also welcomed the return of trade shows in FY '23, with these events providing a fantastic and essential opportunity for the SDI team to showcase our new products. Our much talked about innovative product Stela has now been launched across Australia, the U.S. and Brazil. We're receiving positive feedback on Stela, repeat orders and know, with time and education, that the future prospect of Stela is both promising and exciting. For those less familiar with Stela, it's an innovative restorative product that will meet a wide market need. Following changes in the registration requirement in Europe on restorative products, we have been working hard to apply for the new MDR European registration on SDI's products. The process is complex. However, our team has worked tirelessly and done a wonderful job managing the registration process to ensure we meet the due date. SDI welcomes stringent registration processes globally. We are confident in our manufacturing practices and products to meet the regulatory requirements. These regulations place a valuable barrier to entry for the industry. Let's now turn to the Montrose site update, Slide 11. As I've previously shared, in August 2022, following an in-depth review of our company footprint, we purchased the 6 acre Montrose property for $19 million. Now that we have completed Stage 1 of the plan, moving our warehouse to the new site, we are excited to progress with Stage 2, transitioning our manufacturing facilities. This is a major transformational project for our business, one we are carefully planning. We will continue to update our shareholders with progress and plans. At this stage, we can share the following. We believe the total project will cost approximately $60 million, providing an expected pretax return on investment of greater than 20%. Of the total $60 million cost, land and buildings are estimated at $45 million, which includes the $19 million purchase price. The new production machinery of $15 million is the other cost or the other breakdown. We are currently reviewing plans and build estimates and looking to provide investors greater detail at the half year in February next year. Turning to the ESG road map. We believe that effectively managing our environmental, social and governance risk positions SDI for sustainable growth at both the corporate and product level. While these factors have always been a focus for SDI, we are pleased to have recently formalized our ESG road map, which has been developed in line with our overarching corporate strategy time lines for FY '24 to '27. In FY '24, we'll be establishing the foundations for a best practice approach to ESG. In FY '25, we will be ensuring compliance with the expectations of our various stakeholder groups. And in FY '26 and '27, we'll be enhancing our performance to effectively manage risk and drive value. So far in FY '24, we've established our internal ESG working group. We've commenced baseline measurement of our Scope 1 and 2 GHG emissions, and we've also started a materiality test, which will define the ESG topics that SDI will focus on both from a reporting and performance perspective. This is a topic that is of increasing interest and importance to our stakeholders and, in many respects, considered the minimum operating standard for today's organization. We look forward to sharing our journey and progress with you. Next, to the business update, Slide 13. The first 4 months for FY '24 were down 7% on the prior corresponding period, with Amalgam declining by 24.5%, returning to longer-term trends. After adjusting for the decline in Amalgam, sales were down 2.3%. This reflected large sales in June 2023, with some orders overstocked in that period -- with some customers overstocked in that period. We expect to gain momentum in the remaining quarters of the financial year. The first 4 months of FY '24, gross margins were up -- were -- sorry, were 59%, 59.0%, up 2.2 percentage points from 56.8% as of June 2023. The improvement in margin reflects operational efficiencies, product and regional mix changes, further price increases and freight costs continuing to normalize to prepandemic levels. Operating expenses increased by 3.4%, reflecting inflationary pressures on employment and services costs. As mentioned earlier, SDI successfully launched Stela across several regions, and we're excited to watch this product develop as we continue to enter new markets. We expect Stela to be approved for the European market in the 2024 calendar year. So far, the feedback has been positive with repeat orders from customers. Finally, I wanted to discuss our strategy and outlook for the coming year, Slide 14. The company's strategic priorities remain. Aesthetics and Whitening continue to be our focus for new product development. Stela and Riva Cem Auto were the latest product launches, and I look forward to updating you all throughout the year of the positive progress of these products, particularly Stela, given its unique characteristics. As discussed at the full year, we've been focused on meeting the updated regulatory requirements in Europe and securing registration. We have made substantial progress and are confident we will continue to meet these requirements and deliver high-quality products to the market. We continue to focus on improving operating manufacturing efficiencies via automation and new site relocation. As I mentioned, we have installed and are planning to install several new machines across the next 12 to 18 months. The completion of the project analysis for Montrose and understanding the capital needs will be a high priority for us moving into the new year, and we are hoping to provide a further update at the half in February 2024. On this slide, I've highlighted the 3 core strategic priorities for SDI. Priority 1 is to ensure high-quality, market-leading products, which we will continue to deliver through innovation and growth in key regions. Priority 2 is to ensure business excellence and will be done so through innovation in manufacturing processes and our supply chain. Lastly, priority 3 is to ensure premium position and awareness within the community, ensuring our products are approved through strict regulatory rules, demonstrating to customers that our products adhere to the highest quality and standards. This will be supported with more investment in branding, key opinion leaders and research with outside universities and evaluators. We are confident that these 3 pillars in our core strategy will hold us in a strong position to continue our growth into the future. Thank you for your participation today. That concludes my presentation. Back to you, Chairman.

