SDI Ltd
ASX:SDI
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
0.688
1.075
|
| Price Target |
|
We'll email you a reminder when the closing price reaches AUD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
SDI Ltd
You don't have any saved screeners yet
Thank you for standing by and welcome to the SDI Limited HY '20 results conference call. [Operator Instructions] I would now like to hand the conference over to Ms. Samantha Cheetham, Chief Executive Officer and Managing Director. Please go ahead.
Thank you very much. Good morning, everyone, and thank you for joining us for our first half results investor conference call for the financial year 2020. My name is Samantha Cheetham, the Chief Executive Officer; and with me today is John Slaviero, our Chief Financial Officer and Chief Operating Officer. This is a very pleasing result, with many of our milestones achieved in the half. With increased investment in sales and marketing activities, we are beginning to see strong growth in the product category and in the regions we are targeting. Gross margins have been particularly pleasing, reflective of a continuing shift towards our higher-margin products. We are continuing to make improvements in our manufacturing processes, we are investing in research and development and we are growing faster than our peers in the global dental industry. Before talking about this result and sharing with you some of the highlights of the last 6 months, I wanted to recap on where we have come from. Having been established in 1972, we have built this business into a successful manufacturing company, where today, we are exporting to more than 100 countries. Underpinning this success has been our continuing focus on research and development. And through this, we have developed new and innovative products that meet the needs of our customers. Let me now turn to the agenda for today's presentation. I will begin with the highlights for the last 6 months, then spend some time talking about the product categories and the key geographies we operate in. I'll then turn over to John, who will run through the financials before returning to me to talk about our strategy and outlook for the remainder of the financial year. Let's begin with a review of the highlights for the 6 months to December '19. I'm now on Slide 4. This was another record half for SDI, both in terms of sales, up 7.7% to $40 million, and net profit after tax up 11.9% to $3.5 million. Currency had some impact on sales in the period, but as we will discuss later in the presentation, the local currency performance was very strong. As we've spoken about, in recent updates, the mix of products continues to drive strong growth and importantly, favor gross margins -- favorable gross margins. In this last half, we saw 2 of our key category sales, Aesthetics and Whitening, up 11.5% and 12.9%, respectively, significantly ahead of market rates of growth. Amalgam sales continues the trend we have seen in recent years with the U.S. market, the largest region for this product's sales, the biggest detractor. The favorable product and market mix has driven the improvement in the gross margins and in turn, the improvement in the EBITDA. Directors have declared a fully franked dividend for the half year of $0.0135 per share representing 12.5% on the previous period and broadly in line with the net profit after tax growth of 11.9%. Let's now turn to the product category. I'm now on Slide 6, to talk about the product growth drivers. As mentioned in my opening remarks, Aesthetics and Whitening sales growth have been the highlight for the period with local currency growth of 11.5% and 12.9%, respectively, reflecting the continuing growth in these core products. These products now represent over 72% of total sales, while Amalgam has continued its downward trend as seen in recent years. Turning now to the key geographies. Slide 8 breaks down the sales by business unit, as disclosed in our accounts with local currency growth in Australia at 3.2%, Europe at 9.1% and Brazil at 21%. Sales growth in Europe and Brazil were back on track after coming off a previous low base, with sales of non-Amalgam products increasing significantly faster than the decline in Amalgam sales, highlighting a lower reliance on Amalgam products in these markets. The better way to look at our sales is on the next slide, Slide 9. This slide shows the geographical sales and is more meaningful in understanding customer behavior. The strongest regions in the 6 months to December were South America, Europe and Asia Pacific, with sales up 19.9%, 11.7% and 10.9%, respectively, in Australian dollar terms. As indicated earlier, the strong sales performance was due to product sales in our 2 leading product categories, Aesthetics and Whitening. Further, following investments we have made in building our local manufacturing capability in -- for some products in Brazil, we are beginning to see strong performance in this market. These initiatives have enabled us to compete more effectively in this local market. Finally, the Asia Pacific result has continued the trend seen in other regions with our leading products gaining traction. In Australian dollars, the North American market was flat, down 5% in local currency for the period. Amalgam sales represent more than 1/3 of sales in this market, were particularly weak in the 6 months to December. In addition to this, Whitening sales were also down, which is being addressed with a new marketing campaign. I will now hand over to John to talk through the financials.
