Thank you for standing by. Welcome to the SDI Limited H1 Fiscal Year 2023 results call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. At this time, I would like to hand the conference over to Ms. Samantha Cheetham, Chief Executive Officer. Please go ahead.
Thank you, Chad. Good morning, and thank you for joining us for our first half FY 2023 investor webinar. My name is Samantha Cheetham, the Chief Executive Officer, and with me today is John Slaviero, our Chief Financial Officer and Chief Operating Officer. As we will discuss today, we are pleased to present another record sales result for SDI, achieving first half revenue of AUD 50.5 million.
The continued momentum in revenue growth has been driven by increasing sales in our core aesthetic products in most regions, as well as the amalgam category, where we are winning government tenders and gaining market share from competitors exiting the category. As was previously reported, high logistical costs are still impacting the business.
Whilst we have seen the start of some relief in container pricing, our products, by their nature, do require specialized refrigerated shipping containers, which remain high and less frequent compared to pre-COVID levels. Nevertheless, our focus continues to be making sure we meet customer demand.
While this has meant some additional costs and some inefficiencies in the short term, we remain confident that this deliberate strategic decision is supporting our top-line growth and will deliver longer-term benefits for our group. Thankfully, we are back to being able to educate and market our products around the world, seeing travel and essential trade shows back in the calendar. Our operating expenses have increased accordingly as our operating conditions normalize, coupled with some inflationary pressures.
Before John and I take you through the results in more detail, I'd like to first highlight our recent awards, which we are very proud of here at SDI. We've been recognized in a number of key categories within the industry regarding our restorative products and whitening products, curing lights, and the Riva range of products.
The new products we develop and release to the dental market underpin SDI's growth with awards like the Innovative Company of the Year, recognition of our place in the market. One award I'd like to highlight is the one to the left-hand side of the slide. We were awarded Exporter of the Year at the Governor of Victoria Export Awards in November last year. Subsequently named a finalist at a national level.
This award is in recognition of our international success, competing against a wide sector of medical, healthcare, and biotechnology fields for products, technology, equipment, and services. We are extremely proud of this recognition. We have built this business over 50 years into a successful manufacturing company, where today we're exporting to more than 100 companies, countries, sorry.
Firstly, let's turn to today's agenda. I will begin with a summary of the first half results highlights, then spend some time talking about the product categories and the key geographies we operate in. I will then get John to run through the financial performance in more detail before returning to me to share some important operational updates, and then finish with our strategy and outlook for the remainder of the financial year. At the end, we are happy to take your questions.
Let's begin with a summary of the highlights from the last half. I'm on Slide 4. I'm pleased to report that this was a record half for the group with total sales of AUD 50.5 million, up 9% on the prior corresponding period. This was driven by strong growth in both as-aesthetics and amalgam product categories.
Although there has been some easing of inflationary pressures, we are still experiencing elevated costs, especially in freight costs, which are yet to return to pre-COVID levels. As a result of these conditions and other factors, including normalized travel conditions and an increase in marketing costs, EBITDA remained flat at AUD 6.1 million, up slightly by 0.1% on the prior corresponding period.
We saw an increase in debt during the period after purchase of our new site, with this strategic purchase offering long-term benefits for the company and in short-term catering for our expanding warehousing needs. Finally, the directors have declared an interim dividend of AUD 0.015 per share in line with the prior corresponding period and reflecting the board's continuing confidence in the outlook for the business.
Let's now turn to the product categories on Slide 5. Our core categories of aesthetics and amalgam generated the fastest growth in the period, up 8.4% and 17.8% respectively in local currencies. The strong result in amalgam sales was driven primarily by the withdrawal of two major competitors last year from the amalgam market.
The decline in whitening of -1.9% and equipment of -8.6% overall, masking different regional performances, was held back by the European market, in particular France, with inflation impacting demand in these product categories. Turning to sales by business unit on S lide 6. This slide shows sales by business unit as disclosed in our accounts.
Sales by business unit were consistent with the normal, with a return to normal operating conditions in many key markets. The Australian unit sales, which also captures the Australian export, direct export markets, were down 0.6%, with the domestic sales up 4.1%, offset by direct exports, which were down 2.4% in the period. The European unit sales were up 11.9% due to strong demand in the U.K., with conditions returning to normal.
Brazilian sales increased by 10.5% in local currencies from the market, returning to normal operating conditions and overall strength in the dental market. For a more detailed look at what's going on in the region, let's look at customer behavior by region on Slide 9. Sorry, Slide 7. This slide shows the regions where sales were in Australian dollars.