Thank you, Sam. We will now turn to the formal business of the meeting. The notice of meeting dated the 23rd of October 2023 was circulated to members, and I will take the notice of meeting as being read. The consideration of reports. The 2023 annual report contains the financial report, directors' report and independent auditors' 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 the directors and auditors by Deloitte. Please ask any questions that you have of our auditor on the virtual meeting platform. Voting is not required as this is a discussion item only. Are there any written questions on SDI Limited's financial report, directors' report or the auditors' report?

Chairman, there are no questions on this item.

Are there any phone questions?

Chairman, no question...

Chairman, there are no questions on this item.

Thank you. If there are no further questions on the item, the operator will advise the Chairman. With no further questions, I will move to the next item of business, election of Directors. Mr. Cameron Allen, Resolution 1. This resolution is for the reelection of Mr. 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. Are there any written questions on this item?

Chairman, there are no questions on this item.

Are there any phone questions?

Chairman, there are no questions on this item.

If there are no further questions on the item, the operator will advise the Chairman. With no further questions, the details of the total valid proxy for this item are displayed. I will be casting the undirected proxy 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'll now move to the next item of business, which is Jeffery Cheetham's -- as Resolution 2 relates to my election -- reelection as director, I'll step down from the chair and ask Mr. Bullon to chair the meeting for that resolution. Mr. Bullon?

Good morning. This resolution is for the reelection of Jeffery Cheetham as Director of the company. The directors, with Mr. Cheetham abstaining, unanimously recommend shareholders vote in favor of the reelection of Mr. Cheetham as a Director of SDI Limited. Are there any written questions on this item?

Chairman, there are no questions on this item.

Okay. Are there any phone questions?

There are no phone questions on this item.

Thank you. So with no questions, the details of 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 this resolution. The directors recommend shareholders vote in favor of the resolution. Chairman, I'll now pass back to you for the next item of business.

Thank you, Mr. Bullon. Remuneration report. Are there any written questions on this item?

Chairman, there are no written questions on this item.

Are there any phone questions?

There are no questions on this item.

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. Other business. Are there any written questions on this item?

Chairman, there are a number of questions on general business.

So you'll read these out?

Sure. First question from [ John Galt ]. From the first half 2023 result presentation, SDI stated bank borrowings will be reduced by $9.8 million pending the sale of 2 existing properties. Has this occurred? And if not, why not?

I'll direct this to CFO, Mr. John Slaviero.

Yes. We have not reduced the debt. We have just recently sold the property on a fairly long takeover turn, about 15 months, and the purchaser will be renting that property from us over that period with a total rent of around $155,000. So those debts will be reduced once the property is settled. There's another property up for sale, which is a smaller property. That has not been sold as yet, but it is up for sale.

Mr. Chairman, next question from [ John Galt ]. Are sale and leaseback strategies being considered with regard to the existing Bayswater manufacturing site and the recently purchased 1.4 acre warehouse site to assist in the financing of project Montrose?

Look, yes, we have spoken about that, but the timing, we have not concluded any way forward on that yet, but it has definitely been considered. And what we are waiting for is finalizing the Montrose project first before we look at that again.

The final question from [ John Galt ], SDI has over $10 million of franking credits on the balance sheet. To assist funding project Montrose, has SDI considered raising [ preference ] shares convertible notes from existing shareholders? This measure would simultaneously reduce SDI's finance rate and would also crystallize the value of franking credits to existing shareholders who participate in the raising.