Thanks, Sam. I'm now on Slide 11, the profit and loss. The key drivers, as shown in this report, are sales growth of 7.7% with gross margins up 5.3% to an impressive 66.2%. As mentioned by Sam earlier, this was past -- in part driven by favorable currency, but has been mainly driven by sales of our higher-margin products in favorable margin regions. Other income expenses relates to unrealized currency losses of $707,000, reversing the trend we saw in the prior period. Operating expenses grew by 12%, 9.7% in local currencies, with most of this growth attributable to increased sales, additional investment in sales, marketing and distribution, continued promotion of SDI's Aesthetics product strategy, additional sales staff and increased investment in research. Excluding these additional investments, the underlying cost growth was 3.5% for the period. Turning to the balance sheet on Slide 12. Today, we have a healthy cash balance of $6.1 million with no debt, adding significant flexibility to be able to pursue further automation initiatives, to continue to invest in research and development and to increase returns to shareholders. One other area that needs some additional attention is the increase in inventories. This increase is primarily due to the initial stocking of packaging for the rebranding of the Whitening products and the new light curing light due to -- for release to all markets this year. Our expectation is that inventory will return to normal levels in the second half. Turning to the cash flow statement on Slide 13. As mentioned, there was an increased investment in inventory with the rebranding of the Whitening product and the new light curing light launch. We also continue to invest in product development with $1.1 million spent in the period. I will now hand back to Sam to run through the strategy and outlook for the remainder of the financial year.
Thanks, John. As shared with you previously, our 4 strategic priorities are as follows: one, rationalize the product portfolio and focus on products that will drive the best returns; two, focus on key product categories for growth including Whitening, Glass Ionomers and Composites; three, drive Amalgam replacement; and four, increase innovation and speed to market to meet the changing needs of dentists and their team. On progress to date, I wanted to share with you some of the milestones we have achieved. We have been -- we have made significant progress on our plans to rationalize SKUs and expect to see this drive further operational efficiencies in our manufacturing process. Our focus on the core categories is driving strong growth ahead of our peers. We continue to invest in the development of new products, which will be launched this year and our Brazilian manufacturing investment is beginning to yield returns. On the outlook for the remainder of the financial year, we expect to see the typical seasonal bias favoring the second half of the year with our 2 core categories continuing to drive sales growth. Thank you for listening to our presentation. I will now return to the operator to moderate for your questions.
Thank you. [Operator Instructions] Your first question comes from Doug Macphillamy with Avoca.
Just a quick question, if I may, on the staff costs, that upwards in the first half, just how you expect that to step into the second half in terms of, I guess, how that cost base looks on an annualized basis? Also, if you wouldn't mind talking through in a little bit more detail, the inventory build and expected wind back in the second half?
Yes. In regards to the staff increases in our sales areas, we expect that to continue. That cost, that's the new cost base level. Also, part of those sales distribution and distribution cost also relate to the level of sales, which, obviously, there are some variable costs there. If the salespeople have achieved their targets, it's commissions to be paid. So we see that as a new cost base. And maybe a couple of hundred thousand difference. But we see that is a new cost base and including in the R&D, see that as the new cost base as well. In regards to the inventory, we see the light curing product that's being released in most markets and most importantly, in the North American market, so we see that initial stocking sort of get back to normal levels in the second half. And the rebranding of our product, our Whitening products, we bought all the -- pre-bought all the packaging. That will also feed through in the next 6 months.
Okay. And I guess, just what [ sort of ] that to me was that uplift in the Whitening product after a few periods of a fairly, I guess, stable sales. Just a little bit more detail, if you wouldn't mind, on what's driven that growth?
Sure. There's just more awareness by the key dentists in various markets. We've got an extremely high-quality product. We are competing in several areas with some local manufacturers, and they want the Australian made products, it does work very well for us. We've just got to get the U.S. sales up. And that's our goal for this year.
And I guess the last one for me, Sam and John, but it's just on the coronavirus impact, if any, just on supply chain and the business.
Yes, we're looking at that on a daily basis. So far, everything seems okay. The key products that we get from China, that's where the overstock is. And we're just -- it will affect us in some areas, but nothing significant that we've highlighted for yet.
Yes, in lots of ways, we're sort of falling left that these products, the rebranding, that packaging is from China, which we're well-stocked in. And also the light curing devices and also our mixing machines are made in China. We've got quite a reasonable stock of those. So at this stage, we don't see -- I agree with Sam. We don't see anything dramatic happening. We're still looking at it -- on some minor packaging for our products. But I think we're in a pretty good position.
We feel pretty good, yes.
Your next question comes from Mark Topy with Select Equities.
I think my question was really around the Whitening -- in Whitening products in U.S. as well. So just to be clear on that, it's North America that's caused an issue? And can you just elaborate in terms of the marketing, what do you need to do to drive that product in the U.S.?
So we're launching our new packaging, and it's a whole new uplift in the image there. That's happening at the trade show next week. We have to -- there's some other competitors that have really entered the market and become quite aggressive, and we'll have a new product out later this year. But in the meantime, we have some very aggressive marketing campaigns. But in particular, we are the -- sorry, the U.S. sponsor of Miss Universe, the modeling competition. So that's pretty exciting. And it's done very well for us, being the sponsor here in Australia. And we're going to -- sorry, we're already -- we've just started in this last financial year to sponsor Miss Universe.
