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

Thank you for standing by, and welcome to the SDI Limited First Half Year Results 2025. [Operator Instructions] I'd now like to hand the conference over to Samantha Cheetham, CEO. Please go ahead.

Thanks very much, Darcy. Good morning, and thank you for joining us for our first half FY '25 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, margin growth has continued into this financial year, achieving a gross margin of 63.5%, up 200 basis points on the previous corresponding period. Product margins have been driven by operational efficiencies plus favorable product mix within the growth in our higher-margin products in higher-margin regions. Amalgam sales declined as expected, and we expect aesthetic sales to continue to improve with Stela gaining some momentum in the market. Now let's look at today's agenda. I'll begin with the presentation with our performance highlights, which will include a sales by business unit and sales by region, followed by a sales by category and the current product trends. I'll 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. The first half FY '25 saw sales of $51.5 million for the group, down 1.3% on the prior corresponding period. Gross profit margin increased 200 basis points to 63.5% due to stronger performances in our higher-margin products as well as stronger regional mix and increased efficiencies across production. EBITDA fell by 4.4% to $8.6 million versus $9 million in the prior corresponding period. A final dividend of $0.015 per share, in line with the prior corresponding period with net profit after tax of $3.8 million, an increase of $3.5 million on the prior corresponding period. In terms of our business updates, gross margin improvements have largely been attributable to product mix and increased efficiencies in production. We are hopeful to see further improvements with the move to our new facility in Montrose. 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. Trade shows and investment in marketing have also continued to drive sales and product exposure in the industry and play an important role in increasing product awareness and the innovative nature of our products. Let's now turn to sales by business unit. This slide shows sales by business unit. The strong performance in business unit sales reflects good European and Brazilian growth. The Australian unit sales, which also captures the Australian direct export market, was down 10.9% in the first half with Australian direct exports decreasing 15.7% when adjusted for currency movements. These sales were materially impacted by a reduction in sales from the Middle East and Asian regions. The North American market was down 7.2% in local currency, primarily due to a 20.2% decline in amalgam sales in the region. The European unit sales were up 10.9% in local currencies, driven by strong demand in most European markets. Brazilian sales increased 28.4% in local currencies due to a major distributor returning to normal business after reducing inventory in the prior period. Now on to our sales by region. Sales by region reflects strong growth in the European markets, which were aided by favorable currency movements and strong demand for aesthetic products. South American sales were up modestly with Brazilian sales up over 20% in local currency terms, as previously mentioned. The next slide details our sales by category. In local currencies, aesthetic sales continued to show solid growth of 4.5% for the half year in local currency terms, with growth across all regions, partly offset by a decline in Australian direct export sales, down 17.4%. While whitening product sales were broadly flat in local currency terms, we did see good increases in the European and Australian domestic markets, up mid-single digits. Equipment, which is largely a complementary product and represents our smallest product category, was broadly flat in most markets, offset in part by Brazil and Europe. Finally, Amalgam sales decreased by 12.7% in local currency terms, declining in most markets, particularly the North American market, down 20.2%. Turning to drivers behind our gross margin improvement. The shift in product and regional mix is driving margin improvement. In addition, we've also seen some early contribution from our investment in machinery and automation. We expect to see further efficiency improvements heading into the second half with greater utilization of our machinery expected over the financial year. Now turning to John Slaviero.

Thanks, Sam. And we are now on to the profit and loss, Slide 9. As was mentioned by Sam, sales declined by 1.3% in the period with good growth in the European and Brazilian markets, offset by declines in the Middle East and Asian market, and the continued decline in Amalgam product sales. Profit after tax was up 3.5% to $3.8 million with EBITDA down 4.4% to $8.6 million. Gross profit margins increased by 200 basis points to 63.5%, reflecting operational efficiency, geographical and product mix. Total operating expenses in Australian dollars increased by 4.3% to $27.1 million when compared to the previous corresponding period, reflecting inflationary pressures, particularly in employment costs. Turning to the balance sheet. Cash decreased by $1.4 million after investing $1.9 million in property, plant and equipment, and $2.3 million in product development expenditure and $1.4 million in inventory and reducing debt by $2.1 million. Debt has been further reduced in January by $4 million related to the sale of a property, which settled on the 17th of January 2025. The company has unused bank facilities of $9 million and $4.9 million in cash. Now turning to the cash flow statement. There were several factors that impacted the cash flow in the half. These included increase in payments to suppliers and employees, higher income tax payments and repayment of debt. We also made the payment for the final dividend for FY '24, which was higher than the previous corresponding period. I will now turn back -- I will now hand back to Sam to run through the business update and the strategy and outlook section.

