SDI Ltd

ASX:SDI

Earnings Call Analysis

SDI Limited Posts Strong H1 FY '24 Results

SDI Limited reported a record first half in FY '24 with total sales rising by 3.5% to $52.2 million, leading to a net profit after tax increase of 37% to $3.7 million. Gross profit margin grew by 530 basis points to 61.5%, propelled by robust performance in high-margin Aesthetic categories and moderated logistics costs. EBITDA soared by 48.9% to $9 million due to margin expansion and cost control. In regional performance, while North American sales dipped by 3.5%, European sales increased by 6.9%, compensating with robust demand. South American sales declined, primarily in Brazil, where a major distributor reduced inventory. Aesthetic sales grew by 5%, showing market gains and product traction. The company advanced operational efficiency through automation, with several machines ordered for 2024. They also maintain a final dividend of $0.015 per share.

Continued Profitable Growth Sets Strong Stage for Second Half

SDI Limited has carried its momentum forward, achieving record half-year sales results which have been supported by both strong revenue growth and rigorous expense control. An impressive increase in product margins has also contributed to establishing a robust foundation for the latter part of the financial year.

Dividends and Profits on the Rise

Shareholders can take comfort in the consistent dividend, maintained at $0.015 per share. Net profit after tax for the company has swollen to $3.7 million, marking a substantial 37% jump from the previous period.

Strategic Investments and Optimizations

SDI Limited has progressed on operational fronts by upgrading and relocating to a new warehousing site in Montrose. The detailed effort to meet the regulatory requirements for European dental materials is indicative of the company's rigorous standards and its potential to strengthen its competitive advantage from such high barriers to entry.

Product Innovation and Manufacturing Efficiency

Innovation remains at the forefront with Stela, a new restorative product in their Aesthetics range, which has received highly positive feedback. Further attention is directed towards automating and improving manufacturing processes to enhance efficiency and operational performance moving forward.

Regional Sales Performance: A Mixed Picture

The company's sales landscape presents a diverse picture, with strong European growth and favorably impacted by currency movements. However, some challenges were seen, including a slight dip in Australian sales and a more significant downturn in North American and Brazilian markets, the latter of which is anticipated to normalize in the second half.

Product Categories: Aesthetics Lead the Charge

Aesthetics continues to be a growing category with a 5% growth rate, driven by market share gains and new products. Even as Whitening sales show a modest dip, European and North American markets have witnessed an uptick. Meanwhile, strategic shifts from lower-margin products like Amalgams to higher-margin Aesthetics over the past decade have been instrumental in gross margin improvements.

Financial Performance: Margin Improvements and Strong Cash Flow

The company demonstrates financial robustness, with a notable profit margin increase to 61.5% attributed to the success in Aesthetics and a normalization of logistics costs. A significant EBITDA hike by 48.9% to $9 million further underscores efficient operations, while cash flow remains substantial at $7.9 million, bolstering the company's fiscal strength and ongoing investments.

Operating Expenses Kept in Check

In the face of inflationary pressures, the company adeptly managed a modest increase in operating expenses, up 4.2% in Australian dollars. When adjusted for currency fluctuations and considering an impairment charge, expenses have effectively reduced by 1.6%, exemplifying SDI Limited's commitment to financial prudence.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by, and welcome to the SDI Limited FY '24 Half Year Results Presentation. [Operator Instructions]

I would now like to hand the conference over to Samantha Cheetham, CEO. Please go ahead.

[Samantha Cheetham, executive]

Thanks, Travis. Good morning, and thank you for joining us for our first half FY '24 results presentation. My name is Samantha Cheetham, the Chief Executive Officer. And with me today is John Slaviero, our Financial and Operating Officer.

Pleasingly, strong revenue growth has continued into this financial year, achieving another record half sales results. The half saw solid revenue growth and supported by ongoing expense control and impressive product margin improvement, setting up a strong base for the second half of the financial year. We have continued to gain market share growth, supported by our reliable supply of quality dental products to our customers.

