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

Thank you for standing by, and welcome to the SDI Limited FY '25 Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Ms. Samantha Cheetham, CEO. Please go ahead.

Thank you, Darcy. Good morning, and thank you for joining us for our 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. While the result is flat on last year, I'm pleased to report that we have continued to make significant progress on product development, on our Montrose project and saw further improvement in our gross margins with another 80 basis point gain over the year. The only soft spot in the result was the Amalgam sales, which continued to decline, now representing 13% of total sales. 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 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 entering -- returning to me to outline our key business updates that have occurred throughout the year before concluding with our strategy and outlook. Next slide. FY '25 saw sales of $110.4 million for the group, down 0.7% on the prior corresponding period. Gross profit margin increased 80 basis points to 62.9% due to stronger performances in our higher-margin products as well as stronger regional mix and increased efficiencies across production. EBITDA fell by 2.7% to $21.6 million on the prior corresponding period, with operating expenses well managed for the period. A final dividend of $0.019 per share was in line with the prior corresponding period with normalized net profit after tax of $10.5 million, an increase of 0.1% on the prior corresponding period. In terms of our business updates, revenues were flat with a mix of regional performances. The gross margin improvement of 80 basis points was largely attributable to product mix and increased efficiencies in production. And as we move into FY '26, we expect this trend to continue with the new machines becoming fully operational. During the second half of the year, the Pola tooth whitening product range undertook a branding upgrade and was well received in the market. Stela, a posterior restorative product that forms part of our aesthetic product range continues to reach broader acceptance in the market with continuing strong take-up. Finally, we have made significant progress on our Montrose site relocation with the permit process, the last step before we begin construction. Let's now turn to sales by business unit. Next slide. This slide shows sales by business unit. During the year, we saw good growth in Europe but was offset by weaker direct exports. The Australian unit sales, which also captures the Australian export markets, was down 10.5%, with Australian direct exports decreasing 15.3% 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 3% in local currency, primarily due to a 16.6% decline in Amalgam sales in the region. The European unit sales were up 5.8% in local currencies, driven by demand for aesthetic products in most European markets. Brazilian sales increased by 9.7% 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. Next slide. Sales by region reflects strong growth in the European markets, which were aided by strong demand for aesthetic products. All other regions were weaker with the Middle East and Africa experiencing some local challenges given the conflicts in this region. Next slide. This slide details our sales by category. In local currencies, Aesthetics sales continued to show solid growth of 4% in local currency terms, with growth across most regions partly offset by a decline in Australian direct export sales which were down 10.2%. Whitening product sales were up 2% in local currency terms with good increases in North America and the Australian domestic market. Equipment, which is largely a complementary product and represents our smallest product category, was down 2.2%. However, Brazil and Europe saw good growth with 4.4% and 18.3%, respectively. Finally, Amalgam sales continued decline, sorry, continued recent declines, falling a further 21.9% in local currency terms. The declines were in most markets, particularly in North America, which was down 16.6% over the year. Let's now turn to the financials, which John will take you through. Next slide.

Yes. Thanks. Thanks, Sam. We are now on to the profit and loss, Slide 8. As was mentioned by Sam, sales declined by 0.7% in the period with good growth in the European and Brazilian markets, offset by declines in the Middle East and Asian markets and the continued decline in Amalgam product sales. Normalized net profit after tax was up 0.1% to $10.5 million, with EBITDA down 2.7% to $21.3 million. Gross product margins increased by 80 basis points to 62.9%, reflecting operational efficiencies plus geographical and product mix. Total operating expense in Australian dollars increased by 3.6%, reflecting a return to a more normalized inflationary environment. Turning to the balance sheet, next slide. Cash increased by $2.7 million after investing $4.1 million in property, plant equipment, $4.4 million in product development expenditure, reducing inventory by $1 million and reducing debt by $7.1 million following the recent -- the receipt of funds from a sale of a property. The company has unused working capital facilities of $10 million, a $23 million unused building construction facility and $9 million cash in bank. Now turning to the cash flow statement. Next slide, please. Operating cash flow was up strongly in the period, boosted by a reduction in working capital and a normalizing of operating expenses back to more normal levels of inflation. There was a further repayment of borrowings following the sale of a property, and we also made a payment for the interim dividend for the half year 2025. I will now hand back to Sam to run through the operational update and the strategy and outlook section. Next slide, yes.