The Americas, Europe and Asia-Pacific all performed well, with Middle East, Africa slightly underperforming, reflecting inconsistent ordering patterns of some of the countries within that region. These performances reflect the return to normal operating conditions, also the continuing success with new products, with new product releases and significantly market share gains. As shared, we made sure there was no unmet demand and saw the rewards in most regions. I'll now hand over to John to talk through the financials.
Thank you, Sam. Turning to Slide 9, profit and loss. Sales were up 9% in the period, underpinned by strong growth in aesthetics and amalgam product categories and strong growth from the European and Brazilian business units. Product margins increased by 7.3% to 56.2%, driven by slightly improved logistics costs and successful implementation of our pricing strategy.
As I have shared before, SDI exports to over 100 countries with a wide range of regional and product margins impacting the overall outcome. In this first half, the strong sales growth in the lower margin amalgam products impacted the overall gross margins. The operating expenses increased by 22.3% in Australian dollars on the prior period last year.
The most notable increase was travel, up 89.4% on the previous period, and marketing expenses up 27.3% on the previous period. Many of these drivers reflect a return to normal operating conditions, but also reflect the investment being made today in people, product launches, promotional activities that will lead to higher levels of sales in the future.
The increase in operating expenses resulted in a relatively flat EBITDA and a flat NPAT year-on-year, with EBITDA of AUD 6.1 million and NPAT of AUD 2.7 million. Turning to the balance sheet. I'm now on Slide 10. Our cash position fell slightly to AUD 6 million year-on-year.
We have invested an additional AUD 500,000 in inventories, AUD 1 million in plant equipment, and AUD 1.5 million in product development expenditure, financed partly by cash and debt. The inventory increase reflects, as we have spoken about previously, the strategic decision to ensure customer demand is met, mitigating the dislocation seen in global logistics, as well as the deliberate buildup of newly released products.
We have also invested AUD 24.8 million in land and buildings financed by bank borrowings, with debt sitting at AUD 26.8. This will be reduced by AUD 5.8 million, pending the sale of two existing properties. Finally, we have unused bank facilities of AUD 6.6 million and AUD 6 million cash in hand. Turning to the cash flow. There were several factors to highlight in the cash flow statement.
We had a stronger first half 2023 operating cash flows due to the strong half of cash receipts, reflecting the record sales performance in the half. As I've highlighted previously, the company has invested AUD 24.8 million in land and buildings following the strategic investment in the new 6-acre site, which was financed by just bank debt of AUD 26.8 million.
As Sam mentioned previously, long-term benefits of this site will create efficiencies for your business in the medium to longer term. We also made the payment of a full year dividend for financial year 2022. I will now hand back to Sam for the operational update.
Thank you, John. I'm now on Slide 12, the operational update. As we've touched on several times, at the end of August, we announced the purchase of a six-acre site to support the short-term needs of adding important warehouse capacity and the longer-term strategic plan for expanded manufacturing capacity. We are currently finalizing the renovation work on the warehouse, which will see increased production efficiencies for SDI.
Following the completion of this, we are scheduled to relocate in July 2023, a slight delay from previous announcements. In exciting news for SDI, we have now received FDA approval for our newest product Stela in the U.S., TGA approval in Australia, and ANVISA approval in Brazil. Further, we have received first orders of Stela in non-European U.S. regions that do not require formal approvals. In the U.S., we expect the first orders to start in July this year.
We are excited by Stela and the opportunity it creates, not only as an amalgam replacement product, but more importantly in the aesthetic character, given its strength and natural tooth color advantage. Finally, we remain committed to investment in automation to drive manufacturing efficiencies. An example of this, we have recently purchased a high-speed production machine, which will increase syringe output, moving from one to approximately eight per minute.
This is a great example of operating efficiencies with a short payback and adds to our ability to manage new and existing product growth. Our product development is something we are proud of. Next, I want to highlight rigorous processes we go through before our products come to market. I am now on slide 13. As I've mentioned many times before, our commitment to research and development has underpinned SDI's success over many years.
We manufacture and sell world-leading products on the global stage with our core IP underpinning these advancements. I often talk about the sales cycle and getting product to market, but what you may not be unaware of is the development cycle that precedes these product launches. Our team of scientists follow a familiar path of development with a focus on manufacturing readiness levels, MRL.
These levels begin at one with new ideas that may come from university collaboration, a new challenge identified by one of our team, or simply a new improvement to an existing product we have. As these projects develop, they move through the MRL stages, starting at proof of concept, then to the formulation stage, then validation and quality assurance before the polite phase. Sorry, the pilot phase. Then finally to full-scale manufacturing.