Now let's look at today's agenda, Page 2. I will begin the presentation with our performance highlights, which will include a sales breakdown by category and business units, the current product trends and sales by region. 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 half before concluding with our strategy and outlook.

I'm now on Page 3. As mentioned, the -- sorry, the first half of FY '24 was a record sales half for the group, with total sales of $52.2 million, up 3.5% on the prior corresponding period. This was driven by strong growth in most regions. Gross profit margin increased 530 basis points to 61.5%, driven by strong performance in our higher-margin Aesthetics product categories and the continued moderation in logistics costs.

EBITDA increased 48.9% to $9 million, with strong growth in the first half, largely due to improved gross margin performance and strong expense control.

A final dividend of $0.015 per share was maintained with net profit after tax of $3.7 million, an increase of 37% 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 with the project on track.

The operational teams will continue to be hard at work focusing their efforts on securing European regular requirements for dental materials. We are confident in how the process is tracking and embrace the high barriers to entry and competitive advantages that these registrations will provide us.

Stela, a [indiscernible] restorative product that forms part of our aesthetic product range is in its early stages of sales with industry back extremely positive so far.

Finally, automation will also be a key focus for improving our manufacturing efficiencies in the business moving forward with a number of machines on order for 2024 expected to continue driving operational efficiencies.

Let's now turn to sales by business unit. I'm now on Page 4. This slide shows sales by business unit. The strong business unit sales performance reflects strong European growth and favorable currency movements. The Australian unit sales, which also captures the Australian direct export markets, was down 0.9% in the first half of '24, with some inconsistent ordering patterns that are affected by customer import licenses, payment terms and credit limits.

The North American market was down 3.5% in local currency, reflecting a decline in Amalgam sales, representing 28.9% of North American total sales.

A cyber attack on a major distributor, now resolved, also affected sales in this region. The European unit sales were up 6.9% in local currencies, driven by strong demand in most European markets. Brazilian sales decreased 20.3% to local currencies due to a major distributor reducing its inventory with sales expected to normalize in the second half of the financial year. Exports from Brazil were also down in the half.

Now on to our category overview on Page 5. This slide details our sales by category. In local currencies, Aesthetic sales continued to show solid growth of 5% in the first half, with contributions across all business units apart from Brazil. Growth in Aesthetics was largely driven by market share gains supported by the release of new products in prior periods, gaining momentum in the market.

We saw a modest decline in Whitening product sales of reflected in most regions apart from Europe, where sales were up 3.6% and North America up 1.9%.

Equipment, which is largely a complementary product presents our smallest product category, decreased 7.7% in local currency across all markets.

Finally, Amalgam decreased 17.1%, declining in most markets after an abnormally strong period in the prior period due to the withdrawal of 2 major competitors and government to the Middle East.

I will now talk to the product shift away from Amalgam in the next slide. Page 6. The following slides continues -- sorry, shows the decline in Amalgam sales that has occurred now for more than a decade. SDI around this time is heavily focused its efforts towards Aesthetics and other products, which has grown strongly in the period.

Over the last 10 years, Aesthetics, Whitening and Equipment have generated revenue CAGR of 11.06% versus Amalgam at negative 2.89%. This product shift seen over the last 10 years is key to the strong improvement in our gross margins with these generally higher-margin products. Looking ahead, the United Nations have planned at a dental Amalgam product out by 2030.

Now turning to the sales by region on Page 7. This slide shows where the sales have occurred with the sales by region in Australian dollars. Strong growth in Asia Pacific and European markets were aided by strong demand for aesthetic products and favorable currency movements. The large decline in the South American markets reflects the decreased sales in the Brazilian market and timing issues in the other key markets with Middle East and Africa flat for the half.

I'll now hand over to John talk through the financial performance on Slide 8. Thank you, John.

[John Slaviero, executive]

I'm now on Page 9. Thanks, Sam. Turning to Slide 9, which as I said. As Sam mentioned earlier, the first half saw record revenue with 3.5% sales increase and improved gross profit margins driven by favorable product mix and exchange rates.

