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

Thank you for standing by, and welcome to the SDI Limited FY '24 Results Call. [Operator Instructions] I would now like to hand the conference over to Ms. Samantha Cheetham, CEO. Please go ahead.

Thanks, Ashley. Good morning, and thank you for joining us for our FY '24 results presentation. My name is Samantha Cheetham, the Chief Executive Officer; and with me today is John Slaviero, our Chief Financial and Operating Officer. Pleasingly, sales growth has continued into this financial year, achieving another record full year sales result. Continued sales growth, along with improved product margins and well-managed operating expenses have resulted in a record profit for the year. Product margins have been driven by operational efficiencies plus favorable product mix with the growth in our higher-margin aesthetic products. Amalgam sales declined as expected, and we expect whitening sales to improve with our planned rebranding in the first half of 2025. Now let's look at today's agenda. Next slide. I will begin the presentation with our performance highlights, which will include sales by business units and sales by region, followed by sales by category and the current product trends. I will then turn over to John, who will run through the financials before returning to me to outline our key business updates that have occurred throughout the year before concluding with our strategy and outlook. Next slide, and I'm now on Slide 3. As mentioned, FY '24 was a record sales year for the Group with total sales of $111.2 million, up 3.1% on the prior corresponding period. Gross profit margin increased 530 basis points to 62.1%, driven by strong performance in our higher-margin aesthetic product categories and continued improvement in logistical costs and improved operational efficiencies. EBITDA increased 35.5% to $21.9 million, with strong growth in the year, largely due to improved gross margin performance. A final dividend of 1.90 cents per share, up 8.6% on the prior corresponding period, with underlying net profit after tax of $11.4 million, an increase of 51.8% on the prior corresponding period. In terms of business updates, we have upgraded the warehouse at the new Montrose site and successfully relocated our warehousing. The operational team were proud to have secured European registration, which will provide a significant advantage in the European markets with high barriers to entry and competitive advantages that the registration provides us. Stela, a posterior restorative product that forms part of our aesthetic product range is in its early stages of sales with industry feedback extremely positive so far. Let's now turn to sale by business unit. I'm now on Slide 4. This slide shows sales by business unit. The strong performance in business unit sales reflects good European growth and favorable currency movements. The Australian business unit, which also captures the Australian direct export markets was down 1.3% in FY '24 with Australian direct exports decreasing 2.4% when adjusted for currency movements. This reflects a reduction in contract manufacturing due to production capacity constraints. The North American market was down 5.7% in local currency, primarily due to a 5.9% decline in amalgam sales, representing 30% of the region's total sales. Additionally, sales were affected by lower private label composite sales due to overstocking by our customer in the previous financial year. The European business was up $6. [Audio Gap] due to a major distributor reducing its inventory in the first half of FY '24. Now on to our sales by region. Next slide. This slide shows where the sales have occurred with the sales by region in Australian dollars. Favorable currency movements and strong demand for aesthetic products have driven growth in Asia Pacific and the European markets, with South America also benefiting from favorable currency movements. Middle East and Africa were largely affected by delays in shipments due to the conflicts in the Middle East. Let's turn to slide 6. This slide details our sales by category. In local currencies, aesthetic sales continued to show solid growth of 4.5% for the full year, with growth in aesthetics largely driven by market share gains, supported by the release of new products in prior periods gaining momentum. We saw a decline in whitening product sales of 4.2%, with declines in most regions, apart from Europe, which saw a modest increase of 0.7%. This decline is the result of weaknesses in discretionary spending. Equipment, which is largely a complementary product and represents our smallest product category decreased 2.1% in local currency across all markets, apart from Brazil, which increased 20.5%. Finally, amalgam decreased 6.5%, declining in most markets after an abnormally strong period in the prior year. I will now talk to the product shift away from amalgam in the next slide. Slide 7. The following slide that shows the decline in amalgam sales has occurred now for more than a decade. The shift in product mix [Audio Gap]. Over the last 10 years, aesthetics, whitening and equipment have generated revenue CAGR of 9.6% versus amalgam at negative 4.2%. This product shift seen over the last 10 years is key to the strong improvement in our gross margin with these generally higher-margin products. Looking ahead, the United Nations have planned that dental amalgam products will be phased out by 2030. Recently, the European Parliament decided that amalgam exports from Europe will cease from January 2025, except for situations where amalgam is the preferred product for specific patients. However, imports into Europe will phase in 2027. Our replacement of product Stela will have more than replaced amalgam revenues, providing a fantastic alternative with a higher margin. I will now hand over to John to talk through the financial performance. Next slide, please.