Thanks, John. I am now on the operational update. During the year, as mentioned earlier, Stela continued to gain traction and acceptance in the market with $2.5 million in sales recorded this year. This is one of the best performances of a new product launch we have seen. And as we continue to roll out to new regions, we expect this momentum to continue. Turning to our investment in automation. We have continued to invest in automation to improve manufacturing efficiencies and capacity and are seeing operational efficiencies reflected in gross margins. The updated 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. As can be seen from the operational dates in the table, the first 2 machines were only operation in the second half of the financial year, and we expect to see continued benefits in FY '26. I will now move to ESG. Next slide. Over the past year, we've continued delivering on our ESG road map while also preparing for the new Australian sustainability reporting standards that came into effect on January 1 this year. For STI, being a Group 3 reporting entity means that by FY '28, we will publish a sustainability report integrated with our financial results, covering climate-related risks and opportunities that could reasonably be expected to materially affect the company's financial position as well as how our governance, strategy, risk management and metrics and targets will be used to monitor and manage them. ESG has always been part of how we run the business, both in our operations and in our products, and we are ensuring this approach positions us well for the future and for meeting these new requirements. We look forward to continuing to share our ESG journey and progress with you. Next slide. Turning to Project Montrose on Slide 15. The tendering process began, and we have received construction tenders around $26 million. The next stage will be the due diligence on the preferred tender. The planning permit for our project is expected to be received by the end of September, although the exact timing of this can be hard to be definitive. As shared recently, the project will be fully funded by the combination of the sale and leaseback of the current premises plus debt. We're excited about the project, including the capacity it will add and the efficiencies it will generate for the business. Next slide. Project Montrose. Here, you will see an approximate -- sorry, here we see an approximate updated time line of Project Montrose. We are currently still on track to be relocated by December 2027. Next slide. Strategy and outlook. The company's strategic priorities remain unchanged. Aesthetics and Whitening continue to be our focus for new product development. Stela was the latest -- Stela and Riva Cem Automix were the latest product launches, and I look forward to updating you all through the year of the positive growth 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. A research and development team will remain focused on product development with the aim to have 1 to 2 products released to market in the next 12 months. We attended the International Dental Show in Germany in March. It was a great success as we were able to showcase some of our most innovative products. Thank you for your participation today, and I'll now turn to questions. Thanks, Darcy.

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

Just first question, just about some of those markets you've seen disruption in the Middle East. Can you give us some commentary around the outlook and the factors involved in that a little bit? And is there any normalization or improvement in some of those markets that you're seeing?

Yes. I mean it's been a bit tricky even getting stock in there, customers will order and we can't ship it because of various reasons. There's no plans going in there or perhaps they haven't paid their bill from -- they're a bit overdue, so we have to manage that as well. And then one company -- sorry, one country, we had some tenders and they've sort of slowed those tenders down. But for the future -- for the FY '26, we are expecting certainly a turnaround. And I guess these conflicts probably -- they probably treated as business as usual. I certainly know the Israelis do.

Okay. And even South America, or what's sort of sort of the outlook there?

No, that's very good. I mean, Brazil is our strongest country, and they are focusing on the growth and the targets for the year, and that will certainly eventuate the rest of South America. It's a huge market. It's a growing market. And they are all very positive for the year.

Yes. Also, Mark, when you look at the South American sales, that's in Aussie dollars. And unfortunately, it's been -- the currency has not gone in our favor. So you can see that when you look at the Brazil business unit sales in Aussie dollars, they're a couple of percent down, but in Brazilian real, they're up over 9%. So there is a bit of currency in that South American market.

Right. Okay. And that's obviously due to some of the pressures that they're facing from the U.S. or the economy…

[indiscernible]

Yes, fair enough. And then obviously, on the Stela side, just in terms of the ramp-up, the feedback from Europe and where you see that going over the next year. Can you be a bit more -- give us a bit more detail on that?

Stela, we're really pleased about Stela. As I said, it had a really good launch. It's going much better than other launches we've had. The Stela is still rolling out. We have it registered in Europe, North America, Australia, Brazil and some of the countries we're very focused on. We're still rolling it out and getting registration in other regions. We don't have it everywhere we sell. And it does take time for -- in the existing markets for a product to get going. We're investing in research. So proving that the product is right. This is through universities, through evaluation companies. And then once everybody sort of gets to understand the results, key opinion leaders start talking about it. And we certainly are getting key opinion leaders talking about it right now, but there will be more and more that catch on to that. So the Stela is our product for the future. It's very much a company maker, and it's really helping us get -- be well known, more well known in the aesthetics category.

So would the priorities be around Europe in the next year? Or how do we see the kind of the balance of the business…

For Stela?

Yes.

No, the priorities are the key markets, North America, Europe and Australia. But Europe will be growing with Stela plus some of the other products in the Aesthetics and Whitening categories.

