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Edited Transcript of SDI.AX earnings conference call or presentation 23-Aug-19 1:00am GMT

Full Year 2019 SDI Ltd Earnings Call

BAYSWATER , VICTORIA Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of SDI Ltd earnings conference call or presentation Friday, August 23, 2019 at 1:00:00am GMT

TEXT version of Transcript


Corporate Participants


* John Joseph Slaviero

SDI Limited - CFO, COO, Company Secretary & Executive Director

* Samantha Jane Cheetham

SDI Limited - CEO, MD & Executive Director




Operator [1]


Thank you for standing by, and welcome to the SDI Limited FY '19 Results Call. (Operator Instructions)

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


Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [2]


Thank you very much. Good morning, everyone, and thank you for joining us for our full year 2019 results presentation. My name is Samantha Cheetham, the Chief Executive Officer; and with me today is John Slaviero, our Chief Financial Officer and Chief Operating Officer.

Let me begin with the highlights for the year, then spend some time talking about the product categories and the key geographies we operate in. I will then turn over to John, who will run through the financials before returning to talk about progress with our strategy and outlook for the year ahead.

Let's start with a look at the year just completed. And I'm now on Slide 4. This was a really pleasing result with many of our growth ambitions met over the year, and encouragingly, we are starting to see genuine operating leverage emerge in our business. As we will discuss later, we continue to grow faster than the market in many of our leading product categories following the successful execution of our strategy in product development and distribution.

Now looking at the numbers. Sales grew 6.8% in Australian dollars to $79.6 million. EBITDA was up 16.5% (sic) [16.7%] to $12.2 million (sic) [$14.2 million]. And net profit after tax was up 29.4% to $7.3 million. Sales were driven by a strong performance with our Aesthetics products, which represent 42.7% of total sales, up 11.6% for the year in local currency. Cash flow was once again a feature in this result, and as John will discuss later in the presentation, there is no net debt.

Gross margins were boosted in the period to 62.6%. This was a result of favorable currency, but also a reflection of the improving product mix we are seeing towards our higher-margin products, however, somewhat offset by strong direct export sales, which attract lower margins.

Dividends for the year were up 48% or $0.037 per share, including a special dividend of $0.01 per share in the first half of the financial year.

Turning to Slide 5 on the high-level financial overview. Today, the company is in a strong financial position, giving us the flexibility to explore a range of opportunities to continue to grow our business. We generate a sufficient amount of free cash, enabling us to maintain our focus on investing in the business, including new machinery and product development. We have also stepped up our investment on brand development and new marketing initiatives, and I'll outline some of these later in the presentation.

Let's now turn to the product categories. I'm now on Slide 7 to discuss research and development, a key strategic focus for our company and a significant driver of the business, and also an update on our product mix as it stands today. As you can see in this slide, the Aesthetics and Whitening products now make up 70% of sales from less than 50% 5 years ago. This is reflective of the success in the research, development and commercialization of new contemporary dental products, which we are now known today for. Over the last year, we invested a further $2.6 million in research and development on new products and expect this level of investment to continue in FY '20.

With respect to research and development accounted for on the balance sheet, shown as intangibles, 70% of this amount relates to Aesthetics products. This leading category in our business was 43% of total sales in FY '19 and includes Composites and Glass Ionomers. Encouragingly, and as I will discuss later in the presentation, we continue to see strong growth in these core products well ahead of market growth rate.

So what is driving our growth? Slide 8 breaks down the product categories, highlighting the 2 largest categories: Aesthetics and Whitening. These categories make up 70% of group sales, and in the last year, they grew 11.4% (sic) [11.6%] and 3.2% in local currency terms, respectively. The Aesthetics category includes Composites and Glass Ionomers, the preferred solution for dentists and their patients today in many countries. Pola is our successful whitening brand, and in addition to holding a dominant market share in Australia, is growing share in other markets we operate in. This chart also draws attention to the continued structural weakness in Amalgam, which now makes up 22.8% of group sales.

Looking at the key markets we operate in. Let's turn to Slide 10. Slide 10 breaks down the sales by business units as disclosed in our accounts, with the Australian business unit growing sales by 17.1% in Australian dollars. We have also included in this release a breakdown of the regional exposures of the Amalgam markets for better context. As can be seen from the chart, the North American and European markets are the biggest markets for this product, and not surprisingly, this is where we are seeing the trend away from this product continuing.

The better way to look at our overall sales is on the next slide showing the regional sales activity. This slide shows the geographical sales and is more meaningful in understanding customer behavior in the region we -- in the regions we operate in. The strongest region has been the Middle East and Africa, with sales up an impressive 35.5% in local currency terms. This region's performance highlights continuing strong growth in Aesthetics product sales. The next best-performing region was Asia Pacific, with sales up 13.8% in Australian dollars. This region, which has very little Amalgam sales, reflects the trend we've been favoring contemporary -- we have seen favoring contemporary dental solutions. The North American and South American regions were up 6.3% and 1.6%, respectively, with the European region down 1.3% in Australian dollars over the year. With respect to Europe, the biggest impact in this region were weaker sales in the U.K. due to a combination of weaker Amalgam and also Whitening sales.