I'll ask Mr. Slaviero to answer that question.

Yes. Look, we haven't finalized anything yet, and we haven't finalized the exact project cost yet. Once that's all done, and yes, we'll be looking at various options how we're going to finance the project. So it's nothing -- everything is on the table at the moment and -- but we haven't finalized anything.

Mr. Chairman, the question on general business from [ Andrew Tan ]. With respect to year-to-date trading update, is the decline in Amalgam sales a reflection of a normalization of sales trends in Amalgam or a strategy to focus on the sales of Stela, amalgam replacement product?

I'll ask Samantha, the COO, to answer the question, please -- CEO, sorry.

Thank you, [ Andrew ]. We certainly are -- the teams are all focused on the non-amalgam products, whether it's development or sales and marketing. But the Amalgam products is certainly a large amount of our sales. And they -- I guess, we don't have to focus too much of those. We've just been gaining the sales from the competitors. But in terms of normalized, is that going to decline at the same rate for the rest of the year? Absolutely not. I do not believe that. I think it's a little bit of timing as well. So no, it shouldn't be going down. That's not normal.

Mr. Chairman, another question from [ Andrew Tan ]. What is the key driver of the material improvement in gross profit margins? Is it a reflection of product geographic sales mix or a reflection of a reduction in freight costs? Or are there other drivers of the gross profit margin improvement?

Mr. Slaviero?

Yes. Look, there's a mixture of all of those. Definitely, a lesser percentage of Amalgam sales, which attracts lower margins. Geographical sales, that is also a consideration, but definitely, logistics costs have reduced, which has all contributed to the EBITDA margin.

Mr. Chairman, another question from [ Andrew Tan ]. How are you finding general demand conditions for your products? Does the sales decline of 2.3% excluding Amalgam reflect a slowing in trading conditions? Or is it just a matter of timing of sales?

I will ask Samantha to answer that question.

Thanks, [ Andrew ]. Look, in the Aesthetics products, probably more so the Whitening products, there could be a -- it might be flattening a bit there. I don't believe the other one will be flattening too much. It depends on the market, of course. Some countries are booming ahead. Generally, I think that decline won't continue.

Mr. Chairman, next group of questions. There are 3 questions from [ Brett Westbury ]. Aside from trade shows and promotion with dentists, has SDI considered any targeted marketing for Whitening or Aesthetics products to drive demand from consumers? Thank you.

Again, I'll ask Samantha to answer that question.

We -- depending on the country, for example, Australia and the U.S., we've worked with -- in terms of driving demand for consumers, we've worked with -- we've been a sponsor for many years of the Miss Universe campaign. That's probably one of the key drivers here, but we don't actively go to consumers. And we certainly don't want to sell to consumers because our key categories, the Aesthetics products, and we need to support the dentists and our Whitening products also, too strong to be selling direct to patients.

Mr. Chairman, the next question from [ Brett Westbury ]. The annual report comments on currency exposure, having 41% natural hedging. Could you please expand on your approach to undertaking other hedging measures to manage currency effects?

I'll ask Mr. Slaviero to answer that again.

Yes. Look, we take -- we try to bring in as much natural currency as we can. Generally, we have in the past looked at some hedging contracts, but we find that the cost of that and risk management, that it's better to concentrate on natural hedging.

Mr. Chairman, final question from [ Brett Westbury ]. Has the Board considered any measures to improve the liquidity in the company's shares? Sorry, I will repeat the question. Has the Board considered any measures to improve liquidity in the company's shares?

I'll ask Mr. Slaviero to explain, answer.

Yes. Look, liquidity is an issue, with the founder owning around 46% of the shares. It's probably more a question to the founder and -- who is the Chairman. So the shares are fairly closely held. So that's really a question for the Chairman, if what you believe the future is going to be, from your shareholding.

It's Jeff Cheetham here. I think the family holding of the company is a very strong point for the company, and at this stage, the family has no intention of reducing its shareholdings at all. That may change in the future, but at this point of time, no change.

Mr. Chairman, there are no further written questions in the general business.

Are there any phone questions?

There are no phone questions on this item.

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