This cycle can be as long as five years, with the sales cycle to follow, potentially a similar period of time as we engage dentists and the key opinion leaders in the industry. We operate in a highly regulated industry. Our investments in research and development are key to maintaining our relevance and advantages in the market. On to our ESG initiatives on Slide 14.
Along with many other organizations, we realize the importance of ESG and constantly assess ways we can improve our impact on the environment and help support our communities. While relatively early in our journey, as a board and management team, we are committed to making significant progress in the coming years and will share our progress over time. Some current initiatives to share include the appointment of a qualified engineer to the role of environmental officer.
This person will be tasked with ensuring we are meeting expectations and looking to make continuous improvements on the way we impact our environment. An internal ESG group has recently begun making suggestions towards positive initiatives that can start to be implemented within SDI's warehousing, and we are looking forward to the suggestions that are presented to make our working environment better.
Finally, for many years, SDI has been proud of their community work and taking the opportunity to assist disadvantaged communities. Our work with Rotary in East Timor is just one example how we have assisted in improving the dental hygiene of people who may not have those benefits. Now turning to strategy and outlook. The company's strategic priorities remain. Aesthetics and whitening continue to be our focus for new product development through our R&D team.
As I've already highlighted, SDI's aesthetic product, Stela, is on schedule to be released in several markets at the International Dental Show held in Cologne, Germany next month, along with several other key products. We remain committed to an ongoing investment in R&D, our aim to release one to two products per year is on target. These include Riva Cem Automix and Stela, scheduled to be released from March 2023.
They are in the aesthetic category. We continue to focus on improving operating manufacturing efficiencies via automation and new site relocation. Lastly, although we continue to be challenged by elevated logistic costs, operating conditions in nearly all regions are back to pre-pandemic levels, and we are focused on capturing the ongoing benefits from the strong base built in SDI's target market. Thank you. I will now hand it back to the operator for Q&A.
Thank you. At this time, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question. Again, pressing star then one will allow you to ask a question. At this time, we'll just pause momentarily to assemble our roster. The first question will be from Mark Topy from Select Equities. Please go ahead.
Yeah. Good morning, Sam and John. I was just gonna ask a question about the trend then on costs. Firstly, I guess we're seeing shipping costs come down, so I'm just thinking about the second half, you know, what you're seeing in terms of costs coming down. Secondly, I know you did talk about cost price increases. Can you tell us anything about the ability to recoup some of these costs that may not be so transient?
Mark, we, I think we've mentioned before our C containers are a specialized container, which we need refrigeration and also some of our goods are classified as dangerous goods. It's very difficult still at the moment to get containers. We are seeing an improvement. The costs have slightly come down, same with air freighting, slightly come down, but still nowhere near to the pre-pandemic costs.
The more, I guess more other bits of impact on our logistics costs is when a container gets caught up at a port. We've had instances in the past where the container's sat there for three to six months. We have to rebuild that stock and ship it by air freight.
We are starting to see a little bit better movement now on containers in the particular shipping ports. Hopefully in the second half, the scenario will improve a lot more. I think the costs will come down. I don't know how significant, but I believe that the trending is downwards. Regarding pricing to cover those costs, perhaps Sam can mention the pricing that we can do.
Sure. Well, we certainly are increasing our prices more regularly than we were pre-pandemic. We are getting some of those costs back, but it does take time for it, the pricing to come through. You know, we're watching where possible to increase prices more. Usually pre-pandemic, it was definitely one price increase per year. At the moment, it's sort of probably at the moment, probably about two per year, depending on the region.
Right. Great. Thank you. Just in terms of Stela, can you've indicated first orders. Can we get a sense of perhaps of the ramp up of the production here or what are you expecting over the next 12 months in terms of the product ramp up?
We're sort of rolling out gradually around the world. We've taken orders from a couple of countries, I believe, for when the stock is available. It's only a few weeks away from being available. We can sell to countries that don't require registration or have got the registration. We're selling these are going into the export markets.
We will be releasing in Germany. We'll start in Australia. Australia, we've got the TGA approval, and we'll release at the end of the month, end of March. Brazil and U.S. will be sort of mid-year. Europe will be later on in the year when we get the approval there.
When we get the MDR, which is the new regulatory approval we need before we can release any new products. The Europeans have been up last month to audit us. Looks okay, but it could take us longer than it should be in the first half of next financial year.
All right. No sort of sense that you can give us on how much sales you might expect in the first year or?
No, it's really difficult, Mark, because we've only been able to give it to dentists that are allowed to put it in the mouth, which, because if you don't have registration, you're not allowed to put it in the mouth. We're just going to be sending them out to the U.S. dentists.