And sort of the competitors in the space, how do you see Stela as a sort of leading product against some of the competitors in the space?

Yes, it really has no competitors there. Some people -- some companies say, hey, we're similar, but we just have to prove and show that we're not.

Sure, sure. And then, John, on the net cash, I presume that is a function of -- that lift is a function of some of the costs coming down? Or could you just elaborate on what is happening there?

Yes, look, the cash, it's been -- we've managed our inventory quite well. I think June last year, we were probably about $1 million overstocked. So we've managed that and brought it down. Our collections, our finance team have been very focused on collecting -- on the collections. So yes, we've put a lot of effort in the cash flow. But also, as you say, there also is a reflection on our operating expenses. We don't have the -- particularly overseas, we don't have 5% to 8% inflationary pressures that they all come back. So yes, so it's all been quite good.

Your next question comes from [ Peter Stora ], private investor.

Peter Stora here, shareholder. The new machines have got quite a short payback period. In terms of the cost, are they expensed or capitalized?

They're capitalized, yes.

They're capitalized over the what? Over the payback life or a long…

It's probably around -- on average, it would be about somewhere around the 10 years.

All right. Okay. Great. Okay. And with the Montrose tender, is that close to being fixed cost? Or is it -- given the way materials are moving at the moment, is there wiggle room for the tender for contingency for those additional costs?

Look, we -- I haven't seen -- because we haven't appointed anybody, I haven't seen an actual contract yet, right? So where we're up to, we do have a preferred one. So we're doing financial due diligence on that company. Once we get that satisfied, then we'll get the contract. We'll obviously have to pass it through lawyers. And then I'll have a better idea of what's going to be included in those contracts and also the stage in which we have to do payments and therefore drawing down on debt. So it will all come -- I'm hoping that it will come a lot clearer in the next couple of months…

Great. Okay. And then finally, given that sales -- more than 20% of sales are North American, the big question is, how will Mr. Trump's tariffs affect the company? Do we have stuff coming through from China that's going to pick up a higher tariff or we…

There is some, in our equipment category, there is some of that, but that's a very small category to us. That will be an interesting one because I believe that our competitors will be hit with the same, and that's LED lights and curing lights and the mixing machines. But we're looking at it, trying to put -- looking at the rules and maybe moving some of the content into Australia rather than a whole lot in China. So we're still working through that one. The rest of it, the 10%, we've already started paying that, and we will absorb that with future price increases. But we don't see that to be a big issue for us.

There are no further phone questions at this time. I'll now hand back for any webcast questions.

Thanks, Darcy. We've got a number of questions here, John and Sam. First question, you dealt with, with respect to the tariffs, I'll move on to the next one. "Post completion of the move to Montrose and the sale of Bayswater site, roughly how much debt will SDI have?"

It will be sitting around the $23 million. But I can confirm that up once I've got all, the more detail in the tenders, so, yes.

Thanks, John. Next question. "Given the change in the U.S. with Robert F. Kennedy, Jr. leading the HHS, are there any regulatory concerns for selling Amalgam into the U.S.?"

No. If anything, is sort of a bit more focused on fluoride, and we haven't had any concerns about that yet, the Amalgam part, yes…

Thanks, Sam. John, a couple for you. "Can you provide an update on production equipment CapEx expected for the Montrose upgrade?"

Yes. Well, we expect that our CapEx, once we do move to Montrose will -- for the first couple of years, will be around the $4 million to $5 million because there's some machinery which we want to order, we haven't yet. And when we get a clearer picture, when we start moving, we'll put the orders in because they won't fit where we are now. So there will be some -- I would expect our capital expenditure for the next, say, 3 years -- 3 to 4 years would be around the $4 million to $5 million.

Thanks, John. Very clear. So a simple question here. "Why is there so much cash on the balance sheet when the company is carrying debt?"

Well, the company is carrying the Montrose purchase debt, right? So that's a facility that we have separate to working capital. Apart from that, we have not drawn down on our $10 million of working capital. So we're sort of more or less fixed in on that. We have -- we are fixed in on our repayment plan with that at about $1 million a year. So that could be something we look at in the future at the next facilities review.

Thanks, John. Sam, this one will be with respect to Stela, obviously, good result in the year. So this investor is asking the question on the revenue. "You reported $2.5 million in FY '25, $1 million in FY '24. Do you anticipate Stela will continue on this growth trajectory? And obviously, the math is being done here, $10 million for FY '26, $20 million for FY '27. Or is it still the early stage, you expect it to be circa $5 million in FY '26?" So some guidance being sought here by this investor.