Thank you, John. I'm now on the operational update page. During FY 2024, 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 the longer-term project of transitioning our manufacturing to Montrose, and I'll provide more details on our progress in the outlook. Turning to product. As previously mentioned, Stela continues to receive great feedback from key industry opinion leaders, with Stela achieving over $1.3 million in sales in the December half. Stela has now been launched across Australia, North America and Brazil with repeat orders coming through. In July 2024, we launched Stela into the European market, which is showing good results. We know with time and education that the prospects for Stela is promising. Turning to our investment in automation. 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 nozzle and tip packing machine located at Bayswater due to space vacated by moving the warehouse to Montrose is one of the many efficiencies by having additional space at Montrose has provided us with. I'll now move on to ESG. Our ESG road map, I've previously shared with you before. We believe in managing our environmental, social and governance risk positions for sustainable growth at both the corporate and product level. While these factors have also always been a focus for SDI, we're continuing to follow our ESG road map, which is in line with our overarching corporate strategy. With a significant number of initiatives achieved in FY '24, we look forward to further progress in FY '25 and beyond. We will continue to share our journey and progress with you. And now on to the strategy and project Montrose. The overall cost of our Montrose project has reduced by $4 million from previous estimates due to revising of our plans. The existing warehouse will stay at its current location and the new construction will now incorporate manufacturing, research, development and related functions. We are excited about the project, including the capacity it will add and the efficiencies it will generate for the business. Project Montrose, the next page. Here, we see an approximate updated time line of Project Montrose. Our next stage is to move into the tendering works, and we are hoping to have planning approval by June 2025. We are currently still on track to be relocated by December 2027. The company's strategic priorities remain unchanged. Aesthetics and lightning continue to be our focus for the new product development. Stela and Riva Cem Automix were the latest product launches, and I will 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 is expanding our sales capacity to over $200 million. The research and development team will remain focused on product development with the aim to have 2 to 3 products released to market in the next 12 months. We also look forward to presenting at the upcoming International Dental Show in Germany, an important event that will help SDI to continue to drive sales and highlight our innovation to the market. Thanks for your participation today, and I'll now turn to questions.

[Operator Instructions]. Your first question today comes from James Bisinella from Unified Capital Partners.

Just a couple from me. Firstly, on the first half gross margin, that was a highlight at kind of 63.5%, up 200 bps. You've mentioned some of the operational efficiencies expected into the second half. So, in terms of the margin, I guess, going into the second half and probably into FY '26, should we expect that to kind of hold or increase a bit? Just keen for a bit more context around that.

Yes. James, yes, look, we had some operational efficiencies in the first half. We expect to get a bit more, but we don't believe we'll get the full efficiencies until the next financial year. We would expect -- we don't expect the margin to go backwards. So, we always aim to improve the margin. Yes. So, the next 6 months, we hope to hold that margin and the following years to have some improvement on it.

And then I guess further to that point, just looking at the European business unit sales, that's kind of 40% of sales now up from 36% in the PCP. So, does that also support margins looking forward as the mix increases just given, I guess, perhaps the lower margin in some of the export markets?

Yes, absolutely. The European market is the biggest dental market, and they focus very much because we don't have Amalgam in the Continental part of Europe. The margins will definitely increase there.

And then switching gears on to sales in whitening. I think that looked like a bit of a highlight. And typically, the second half is seasonally stronger as well. You've got the new packaging coming on. So, I suppose, how should we think about that segment from a sales perspective, firstly? And then also just keen to hear a little bit about the competitive landscape in whitening in Australia and the U.S. in terms of your market position?

Sure. So, the new packaging that we've got coming along is top-notch is absolutely much nicer than every other competitor out there, high quality. It's reflecting the high quality of our Pola product. In terms of -- and sorry, that will also give a nice increase boost to the distributors. The dentists will love to show it in their dental surgeries. And the team will be very much focused on that. It will be a great door opener to them. In terms of competition, the U.S. is the most competitive market with -- just become number one through distribution. Not all of the whitening products are sold by the dental office, and so the distributors don't -- sorry, via the distributors. Several key companies sell direct to the distributors, so we're number one through the distributors and that's a huge thing because we've got many, many sales reps calling directly on their long-term relationships with the dentist and that should really go well. And globally, we've got very good market share today. So, in Australia here, we are definitely number one.