Thanks, Sam. I'm now on slide 9. As Sam mentioned earlier, the full year saw record revenue with sales up 3.1% with improved gross profit margins. Profit margins increased by 530 basis points to 62.1%, driven by improved operational efficiencies, price increases, improved logistics costs and strong growth in aesthetics products. Growth in aesthetics reflects the market share gains and pleasingly, our newer products released in the past 2 to 3 years have seen positive sales and momentum in the market. Logistics costs continued to fall getting back to normalized levels, and we remain committed to ensuring that our service levels with customers are maintained. Due to production capacity constraints, we have substantially reduced contract manufacturing, which attracts lower margins. We have been rewarded with market share gains and as costs continue to normalize, we expect to continue to see reward from this strategy. We will now turn to the FY EBITDA discussion. Slide 10. EBITDA increased by 35.5% to $21.9 million, underpinned by gross margin improvement and well-managed expenses. Operating expenses of $50 million were down by 1.9% when we exclude impairment expenses of $1 million and currency movements. On next slide now to Slide 11. It's cash flow. FY '24 operating cash flow was very strong at $14.3 million, driven by improved product margins and good expense control. Net investing activities of $8.8 million represents the continued investment in plant and equipment, including the refurbishing of the warehouse in Montrose and product development. We maintained strong financial flexibility with cash of $6.3 million, low leverage with $8.5 million of headroom under current bank facilities. I will now hand back to Sam.

Thanks, John. I'm now on the operational update, Page 13. Most recently, we have relocated our warehouse to the new Montrose site. During FY '24, we invested approximately $3 million upgrading the 4,000 square meter warehouse. This is the first step in the complete relocation and provides additional warehousing space, allowing us to continue to grow, whilst we carefully plan and execute on the longer-term project of transitioning our manufacturing to Montrose. As previously mentioned, Stela continues to receive great feedback from key industry opinion leaders with Stela achieving over 1 million in sales. Stela has now been launched across Australia, North America and Brazil with repeat orders coming through. In July 24, we have launched Stela into the European market, which is showing good results. We know with time and education that the prospects of Stela are promising. We have continued to invest in automation to improve manufacturing efficiencies and capacity. The table on this slide details the machines. We have invested in and their current progress stages. All machines have a remarkably short estimated payback period. The automation of the nozzle and tip packing machine located in Bayswater due to the space vacated by moving the warehouse to Montrose is one of the many efficiencies by having additional space that Montrose has provided us with. I will now move on to ESG -- I'll move on to Page 14. Securing of European registration. Recently, most teams spent much of their time and effort in securing European registration, which the team was able to secure in late last financial year. This means that SDI will be able to continue selling existing products into all European markets as planned. We understand the strict requirements that must be undertaken and the team embraced these challenges. This has SDI at the forefront in Europe with tougher barriers to entry, putting SDI at a competitive advantage. Our new aesthetic product, Stela, is among the registered products now available in Europe with opportunities to attack the European market and grow Stela into the largest composite product. Page 15, the ESG road map. Now an update on our ESG road map I've shared with you previously. We believe in managing our environmental, social and governance risk positions for sustainable growth at a corporate and product level. While these factors have always been a focus for SDI, we are continuing to follow our ESG road map, which is in line with our overarching corporate strategy. With a number of items ticked off in FY '24 this is a topic that is of increasing interest and importance to our stakeholders and in many respects, considered a minimum operating standard for today's organization. We look forward to continuing to share our journey and progress with you. Project Montrose, Page 17. On Slide 17, you can see an approximate time line of the project in Montrose. The project has unfortunately been pushed back -- pushed out by 6 months due to SDI awaiting permits. However, we are now able to move forward with the project. We're excited about the project, including the capacity it will add and the efficiencies it will generate for the business. Now on to the strategy and outlook on Page 18. The company's strategic priorities remain unchanged. Aesthetics and whitening continue to be our focus for new product development. Stela and Riva Cem Automix 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. We continue to focus on improving operational manufacturing efficiencies via automation and project Montrose expanding our sales capacity to over $200 million. The research and development team will continue to focus on product development with the aim to have 3 to 4 products released to the market in the next 12 months. Thank you for your participation today, and I'll now turn to questions.