Profit margins increased by 530 basis points to 61.5% driven by growth in Aesthetics products and further normalizing on logistics costs. Growth in the sector reflects market share gains and pleasingly, our new products released in the last 2 to 3 years has seen positive sales momentum in the market.

Logistics costs continue to fall, getting back to pre-pandemic levels, and we remain committed to ensuring that our service levels with customers are maintained. We are being rewarded with these market share gains as our costs continue to normalize, and we expect to continue to see rewards from this strategy.

I will now turn to Slide 10. EBITDA increased by 48.9% year to $9 million, underpinned by gross margin improvement. Operating expenses were up 4.2% in Australian dollars and 1.4% after adjusting for currency movements.

Included in operating expenses is an impairment of $700,000 relating to properties in Australia and the Brazilian operations. Adjusting for this currency variation, expenses actually decreased by 1.6%.

Across operating expense category, inflationary pressures while moderating are still a feature.

I now turn to Slide 11. The first half of financial year '24, operating cash flow was very strong at $7.9 million driven by improved product margins and good expense control. Net investing activities of $5.4 million represents continued investment in plant and equipment, including the refurbishment of warehouse in Montrose and product development. We maintain strong financial flexibility with cash of $7.1 million, low leverage with $6 million of headroom under current bank facilities.

I will now turn -- hand back to Sam for the business.

[Samantha Cheetham, executive]

Thanks, John. I'm now on Slide 13 operational update. Most recently, we have relocated our warehouse for new Montrose site.

During FY 2023, we invested $2.5 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 industry key opinion leaders. Although in the, at the early stages, we're excited about Stela's progress so far. Stela has been now launched across Australia, the U.S., Brazil and other export markets with repeat orders coming through. We know with time and education that the future prospects of Stela is both 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. All machines have a remarkable short estimated payback with our composite syringe machine already in use.

Following changes in the registration requirement in Europe on dental materials, we have been working hard to apply for the new MDR European registration for SDI's products. The process is complex. However, our team has worked tirelessly and done a wonderful job managing the registration process to ensure we meet the due date.

SDI welcome stringent registration processes globally. We are confident in our manufacturing practices and the products we have to meet regulatory requirements. These regulations place a valuable barrier to entry for the industry.

I will now move on to ESG. Page 14. Now an update on our ESG road map I've shared with you previously. We believe in managing our environment, social and governance risk positions to sustainable growth at a corporate and product level. While these factors have always been a focus for SDI, we are pleased to have recently formalized our ESG road map which has been developed in line with our overarching corporate strategy time lines, FY '24 to FY '27.

FY '24, we will be establishing the foundations for a best practice approach to ESG. FY '25, we will be ensuring compliance with the expectations of our various stakeholders to group. FY '26 and '27, we will be enhancing our performance to manage -- and to effectively manage risk and drive value. We are currently in the process of completing a number of assessments in the early stages of our ESG road map. This is a topic that is of increasing interest and importance to our stakeholders and in many respects, consider a minimum operating standards for today's organization. We look forward to sharing our journey and progress with you.

And now to the strategy on Page 16. Moving to the update on our future manufacturing plants for the Montrose site. In August 2022, following an in-depth review of our company footprint, we purchased the Montrose property for $19 million. Now that we have completed Stage 1 of the plan, moving our warehousing to the new site, we are excited to progress with Stage 2, building a new facility and transitioning our manufacturing to the new site. This is a major transformational project for our business, one we are planning carefully. We will continue to update our shareholders with progress and plans.

At this stage, we can share the following. We believe the total project will cost approximately $60 million, providing an expected pretax return on investment of greater than 20%. Of the total $60 million cost, land and buildings are estimated at $45 million, which includes the $19 million purchase price. The new production machinery are estimated at $15 million.

We strongly believe that the project will get us to $200 million of sales capacity with a new warehouse production space, a state-of-the-art facility with new machinery driving greater efficiency.

