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Edited Transcript of SDI.AX earnings conference call or presentation 14-Feb-20 12:01am GMT

Q2 2020 SDI Ltd Earnings Call

BAYSWATER , VICTORIA Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of SDI Ltd earnings conference call or presentation Friday, February 14, 2020 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Joseph Slaviero

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

* Samantha Jane Cheetham

SDI Limited - CEO, MD & Executive Director

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Conference Call Participants

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* Mark Topy

Select Equities Pty Ltd., Research Division - Institutional Research Adviser

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the SDI Limited HY '20 results conference call.

(Operator Instruction]

I would now like to hand the conference over to Ms. Samantha Cheetham, Chief Executive Officer and Managing Director. Please go ahead.

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

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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 Samata 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 the first 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 ourselves 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.

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

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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 Aesthetic 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 products 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 you through the strategy and outlook for the remainder of the financial year.

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

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Thanks, John. As shared with you previously, our 4 strategic priorities are as follows: 1, rationalize the product portfolio and focus on products that will drive the best returns; 2, focus on key product categories for growth including, Whitening, Glass lonomers and Composites; 3, drive Amalgam replacement; and 4, 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.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

Your first question comes from Doug Macphillamy with Avoca.

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Unidentified Analyst, [2]

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Just a quick question, if I may, on the staff costs, that upwards going 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?

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

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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.

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Unidentified Analyst, [4]

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Got you. 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?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [5]

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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.

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Unidentified Analyst, [6]

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And I guess the last one for me, Sam and John, was just on the coronavirus impact, if any, just on supply chain and the business.

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [7]

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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.

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [8]

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Yes, in lots of ways, we're sort of falling the left that these products, the rebranding, that packaging is from China, which we're well-stocked in and also the light hearing 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 the same. 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.

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [9]

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We feel pretty good, yes.

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Operator [10]

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Your next question comes from Mark Topy with Select Equities.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [11]

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I think my question was really around the Whitening, in Whitening productivities as well. So just to be clear on that, it's North America, that's caused an issue? And just to elaborate in terms of the marketing, what do you need to do to drive that product in the U.S?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [12]

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So we're launching our new packaging. And it's a whole new uplift in the image there that 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.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [13]

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Okay. So do you have to do more work with the dentist as well? Or is it primarily a marketing issue, you think?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [14]

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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, in being involved there. It's something for the distributors and the dentist to be involved in. So it's the nationwide thing. But early days yet, but we're feeling very confident.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [15]

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And -- it might be a sample of one. I just noticed with margins, it just is [89 or near] special offer on face whitening. I know, I think, I specifically made that product or not, but with a 10% discount, is that sort of competitive behavior increase in Australia?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [16]

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I don't think, that's pretty normal around everywhere actually. That's been going on for a while. These probably just got your e-mail and your address.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [17]

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That could be it. And also just payback on the new machinery. Can you just give us some feeling about the return, the press you're going to -- is it like a 2 year payback for a use. In terms of sort of the benefits it's going to deliver?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [18]

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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.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [19]

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Well, that sounds pretty positive.

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [20]

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Yes. Look, I guess, an example of that, we've got a new capture coming out, a low activation capture, we've just completed that machine, and it cost us close to $1 million. We expect with this new capture or delivery system in our Glass lonomer range, will significantly boost the sales of that Glass lonomer.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [21]

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Okay. And just on Amalgam, I'm trying to think it sort of had plateau. So can you just sort of comment on your expectations in -- on that trend there? On the downward trend there?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [22]

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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 well back.

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [23]

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I think, Mark, if you turn to one of the slides, one of these 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 over to the few slides of...

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [24]

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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.?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [25]

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Yes, continual decline. What changes had 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.

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Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [26]

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You don't get feedback for you. It's hard to -- hard thing to track on first?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [27]

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It's extremely hard because we're not dealing with the end customer we're dealing with our distributors.