Okay. So do you have to do more work with the dentists as well? Or is it primarily a marketing issue, do you think?
Look, it's with our distributors. When they get a new product to sell, they just go with the hottest, latest. And I think they'll really like the packaging. They certainly are very keen on the Miss Universe and being involved there. It's something for the distributors and the dentists to be involved in. So it's a nationwide thing. But early days yet, but we're feeling very confident.
And -- it might be a sample of one. I just noticed with my dentist, they've e-mailed me a special offer on teeth whitening. I don't know whether I think I specifically need that product or not, but with a 10% discount, has that sort of competitive behavior increase in Australia?
I think that's pretty normal around everywhere actually. That's been going on for a while. He's probably just got your e-mail list and your address.
That could be it. And also just payback on the new machinery. Can you just, like, give us some feeling about the return, the press you're going to -- is it like a 2-year payback, 3 years, in terms of sort of the benefits it's going to deliver?
Look, it is a difficult one to calculate. So we look for a payback of anywhere between 1 to 2 years on most of our machinery.
Well, that sounds pretty positive.
Yes. Look, I guess, an example on that, we've got a new capsule coming out, a [ light activation ] capsule. We've just completed that machine, and it cost us close to $1 million. We expect, with this new capsule or delivery system in our Glass Ionomer range, we'll significantly boost the sales of that Glass Ionomer range.
Okay. And just on Amalgam, I can't afford it considered the -- had plus side. So can you just sort of comment on your expectations in -- on that trend now? On the downward trend there?
Look, some areas have increased, some have gone down. Overall, we've gone down. I think it's continuing to go down in terms of -- certainly, no growth. Really it's just the way the market is going, and that seems to be worldwide.
Yes. I think, Mark, if you turn to one of the stats on the slides where we compare Amalgam versus non-Amalgam products, you'll find that in some markets, the impact of the decrease is a lot less because they're not so reliant on Amalgam product anymore. And I think, as Sam said, the North American market is still quite [ large with ] around 35% of the sales. But the European, when I turn my [ level up to my slide ]...
I'm just trying to -- like, what should we be thinking in that the trend going forward now? Is it just a steady decline, given what you're saying about the U.S.?
Yes, continual decline. Yes. What change is [ hard to pick ] because in the next 6 months, we might pick up a tender in the Middle East, which is mainly all Amalgam, right? And there we have no visibility on those at all. So...
You don't get feedback for you -- it's hard to -- hard thing to track [ outside ]?
Hard, extremely hard, because we're not dealing with the end customer, we're dealing with our distributors, right? Yes.
[Operator Instructions] Your next question comes from [ Matthew Rosso ] with -- a private investor.
I just wondered if you could provide an update on the R&D grant that you mentioned in the AGM and whether that was due come through in the second half. And whether that means you'll be increasing the R&D spend from that $1.7 million in the first half?
Yes. Look, that grant has just started. We've just started working on that. That will increase our R&D spend, but we'll get some grant moneys back on that. And it will be depending on the timing of the spend. So it's over 3 years, but it's virtually just started. So we -- it hasn't really picked up all that much momentum as yet -- still getting themselves organized.
And the product itself will be -- we believe about 3 years.
Yes.
Your next question comes from [ Simon Prowse ] with Barrington Equities.
Sam and John, amazing second half by the looks of things. So I just wanted to ask about the December half, June half split this year. I know you said that it looks stable based on previous years. But I was just trying to adjust for the gains and losses on the currency. And when I do that, it looks like the current half was up almost 50% on the pcp. And I just wanted to see, is that sort of -- is that something that we can expect moving forward? Because wondering whether things had moved from the second half into the first half that would kind of account for that because it's quite astonishing, any thought?
Yes, no, nothing as what we see has changed. We still believe our 2 halves splits about 45%, 55%, somewhere around there. It can vary a little bit on that. But the currency, that'll struggle around a bit. And look, that unrealized currency loss, I think, was in the -- once again, in the last week of December, where the U.S. dollar went over $0.70, and then a week later, it went back to about $0.68, $0.67. So it's quite distorted but it's something we really -- because it's unrealized, it's something we really can't do much about.
Yes. No, no, I understand. Just there's sort of -- it seems like there's been a big step-up. And obviously, the Amalgam drag has been dropping. And then you were mentioning Middle East looking strong in the second half and Whitening to pick up and all these positive things. And I was just wondering if there are any negatives that -- were things in other regions move forward into the first half that you thought or [ evidently ] not, but that was just what I was trying to get at.
No, I think it's all [indiscernible] one each week.
Yes, but we don't know what the next 6 months are going to bring out, especially with this virus going around, whether demand drops off, consumer demand. We don't have a feel for that yet.