Great. So, it sounds like you're number one through distribution in the U.S. but still a pretty low market share so potentially room to grow on that. And then just final one from me, in terms of Stela, just I think the language previously was a million plus in sales now it's kind of 1.3, so it sounds like sales are continuing to grow there. How's the channel looking at the moment in Stela and what's your level of confidence in terms of sales and replacing Amalgam looking forward?

Yes, well it's definitely the company maker, it will replace our Amalgam sales. Stela is used for all the -- for any type of back teeth fillings, it's not just the Amalgam that we're focusing on, it's the entire, all the products that are put in the back teeth of the -- the back teeth such as composites which is the biggest category. So, there's great upside there, we're just touching the surfaces. We've got research and development, working with universities to help them understand why it's good. We've got key opinion leaders talking about the products. And yes, we're only just starting in terms of the infiltration, in terms of the key people who influence the dentist.

Your next question comes from Mark Topy from Select Equities.

Just to pick up on I suppose the Amalgam run off, it's a bit disruptive in the U.S., can you -- how do you see that now, happening over the next say, 6 months, 12 months? Is it going to be a real rapid run down or is it -- how quickly will it -- just trying to get it on the scene.

Yes, it'll continue to decline double digits. The Amalgam phase down will finish by 2030, we will have exited the market by 2028. It's certainly not our focus. And yes, over the next -- for the next financial year, again, it will decline. But we're replacing those sales with our aesthetic sales and that's happening quite quickly.

It's certainly exciting to hear about the Stela, and so, the focus, I suppose have been Europe too and you've got a German conference, but just to talk about the U.S. ramp up. How do you -- do you need additional distribution there or points of contact or promotion, because obviously, U.S., a very big market there. And in terms of, just remind us again on competing products to Stela now being launched in the market, how do you see the competitive landscape there as well?

Yes. We could always do with some more sales people, more advertising and that type of promotion. More investment into key opinion leaders and what they're talking about. That'll cost money. We've got all the key distributors so it's just working with them closely so they focus on SDI, not one of the other competitors. And that's pretty much the way we operate globally. And then in terms of competitors to Stela, there are a few competitors but they don't have the advantage of super high strength which is really important for the back teeth and also the gap-free technology, and this is all patented and -- they've all got their own advantages but this one is a key advantage.

So, when those key opinion makers look at the products, you're confident that you're the gold standard then is what you're saying?

Yes, very much. It's becoming -- it will become a gold standard, certainly on its way.

In terms of promotion then, current year you spend around that, can you give us -- with the sales kind of ramping up, can you see additional promotional spending in the global space?

Yes, I mean, as the sales ramp up for sure, we invest more into the promotional area but we're trying to manage our expenses too. So, it's managing -- using the most, having the most efficient use of the allocation of money and we do it step-by-step, unfortunately we don't go and do the massive launches. However, in Germany next month at the International Dental Show, we will be making a big thing of it and we've got all our distributors saying and playing with the products, and we're doing it -- and we do launches really through the distributors. The dentists, there's so many of them, there's no way we could catch them all.

And on that reduction in the Montrose budget there, is that due to John's tough negotiation or is it --?

I'd like to think so, Mark. If you want to give me that credit, yes, I'll take it but it's not quite true. No, we revamped the plans and we thought we'd done it more efficiently because the first lot of plans were sort of our first thoughts and then we sat down and revamped them and pulled about $4 million dollars out of the building costs. So, we expect that to come down a little bit more because once it goes out of tender, hopefully, the tenders will come a little bit lower as well.

You're obviously project managing that?

Yes, well, we've got a specialist company, TMX, that project manage it for us because they're experts in it, we don't have the expertise here and we don't have the manpower here because everybody's busy doing their normal job. So, we've got external project managers who have done much bigger projects than what we're doing.

And then on that cost side, can you give us a bit more a feel? So, you said there was some additional spend on promotion and some, is it wage pressure or inflation pressure or how do you see that going over the next -- is it stabilizing a bit now or not?

Yes, look, being in Victoria everybody knows payroll tax has gone up, work cover's gone up, land tax has gone up. And then also federally superannuation went up. So, those cost increases we can't do anything about. But also, at the same time, every year, every year, we're going to give our employees wage rise to keep in step with inflation. So materially-wise, it was more the payroll-related or payroll and payroll-related costs. And we have lost a few people because they've got bigger job offers, bigger salaries. So, we have to be mindful of that. So, it is a tough employment market at this point in time, especially in the skills around quality assurance where this MDA is attracting high wages and people.