Right. So we don't usually -- we don't give out any guidance, but it certainly wouldn't be on the first, the $10 million. We will absolutely -- I mean, we have forecast that it will absolutely grow on that $2.5 million.

Great. Thank you, Sam. This could be for you, John. "So one of the features of the result is the good working capital management, obviously good cash flow. Could you indicate how much of the additional inventory in dollar terms is expected will need to be held in the process of moving manufacturing to Montrose?"

I don't see that it will be material because I think I've explained this in previous investor meetings that our manufacturing is quite module. So we'll move -- for example, we would move our composite manufacturing first, get that settled in. So we'll build a little bit of composite stock. And once that's settled in, we go back to normal stock levels and then we might move, say, the next one and build a little bit of stock. So I don't see a material blowout of inventory levels in that move.

Thanks, John. Sam, one for you. "Can you give some detail on the sales cycle of new products, primarily Stela? Do customers generally order small amounts and scale up as they test products and gain confidence -- and do you have a target for the Stela revenue as a percentage of total in the few years to come?"

Well, I guess I just answered the Stela -- the sales target, just question before. But in terms of how does the customer buy, well, they will start off with smaller, like an individual dentist will probably buy 1 box, which will probably have about 15, 20 fillings available to you. And then once they -- it becomes a normal habit, they'll buy more and more, and that will just ramp up, yes.

Thanks, Sam. "Can you comment on the status of the marketing team in the U.S. set apart and now appropriately resourced?"

Well, my team over there will probably say no. However, we do -- the marketing is based here in Australia. We have a team -- and we do it globally from here, we give out all the styles, et cetera. We have one person dedicated here for the North American market, and it's going very well. Probably, if anything, we'd love to spend more money on advertising and key opinion leader development, but we do that gradually. So yes, I believe it's sufficiently resourced in terms of that part.

Thanks, Sam. John, difficult one to answer this one because, as you know, the rules continue to change in the U.S. so it's difficult to know what happens from one period to the next. But are you concerned about Trump's move to 30% to 50% U.S. branch profits tax?

Yes. Look, that's probably quite a complicated question to answer. We will stick by our transfer pricing policies, which it's based on comparative businesses. So most of the profit is here in Australia, but that's handled by our transfer pricing policies. We will get expert advice as we get more clarification on that. So at this point in time, I'm not that concerned, but we will be getting some advice as it becomes clear what's going to happen.

That's great. Thanks, John. Darcy, that's all from the webcast. So back to you for any on the line.

We have a follow-up question from Mark Topy from Select Equities.

Just on the gross margin improvement, Jon, just wondering if you can remind us on with the automation you're now looking to put into place for the new plants and so forth, just that trend over the next few years in terms of that gross profit margin?

Yes. Mark, here, look, we expect the margin to go up. We don't give out where we expect it to be. But we do -- we're slightly a bit disappointed that it came back 0.1% from the half year, but that was to do with mainly product mix and geographical mix. But we do expect it to improve in the next 12 months, probably more improvement in the second half of the year than in the first half of this financial year.

Great. And then as you introduce that automation and reduce the headcount, how do you see it longer term?

The headcount is something that we're always very conscious of. And we are very much in the belief for Australian manufacturing to survive. It's got to be automation, and that's where we're spending all the money in. So part of that payback, you see the payback, most of that is headcount, right.

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

So Darcy, before we hear from Sam, there is just one follow-up question on the webcast, which I'll read out and then pass back to you, Sam. "So operating cash flow growth was very strong year-on-year. Do you anticipate an improvement in operating cash flow in FY '26 compared to FY '25?"

I anticipate some improvement. I guess we're investing more into marketing. And also, we're investing more into our compliance team here to do with the additional requirements of this European MDR, which is quite hefty, resource-heavy. So we will be spending a bit of money there because we need to get all of our products. We've got a time line that we need to get all our products registered under the MDR. And generally, the environment around that, like on the reg affairs and QA, globally, the environment is becoming a lot stricter. So we do have to put some more resources in there.

Thanks, John. Sam, I'm going to hand back to you for closing remarks then.

Thanks, Adrian. Thank you, everyone, for being on the call. It's -- for SDI, it's a really exciting year. We'll start our build at Montrose. It's to put SDI ahead for the future and give us the efficiencies and help us with the innovation of our products. And of course, the other exciting part of this year will be the growth of Stela, which we're all watching. And of course, our increase in market share for our tooth whitening, the Pola, where we've rebranded. So the team, everyone is behind our strategy, and it's definitely going to be a good year. So thanks, everybody.

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