No. Okay. The split looks similar.
Yes.
Great. And then just in terms of the new packaging and stuff, is -- are we expecting -- or would you expect the inventory write-off in -- because the old stuff or do you move that to other places to sell it and just a little bit of extra logistics costs or the inventory is obviously built up. But am I -- would we be expecting any write-off because of the old stock?
Not really. That's sort of taking a while because we don't want to have any significant inventory write-off. So no, that's all. Yes.
Yes, so [indiscernible] right.
[indiscernible] stocks down where possible.
Great. And I just -- I noticed the APAC was obviously growing nicely. Have you started or thought about sales into China? And is that something that the SDI is looking at?
Yes, no, we've got an exclusive distributor there who was going really well. Certainly in the first half, they were -- they've grown -- I think it was even double digits, but -- and we did have good targets for them for the next half. Look, I -- right now, that distributor, all of them are working at home, the dentists are certainly closed. So you can only imagine, the longer this takes, the lower the sales will be in that area. But it's not significant to SDI yet.
No. Great. And that's obviously just a short-term thing. And by the [indiscernible]. And then for -- just in terms of your thinking in terms of capital allocation and everything, I noticed, obviously, the cash is relatively stable. Were you expecting interest to fall in the second half? You've just spent $2.9 million on PPA and product development. Where do you -- I was just kind of -- obviously, the dividend went up by over 10%, which is great. But I was just trying to work out what we're doing with the money. And clearly, there's going to be a lot of cash flow next half. Are we looking at an increase in the PPA and product development? Or is that going to be pretty flat? Or what are we doing with that sort of money? I was just interested in the payout ratio staying at sort of circa 40% or so.
Yes. Look, I think we'll certainly be investing in the areas that produce the results. But -- go ahead.
We have sort of said in the past -- in past presentations that our normal plant equipment expenditures are around the $2 million, but we've increased that to $3 million. So just to speed a few things up.
Is $3 million per half?
No. $3 million per year.
So -- okay. And then we've spent, I think, $3 million in the first half this year?
No. Sorry, that's just plant equipment not in [indiscernible].
All right. Okay. And then $1.1 million in product development as well.
Yes. So you can see that.
So you imagine those 2 costs together in the next few halves, do you think they're going to be around that $2.9 million together? Or would you imagine they'd be higher or lower?
The plant equipment will be about $3 million, all up. And then the intangibles will be around the $2 million to $2.5 million.
Okay, [ broadly ]. And then that just comes back to that sort of -- what are we doing with all the cash that's gone, it'll be building up with the -- once the inventories go down again, are you -- I was just thinking, is the payout ratio likely to amend at all? Or what are you guys thinking in terms of capital return or returns of money?
Well, I mean, I think as the profit grows, we do certainly want the dividend to grow.
But at a steady pace. The last -- we don't want spikes in dividends. We want to be -- ensure that we...
Yes, going up slightly and surely, you don't have to drop it again, completely. Agree. Yes, just -- I thought you were obviously been quite [ in control ]. Happy if you've got things to spend on that have got good ROEs, then great, but just otherwise, it seemed like we had a $6 million that's going to be growing and not really doing anything on that.
Yes, look, we have invested additional, like we said, into the sales and [ marketing ] area just to further enhance its product strategy, to get all momentum in it, and that is continuing.
We'll continue to.
Yes, we'll continue to do that. Our sales force is all over the world, everybody wants more salespeople. So we're fighting that one every day. So there's plenty of things we can spend on to maybe bring forward better sales growth. And yes, it's just a matter of allocating that. And doing this in a responsible and steady way.
Yes, great, great. And one final quick one, just sort to start off with. I noticed that obviously, Brazil was back on track, growing, and you'd obviously spent a bit on sorting out distribution over there. Do you see -- where are we in terms of market share over there? Is there a huge runway there, or is it just a great where we're of tracked -- we've jumped back up and now we sort of track normal growth rate. So where do you see us in terms of the runway in South America?
So there's a huge amount of opportunity. In terms of market share, it just depends on the product categories. In some, we do really well. In others, there's a lot of upside. The Whitening is the one area we're really focusing on and the Composites. They're big markets. And the Whitening, we're being helped by the manufacturing that we're doing in Brazil. So the import costs are low. So that's absolutely roaring ahead, which is great. And the Composites, the tooth-colored fillings, they are also that the whole team over there is very focused on getting them right. So lots and lots of opportunity there. It's a huge market, 180,000 dentists, I think.
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. I'm certainly very happy with -- I'm very happy with the results. And I can assure you that the team are very, very focused on achieving better results over time. And they're working very, very hard. All from the start of the product development to the final sale. So it's an exciting time for SDI, and thank you for your time.