On Slide 17, you can see an approximate time line of the project in Montrose. 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, Page 18. The company's strategic priorities remain. Aesthetics and Whitening continue to be our focus for new product development. Stela and Riva Cem Automix with the latest product launches, and I look forward to updating you all throughout the year of the positive progress of these products, particularly Stela, giving its unique characteristics.

We continue to focus on improving operational manufacturing efficiencies, bar automation and project Montrose, expanding our sales capacity to $200 million.

We have been focused on meeting the updated regulatory requirements in Europe and securing registration and have made substantial progress. We are confident we will continue to meet these requirements and deliver high-quality products to the market.

On this slide, I've highlighted the 3 core strategic priorities for SDI. Priority one is to ensure high-quality market-leading products which we will continue to deliver through innovation and growth of key categories. Priority 2 is to ensure business excellence and will be done so through innovation in manufacturing processes and our supply chain.

Lastly, Priority 3 is to ensure premium positioning and awareness within the community, ensuring our products are approved through strict regulatory rules, demonstrating to customers that our products adhere to the high-quality and standards. We are confident that these 3 pillars in our core strategy will hold us in a strong position to continue our growth into the future.

Thank you for your participation today, and I'll now turn to questions. So back to Trevor. Thank you, Trevor.

[Operator]

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

[Mark Topy, analyst]

Just a question just on the Amalgam, that time frame to compulsory in terms of the pressure that's going to put on -- and how does it speed up the take-up of your new product? Do you think can you give us some sort of maybe comment around that, how you see?

[Samantha Cheetham, executive]

Well, the time line goes to 2030, which is some years away. The -- we've got on all our Melbourne boxes going out by [indiscernible], and Stela will take up some of that. It will also take up market sales in the other categories that we're already in, but we'll be able to infiltrate those categories even more.

So in terms of how -- as the Amalgam goes down and the other categories become more important, Stela will take out some of it. If the Amalgam do say...

[Mark Topy, analyst]

Yes. I just -- why would a dentist continue to use Amalgam, I suppose? Is it cost? Or like why wouldn't they switch ahead of the, I suppose, the Mantry?

[Samantha Cheetham, executive]

Amalgam is extremely strong. We still use it in Australia, U.S., et cetera, some key markets. Insurance is a big thing. Some insurance companies in America pay for the amalgam to certain procedures only. It just lasts a long time, and it's very, very cheap or the dentist put in compared to the other aesthetic products.

[Mark Topy, analyst]

Right. Got it. Okay. And then the timing around Europe, have you got any sense or can you give us any sense of how long this sort of process might normally take? Is it like a 12-month thing -- or I know it's difficult to predict, but the approval process in Europe?

[Samantha Cheetham, executive]

Sorry, the registration. Yes. We'll be -- I mean the deadline for making sure the products are either approved or continue to be allowed to be sold in May this year, and we're fine with that. We believe we'll get that through. But we have about 3 years, I believe, to put the documents in. So we are totally covered. We're not worried about it.

[Mark Topy, analyst]

Yes, I'm just trying to get a sense of the time frame around that, that you might expect to get a registration done.

[Samantha Cheetham, executive]

I would say by the full year for next year, you will -- even the half year, actually, you'll know that we've got the registration.

[Mark Topy, analyst]

Okay. Terrific. And I guess in this consumer environment, which sort of is global, do you get any sense of any pushback on consumers spending and maybe delaying or it doesn't seem evident from the numbers at all, is there any sort of consumer response in the dental space to the sort of economic backdrop and consumers tightening up on spending?

[Samantha Cheetham, executive]

Up and down in each country. I think the consumers are the high-end things like crowns and those things that go to the lab. So out the filings that we do is the second-best alternative. Some of the tooth whitening people could say, we're putting that off and that's more of the discretionary spend. It doesn't seem to be affecting us too much. We do hear that some areas dentists understand as they used to be. But we're not too concerned about that yet, Mark.

[Mark Topy, analyst]

Yes, very good. And then the Montrose, the numbers look impressive, I guess, 20% return, can you maybe flesh out what, again, the time frame on that $200 million, so is it most like a sales target in some ways? And also on the slide, you don't talk about automation in terms of the new product machinery, but I'm assuming there's a fair automation involved in at the new site as well.