Thank you. [Operator Instructions] Your first question today is a webcast question from Andrew Tan with Bell Potter. This reads [ Re: ] Stela. The presentation mentions that Stela reached over $1 million in sales. Given you recently received approval for Stela in the EU, how much of the $1 million of sales was from the EU? And do you think Stela sales will materially increase in FY '25?

Thanks, Andrew. Good question. So there were really -- we weren't able to sell Stela until July 5th, so it's in the new financial year. So these were related to previous -- the previous financial year and no European sales. So predominantly Australian sales and U.S. sales and Asian market with the bigger areas. But all regions have taken depending on the country, have taken -- have ordered. And certainly, for this financial year, Stela will be a very significant item for us.

Your next question is a phone question from Mark Topy with Select Equities.

First on the result. Just a question about the outlook for Brazil and North America with the decline in sales you've seen in those 2 markets as you flag Brazil is due to major distributor. But could you maybe talk us through how you see those 2 markets going in the next year?

Nice to hear from you, Mark. Brazil and North America are key regions for us. They're -- particularly in America, they're dealing with the whole amalgam decline there where it's a big percentage of our market -- of our sales. Both markets have got good growth prospects. They're coming off, particularly in the U.S. with the issues we had in the last financial year with the private label customer, they'll be coming off lower basis. And we see very good prospects for them for the new year.

Okay. So in the case of North America, obviously, you flagged amalgam. So is that a recovery in the new products area? Or could you maybe just sort of clarify that?

Yes, sure. So the amalgam is declining -- being a large part. So yes, the new products will certainly -- sorry, the aesthetic products, including Stela and Riva Cem Automix being the new one will certainly take -- fill that hole. The -- we also have come off a big -- one of our big distributors who we private label products to. So that should normalize now.

Right. And in terms of the ramp-up now Stela, I think you've previously said that you been to some major dental conferences and so forth. Can you maybe talk through just what the program is to continue to make the industry aware of the [ riot ] going forward?

Yes. So we actually haven't gone to too many conferences we've heard -- well, trade shows. Certainly in Australia, we've started to roll that out in the conferences in the U.S. But the big one will be in this financial year, the International Dental Show in Germany, which is in March, every second year. And that's something we're really focusing on having a huge launch in all the different regions that haven't got it yet. The Brazilian show as well in January, that's where we launched it there. So yes, it's going to be shown absolutely everywhere because we've got so much -- so many amazing things to show about us compared to the other products available.

Great. And then just lastly on the product margin improvement. Obviously, quite material. Do you see that as sort of the normal -- the new base? Or is that sustainable? Or is there some cost pressures that might impact in FY '25, i.e., shipping or other factors that might impact the margin in FY '25?

It's definitely for sure the margin that we're focused on. We're focused on increasing the margins. Look, costs, as we all know, increasing a lot, and we want to maintain at least that margin.

Okay. So that's sort of reflecting price increase you've taken and some other factors as well then?

Yes. Yes, absolutely. And we're also getting more manufacturing efficiencies with the new machines that are rolling out after their validation.

Right. Okay. That's terrific. Okay. Thank you for your time there.

Your next question is a webcast question from Michael Burn with [indiscernible] Burn and Associates. This reads, can you give some idea of the approximate timing of peak debt for the Group arising from the investment in Project Montrose? Has any thought being given by the Board to a sale and leaseback of part of SDI's property holdings to provide funding for Montrose?

Yes. We expect -- I should qualify this because we haven't finalized our plans yet. But based on the figures we previously gave or announced our peak debt will peak in financial year 2026 at around $38 million, which will then the following year, once we've moved in the financial year 2027, we would be selling off the property here, which currently is valued at around $15 million. So then our net debt will drop down to about $23 million. There has been consideration on sale and leaseback. And I think it's a bit too early to consider that just yet. But perhaps when we get closer to the time of FY '26, we will look at it again.