Sorry, what was that, the MDA?

No, no, MDR, sorry. MDR. The medical device regulation. That's an enormous cost to us. And yes, the demand for good people in that area is very high.

Got it. Okay. So yes, is that due to any particular factor there or?

Well, it used to be the MDD, and that was a medical device directive. So, it was a directive that wasn't law now it's law. We have to comply to everything. And we've just been audited, and the audit is enormous, like every part of the company was audited and yes, it is an enormous job. We're sort of halfway through it. Our R&D is spending a lot of time on it. So, we've still got a little while to go on it to ensure that we've got the registration.

Right. It doesn't sound like a whole lot of fun.

No. But it's a good barrier to entry because it is costly. And if you're a smaller company and probably, and you're based in America, you'd probably pull out of the European market. The cost of it wouldn't be worthwhile.

There's no implication to the Trump tariff rise or any disruption there? Australia won't -- like you talked about European tariffs now.

I think Sam just came back from the U.S. and she felt that the confidence level in the U.S. has gone up quite a bit. Everybody is a bit more excited. So, hopefully, that will help our whitening sales.

And hopefully, Trump just forget about Australia and not put tariffs on it.

And lastly, just on FX then, just the currency has been bouncing around, you're just covering to normal or?

Yes. No, we just continue with our natural hedging. The euro hasn't moved that much. The U.S. maybe in January moved $0.01 or $0.015 where it ended up in December. But so far, we've got no -- we do good business. Got 6 in front of it for the USD. There's no problems there.

[Operator Instructions] Your next question comes from John Galt, private investor.

I just got 3 pretty easy questions. The first question is about the projected project cost of $56 million. Is that inclusive of the $19 million already spent on purchasing the site?

Yes, correct. Correct.

Yes. So, it's basically subject to the tenders, of course, around a $37 million residual CapEx project?

Yes. But that also includes, there's about a $23 million build cost in there, right? And the balance includes additional machine that we monetize. We've got the space, right? So, John, if you noticed on the presentation, there's a chart with the new machinery and one new one has been added, a working machine, which is about $1.9 million. That is part of that machinery budget, right?

Okay. That's very good. Second question is, whether it's been made or not. When is the decision on the funding of the CapEx to occur been made already? Is it going to get funded or?

Well, we've got bank approval, right? And we've got a written letter of offer from the banks, but the Board hasn't sat down and really gone into the detail that's required and which way we go at this point in time.

That's understood given you probably wait until results of the tenders. And the final question is just regarding the new construction of the premises. Given you've gone down the ESG route, was there any consideration for solar panels or?

Yes, absolutely. The unfortunate bit where we are now, we can't put solar panels on our roofs because it won't support the panels. The structure will support lots of solar panels.

As there are no more phone questions at this time, I'll now pause for a moment and address questions from the webcast. Your first question from the webcast comes from Caleb Weng. Caleb asked, could you please provide some color on the delay in tender in the Middle East and whether that is expected to bounce back in the second half?

Yes. Thanks, Caleb. Just all the Middle East disruption, the Saudi government has not ordered too much on the tender itself. It goes for another couple of years. In terms of the next half, we won't catch up on last year, but it's certainly starting to ramp up. So, we expect good numbers going forward.

Your next question from the webcast comes from Martin Watson. Martin asks, Stela was launched as an Amalgam replacement product. Given that you are now seeing a wider market opportunity for Stela, how will you manage its market position relative to other presumably high-value products in your range that could be impacted?

Well, we are focusing on the back teeth, the fillings that go into the back teeth, which Amalgam is actually a very small part of that in the market. And if we walk into an Amalgam surgery -- sorry, a doctor surgery and they're not using Amalgam, well, of course, the team goes straight for what do you use in the back teeth for your patients. So yes, it's unlimited opportunity in the back -- for the back teeth.

We don't see it cannibalizing our current product range.

No. Absolutely not. This is an opportunity for us to gain market share in the composite segment.

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

Thank you very much, Darcy. Thanks, everyone, for listening. The next 6 months are going to be -- actually, I should say the next 12 months are going to be a hugely busy time for us. Obviously, the building itself is exciting, but it's a big project for us. And I know the results we will achieve through building that project will be fantastic for the company. And in the next month, we've got our big dental show in Germany, and it's an exciting time for us. We'll be able to show our new products to all our distributors and launch the products as we get registration through the world. So, very, very exciting 6 to 12 months ahead of us. So, thanks, everybody, for your time and wait until the next results.

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