Let me now hand over to John to talk through the financials.


John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [3]


Thank you, Sam. Turning to Slide 13. After adjusting for currency movements, sales increased by 2.5%, which we should note that is higher than the industry average from our statistics that we've been receiving.

Gross profit is influenced by currency movements, product mix and geographical sales mix. After adjusting for FX movements, the margin was in line to last year. Although showing an increase in Aesthetics products, which attract a higher margin, this was offset by strong sales in Australian direct export markets, which attract a lower margin.

Operating expenses increased by 5.1% after adjusting for currency movements. The company has invested in additional sales and marketing expenditure to promote its non-Amalgam strategy. This, along with expenditure for the IDS, the International Dental Show, and the introduction of an LTI program, a long-term incentive program, accounted for AUD 2.2 million in the increase in expenses. R&D expenditure, excluding amortization, has decreased as expenditure on pure research was less than the previous year. However, the total R&D spend did not decrease as more expenditure on development was incurred, which is capitalized. Other expenses were predominantly lower due to FX losses that were reported in the previous year and a reduction in interest expenses.

The balance sheet. The company's total cash holdings for the 12 months decreased by 1.8% after reducing debt by $2.2 million -- sorry, $1.8 million after reducing debt by $2.2 million, increasing inventories by $2.7 million, increasing investment in plant and equipment by $1.3 million and increasing dividend payments by $1.4 million. Inventories have deliberately been increased to further improve customer service, reduce the cost of air freights and support expected increase in sales of existing and new products. The company has invested in new machinery for new product lines and continues to upgrade its current equipment in line with its automation strategy.

Receivables increased by 21% in Australia direct exports. The reason for that is that the Australian direct exports relate to longer payment terms, which can range from 90 days to 120, and in some cases, even 180 days. That's the market we operate in. Our competitors offer the same terms.

Creditors. The purchase of raw materials for large sales in May and June, that's the major increase in creditors. So that refers to our building of stock.

Now turning to the cash flow. Receipts from customers -- I guess the main points in the cash flow is increase in sales; increase in inventory and operating expenses; new machinery for product lines and upgrade of existing machineries to improve automation; increasing R&D development project expenditure, our intangibles are up; and as we've mentioned before, $1.4 million increase in dividend payments and paying out debt, $2.2 million of debt repayment. Showing no debt on the balance sheet at all.

I'll now hand back to Samantha. Thank you.


Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [4]


Thanks, John. Before I talk about strategy and outlook, I want to share with you some important investments we have been making on rebranding SDI and promotional activity. So I'm now on -- actually, on Page 16, you can see start of our new branding of the new images for our booth. Page 17 has another image.

So I'm now on Page 17. Over the last 12 months, we have invested in rebranding and promotional activity as we continue to position the business as a leading and innovative player in the global dental industry. We have increased our selling and marketing activities, invested in corporate rebranding, invested in key opinion leaders, in training for our key stakeholders and added important promotional and selling tools to enable the selling of our products in the market. These initiatives will play an important role in our industry positioning but also drive the execution of our strategic plan.

Furthermore, earlier this year, we attended the dental industry's leading exhibition held in Germany every 2 years. At this event, we interacted with distributors, other manufacturers, dentists, key academics and launched our products. The event was a great success and critical to our engagement in the industry and development as a company.

I'm now on Page 18. Turning to my final slide on strategy and outlook. I wanted to reiterate our strategic priorities but also want to share with you some progress we have made and then discuss plans for the coming financial year. We are making progress on all 4 of our strategic priorities. On the portfolio -- product portfolio, we are well progressed in reducing the number of SKUs by 30%. This will enable optimal use of the manufacturing facility, lead to further automation and ultimately drive margin improvement.

Secondly, on key products, we launched new products at the IDS trade show early this year and expect these to contribute to sales over the coming years.

Thirdly, as you would have seen recently, we announced that we have been awarded a $3 million grant from the Commonwealth Government to undertake research on an amalgam replacement, partnering with several academic institutions over the next 3 years.

And finally, we have made investments in new machinery and on product innovation, and the research findings on Riva Star are also compelling.

On the outlook. We expect to complete most of the rationalization of the product portfolio during this financial year. Brazil manufacturing will commence next month, and we are planning to invest an additional $3 million on new equipment, driving further automation and aiding new product development. And on sales growth, we see similar trends we have experienced in recent years for Aesthetics and Whitening products continuing.

That concludes our presentation, and I'm now happy to take your questions.


Operator [5]


(Operator Instructions) There are no questions at this time. I'll now hand back to Ms. Cheetham.


Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [6]


Thank you, everybody, for listening. We're very pleased with the results. And I must say that the company is heading strongly forward in a very strong strategic direction, and couldn't be happy with how we're going. So thank you, everybody.


John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [7]


Thank you.