Next question, the webcast question from Mark Lynch with Wellington Management Company. And read's as the last publicly traded amalgam producer in the world, do you feel any pressure to exit before 2030 in order to minimize potential reputational risk in Asia or legal risk in the United States?

Look, we're going to be -- we're planning to finish amalgam manufacturing 2028 or earlier. We continue on with it because we also -- besides the environmental risk, there's also a social risk if patients aren't able to get amalgam. They can -- they won't have -- they won't be able to afford other restorations. So we're continuing on with that. We believe there's still a need for it, and we're working closely. We're quite open with the United Nations on what we're doing, and they understand why. So legal risks, no. Absolutely none.

The next question is the webcast question from Peter Stora, a Private Investor. This reads with a fabulous 48% increase in impact, strong cash flows and balance sheet, shareholders might have hoped for a higher increase in dividends. Has the payout ratio dropped because of the future CapEx needs? Does the Board have a payout ratio in mind? Or is each dividend decided on its own merits?

Yes, look, we're committed to quite significant capital expenditure, not just with the Montrose project, but also just with our automation program. You can see that this last financial year, we spent $5.3 million on CapEx. Part of that spend was the refurbishment of the Montrose warehouse, but we still plan to keep the automation going. These machines aren't cheap because we just have to -- manufacturing in Australia has to be automated. We just can't have significant labor costs. So that was one of the reasons why we've been a little bit conservative on the dividend. We definitely look at the dividend on a case-by-case basis, look at our cash flow and our CapEx commitments and also our R&D expenditure -- and just normal expenditure. So it is on a case-by-case basis.

Your next question is from Max Moore with Veritas Securities. This reads, can you provide a bit more color on the new machinery efficiency and the level of gross margin improvement you believe you can achieve from the equipment listed? Will there be a step change improvement, 1% to 2% improvement? Will you see this margin improvement in FY '25 or more towards FY '26 or '27?

Yes. The -- most of the benefit from the -- that list of machines that we've got on slide, I'm just trying to find, Slide 13, you can see the operational date. So we won't have a material impact on the margin in the FY '25 financial year. But it will be a step basis. So once they're all operational, we expect the margins to start stepping up at 8 percentage. So we would expect to get bigger benefits in the FY '26 year on this CapEx. And I should state that these machines are custom made, so they take 12 to 18 months to be made. So there's quite then they have to be validated and commissioned, and it's quite a long process.

Your next question comes from Peter Stora, a Private Investor and reads, how many competitors have attained European registration status?

Good question, Peter. We don't know because it's actually not published, but I certainly know are larger ones. Our bigger competitors have. I don't know the ones that haven't yet. But I certainly have heard quite a few American smaller size manufacturers have decided to pull out of the European market because they've already got their own big market there in America. So I don't know the answer to that.

Your next question comes from James Bisinella with Unified Capital Partners. And reads, can you please give us a rough idea in terms of a bridge on the increase in gross margin uplift from operational efficiencies, price increase logistics, et cetera? Where is the bulk of the uplift coming from? Or are the contributing factors well to your side?

Yes... Look, the uplift in the margins in the future will definitely be automation and also the efficiencies that we will get out of the Montrose project. The uplift last year was, as we explained, the normalized logistics costs, operational efficiencies with the move to a warehouse to Montrose, it certainly gave us quite a bit of efficiencies. So that's where we would see the uplift in the margin would be around the efficiencies, both process improvements and also automation.

Your next question comes from Brett Westbury with Western Asset Management. This reads well down on the great results. Could you please expand on the $968,000 asset impairment?

Yes. Yes. That's broken up in 2 pieces. There's around $0.5 million of that is the write-down of a property that we purchased a couple of years ago before we -- before Montrose became available for us. So that property now has been sold and will be settled in January 2025. So we've had to impair that cost around stamp duty and probably a little bit overinflated. The other part of that impairment cost comes from our Brazilian operations, which result in a tax if you like, an indirect tax benefit that we had sitting on the books. It's an asset. And we -- over the years, we believe that maybe we could have got some revenue from that. But as we look more into it, there is -- we cannot sell it off, put it that way. So the old Brazilian operation is now closed and the Brazilian branch to an Australian company is now operational, which is showing great results.