[Samantha Cheetham, executive]

Yes. We're updating -- so we're -- even on this existing site where we're building -- we're bringing in new machines. So that will lower costs. This current site is very inefficient to manufacture. So the new site will certainly make that more efficient, plus we'll bring even more new machines in the new site as well. So a combination of those two. In terms of when we'll get to the $100 million, we're not giving that up, but it might take 50 years to get there like the first $100 million.

[Mark Topy, analyst]

Because I was just going to say that return on investment, 20%, is that like a 3-year kind of time frame or any sort of any comments around that? Or...

[John Slaviero, executive]

It was based on a 4-year time frame.

[Mark Topy, analyst]

4 year.

[John Slaviero, executive]

Yes. Based on efficiencies that we'll get and the extra machinery to give us more capacity and more efficiencies. So it's based around all of that scenario.

[Mark Topy, analyst]

Very good. And just remind me, I might have forgotten the existing site. Your thoughts around that sale? Or I was just trying to recall.

[John Slaviero, executive]

Yes, we once we've built the new warehouse and refurbished the warehouse we currently have in Montrose, will slowly move production over. And as we do that, we can sell off the buildings here. So a lot of our buildings here on separate titles, so we can sell them off individually. We just recently sold one for $1.3 million, which we did a sale and leaseback for 3 years. It's an option of another 2. So we can slowly do it. But that building hasn't settled yet will settle at the end of April.

[Mark Topy, analyst]

Right. Okay. Okay. Very good. And then lastly, no comments around guidance in the second half, but can we assume sort of a continued sort of trend that we're seeing in the first half?

[John Slaviero, executive]

Well, we haven't made any guidance, Mark. So yes, I guess that's -- if you look at the sales trends, yes, I think Amalgam continue to decline and Aesthetics will continue to increase. Yes.

[Operator]

[Operator Instructions] The next question comes from Shareholder, [ Peter Store ].

[Unknown Shareholder]

Congratulations on a great half yearly result. Good to see the strong increase in gross margin and costs are well controlled. I've just got a question on the impairment on Australian buildings. Can you explain why there's an impairment on Australian buildings and whether there's likely to be any further ones in the future?

[John Slaviero, executive]

Well, there won't be any further ones. Could see the ones that we've still got are quite have had them for a long time. Impairment related to a property we bought around the corner that we're going to develop that property, but then this bigger one came up a 6-acre one and a better decision to redevelop that. So we sold the one around the corner and that's where the impairment. It was mainly around the stamp-duty and a few other costs there.

[Unknown Shareholder]

Right. Okay. And logistics costs have come down. Is there any room for those logistics costs to come down any further? Or are we basically back to the you said you were back pre-COVID levels? Is that basically where we're going to end up?

[John Slaviero, executive]

Yes. It's getting closer to the pre-pandemic levels. I don't know whether -- it will get very close to -- that's what we're seeing. So -- and just generally, shipping is more reliable. So we're not airfreighting -- so all those type of issues have sort of got back to the pre-pandemic levels and also the timing of the shipping it, it doesn't take 3 months now at 6 weeks. So I think during pandemic, we had 1 container stuff there in the U.S. for the ports for 12 months. So all those issues are gone, which saved us a lot of costs here.

[Unknown Shareholder]

And Red Sea, does that affect you at all the issues going on in the Red Sea?

[John Slaviero, executive]

I haven't heard Yes, I must -- I haven't heard anybody sort of highlighted in our export department. So yes, I probably ask them some questions. But normally, if there's something that there's is an issue, I hear about it, but I haven't at the moment. Yes.

[Operator]

[Operator Instructions] At this time, we're showing no further questions. I'll hand the conference back to Sam for closing remarks.

[Samantha Cheetham, executive]

Thanks, Travis. Thank you, everybody, for listening. We're certainly very excited for the next 12 months. We've got what's happening. There's super opportunities in the marketplace, and we can't wait to go and get them. So thank you, everybody. Thanks, Travis.