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Operator [28]

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(Operator Instructions)

Your next question comes from Matthew Rosso with -- a private investor.

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Unidentified Participant, [29]

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I just wondered if you could provide an update on the R&D granting 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?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [30]

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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 great money 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.

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [31]

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And the product itself will be -- we believe about 3 years.

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Operator [32]

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Your next question comes from Simon Pros with Barrington Equities.

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Unidentified Analyst, [33]

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Amazing, if at that 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 could 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?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [34]

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Yes, no, nothing as what we see has changed. We still believe our 2 halves splits about 45%, 55%, somewhere around there. I can do a little bit on that. But the currency does throw it around a bit. And look, that unrealized currency loss I think was -- 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 distorting but it's something we really -- to the extent, realized and something we really can't do much about.

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Unidentified Analyst, [35]

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Yes. no, no I understand. Yes, just to, sort of -- it seems like there's been a big step-up. And obviously, the amount of 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?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [36]

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No, I think it's all --

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [37]

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Yes, but we don't know what the next 6 months are going to pronounce especially with this virus going around where the demand drops off, consumer demand. We don't have a feel for that yet.

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Unidentified Analyst, [38]

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No. Okay. The split looks similar. Great. And then just in terms of the new packaging and stuff, are we expecting -- or would you expect an 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?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [39]

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Not really. That's sort of taken a while because we don't want to have any significant inventory write-off. So no.

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Unidentified Analyst, [40]

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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 SDIs looking at?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [41]

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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 imagine, the longer this takes, the lower the sales will be in that area, but it's not significant to SGI yet?

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Unidentified Analyst, [42]

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No. Great. And that's obviously just a short-term thing. And by the (inaudible) and then for -- just in terms of your thinking in terms of capital allocation and everything. I noticed, obviously, the cash is relatively stable. Where you're expecting interest to fall in the second half. We'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'm 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 30%, 40% or so?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [43]

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Yes. Look, I think we'll certainly be investing in the areas that produce the results. But...

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [44]

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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.

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Unidentified Analyst, [45]

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Is $3 million per half?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [46]

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No. $3 million per year.

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Unidentified Analyst, [47]

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So -- okay. And then we've spent, I think, $3 million in the first half this year?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [48]

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Sorry, that's equipment not in...

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Unidentified Analyst, [49]

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Alright. Okay. And then $1.1 million in product development as well. So you imagine those 2 costs together in the next few halves? Do you think they're going to be around that [$3.9 million] together? Or would you imagine that be higher or lower?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [50]

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The plant equipment will be about $3 million, all up. And then the intangibles will be around the $2 million to $2.5 million.

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Unidentified Analyst, [51]

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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 that is the payout ratio likely to amend at all? Or what are you guys thinking in terms of capital return or returns of money?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [52]

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Well, I mean, I think as the profit grows, we do certainly want the dividend to grow.

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [53]

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But that at a steady pace. The last -- we don't want Spikes in dividends. We want to be -- ensure that we...

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Unidentified Analyst, [54]

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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 at all happy if you've got things you spend on with it -- 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?

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John Joseph Slaviero, SDI Limited - CFO, COO, Company Secretary & Executive Director [55]

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Yes, look, we have invested additional like we said in to the Southern area. Just to further enhance its product strategy. To get all momentum in it, and that is continuing. 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.

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Unidentified Analyst, [56]

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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 we'd obviously spent a bit on sorting out distribution over there. Do you see -- where are we in terms of market share over the -- is there a huge runway there? Or is it just a great way of kind of track, jump back up and now we'll sort of track normal growth rate. So where do you see us in terms of the runway in South America?

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [57]

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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 and others, there's a lot of upside. Whitening is the one area we're really focusing on in the composites. The big markets and the Whitening with the -- is 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 2 color filings, 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 dentals, I think.

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Operator [58]

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

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Samantha Jane Cheetham, SDI Limited - CEO, MD & Executive Director [59]

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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 SGI, and thank you for your time.