Your next question comes from James Bisinella with Unified Capital Partners. And reads in terms of the 3 to 4 produced launches flagged for the next 12 months without going into detail, are any of these considered major products? And how long have they been in development for?

Good question, James. Major products, yes, we have one significant one, which is on the -- it's a cement. We have 2 whitening ones and one of them is significant. And then we have one small equipment. So -- and the small equipment one could go either way. If anything, as we've said before, the equipment helps complement our aesthetic category. So yes, really, really exciting products, actually.

The next question is from Ron Shamgar with TAMIM. This reads are you expecting to grow EBITDA in FY '25?

Yes, we would expect that we'll continue to grow EBITDA. So we don't see that it will go backwards. There's nothing that we see currently that would -- that we suspect that it would go backwards yes, and we would expect growth. And that would be generated by our growth in sales and maintaining good expense control, maintaining our margins on the base level where they are now, our product budget [indiscernible].

Your next question comes from Caleb Weng with PAC Partners. This reads, with the mention of production capacity restraints experienced this year, were the new machines planned for 1H '25 alleviate some of the bottleneck?

Yes, it will. Because we moved the warehouse out of the Bayswater site and it has opened up space for the additional machines and that will give us extra capacity. And we've always said that we believe with those machines at Bayswater, our capacity -- maximum machines would be around $130 million to $140 million. We would struggle even with the new machines to get more than that.

Your next question comes from Ron Shamgar with TAMIM. This reads will you need to raise equity to complete project Montrose?

At this stage, the Board hasn't concluded how it's going to be financed, whether it's going to be all debt or part debt, part equity, or all equity. I guess we don't have any pressure on that right now because the first build will start in about June next year. So there're quite a while off to make that decision. But yes, certainly, we have thought about it, and the Board hasn't sort of kicked it off one way or the other at this stage.

Your next question comes from Matthew Smith, a Private Investor. This reads how is the new factory progressing? And when do SDI expect to have the facility built machines installed and fully operational?

That would be moved and fully operational build will be the December 2027 at this stage.

Your next question comes from James Bisinella with Unified Capital Partners. And reads, can you please talk us through the rationale for the whitening rebrand and the anticipated outcomes from the initiatives?

Thanks, James. The whitening rebrand is important. It's very much a consumer-driven product. Everybody wants their teeth to be whitened and it's a quick cosmetic fix. There is a lot of competition, and we need to keep ahead of the market. It's a very smart rebranding. I'd love to show everyone. It's not final yet. And it's -- certainly, the rebrand is putting our product at a premium positioning and we'll be very much ahead of every competitor in the market.

Your next question comes from Andrew Tan with Bell Potter. This reads do you think you can continue to deliver sales revenue growth in FY '25, notwithstanding the continued decline in amalgam sales? If so, what are the key drivers of this growth?

Yes. Thanks, Andrew. We certainly will increase sales. If the amalgam pulls us back, but it's like one step -- sorry, 2 steps forward, one step back. We will be getting our growth from the key regions with the higher sales margin and also very much the growth from the Asian market, which is a really growing market for us. So -- and of course, we'll be focused on the aesthetic products.

Your next question comes from Florian Schultz with [indiscernible] Network. This reads, you have developed your ESG strategy, outlining areas of focus, goals and aligned SDGs, and you have said that you will stop the import of amalgam in Europe in 2027. Why don't you generally stop the production of the amalgam when you move to Montrose in 2027? Mercury releases from dental amalgam are a global concern.

We will be stopping approximately 2028. We certainly are not moving the amalgam production to Montrose. We have no intention of doing that. And we could, of course, stop amalgam manufacturing at any time. If we are -- as I think I said to one caller before, amalgam, yes, it's not considered a good buy for the environment. We -- as -- sorry, the patients who are getting amalgam sometimes that is the only filling that they can get. And if they didn't have the amalgam filling, they would have a decay teeth that would have to be pulled and that's absolutely not good for their health.

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

Thank you, everybody, for listening to us today, and thanks all for your questions. It's a really exciting time for SDI. We're growing with -- we're growing in all regions. Our plans for development are really exciting. Our new products going to be significant products in the market. And yes, it's a totally exciting future. Looking forward to meeting many of you next week on our roadshow, and have a great day, everybody.

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