Well, you know, we've been showing it to some of them, and we're going to be getting evaluations done from the U.S. side, and likewise in Australia. We have, just because of the way it is, it's a medical device and you can't put it in the mouth until we get feedback. In terms of sales, in our industry, restorative products or filling materials do take some time to ramp up.
When we think this will be quicker than normal, but, it's really tricky to say, and we don't give out forecasts.
Very good. All right. Thank you for that.
Thanks, Mark.
Thanks, Mark.
Thank you. Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question is from Peter Storer, a shareholder. Please go ahead.
Thank you. Hello, Sam and John. Peter Storer here, a long-term shareholder. One thing you said there was that in the European market, the U.K. was particularly strong. Do you see this being maintained given that the country's in a bit of a mess at the moment with all the strikes and the strong inflation there? Is the growth still there, or do you think that's gonna flatten out like France?
No. I look at. It was strong because it's come off a very soft year. We've been able to get some good new customers in some of our products, one of them being the amalgam product. I think it should be all right. We're certainly not forecasting at this stage for it to be flat. I think we're investing in the market. It's a good market for us, and we've got a very. I. Yeah, I don't. I'm not seeing that at the moment.
Okay. The second one relates to what I see as a focus on revenue. We've had sort of steady revenue growth since FY 2014, but EPS has been stubbornly unchanged pretty much for that time. It's sort of up to 20% last year, but it's been pretty flat and up and down for all those years. When are we going to see this top line growth starting to hit earnings per share?
Because we've now got the extra cost of borrowing, which we didn't have before with the new site. How long is that gonna wash through? When can we start expecting some earnings per share? Obviously I'm thinking dividends as well. When are we starting to see that come through? Are we talking two or three years?
Yeah, Peter, look, with the increase in the cost base, which is quite large this year, next year, we would not be expecting anywhere near that, so we're back to normal cost base. If we can see improvement in our logistics costs, which normally our product margins, average product margins are 60%+, and we've still got, you know, we're down to 56%.
Mm-hmm.
If we can get that back, and control next year's expense increase, it won't be so big. I would think that in the next year or so, we'd start seeing the benefit of the higher sales flow through. When you look at the half year, if we would've got a 60% margin, you know, probably we would've added another AUD 1.5 million on our bottom line, you know.
Yeah. Yep.
Once that starts filtering. It really has to start filtering through just for Australian exporters. I mean, it has to come back to some sort of normality.
Okay, great. Thank you. That's all from me.
Okay.
Thank you.
Thank you. The next question is from Tim Boreham with Biotech Daily. Please go ahead.
Yeah. Good morning, Sam and John. I was just hoping to ask you about the competitors who withdrew from the amalgam market. Now, is that a permanent thing? Was that just in relation to government tenders? I was just after a bit more explanation.
Sure. The competitors were Dentsply, which is an American company. Then Kerr, which is part of the Envista group, another U.S. company. Look, I think that it was such an insignificant product line to them. I thought, I think, you know, they just realized that, you know, there's no point having it in the portfolio. They focus on all their other products. Yeah, I think it was just too small, and it's, you know, in the end it's a, an market that eventually, you know, will be replaced by these two color fillings.
Yeah, yeah. Okay. It was insignificant for them, but it's certainly not insignificant for you.
No, no, that's right. I mean, we can see by the percentages, but, you know, it's a product we don't have to invest in. We don't have to get new machines. Our sales team generally don't talk about it, and we don't even advertise it. I think it's, you know, while we're in a great position, we may as well maximize that.
Sure. I, and could I also just ask you about the products in the pipeline. You mentioned you've sort of got one to two products per year on the go, and you've mentioned Stela and Riva Cem. I'm just wondering sort of in the longer term, what sort of what you're working on or what we might expect?
It's really in the categories we highlight, small equipment, which we've got, you know, some updated equipment that we've got coming through, a small amount, triturator, which mixes the fillings. We've got composite products, we've got glass ionomer products, some accessories to go with them.
We have, yeah, I mean, they're, they're coming through, you know, in terms of that, those MRL levels, they're coming through. Some will come in the next, after the Riva Cem Automix and the Stela. There'll be some in the second, sorry, in the first half of next year, and then the second half of next year as well.
Yeah. Okay. They're sort of extensions of what you're doing. You wouldn't sort of describe any of them as being sort of blockbuster products per se?
Look, I think they're all blockbuster. coming from, yeah, they're all very much extensions from the existing products.
Yeah. Okay.
Yes.
All right.
Yeah. Sorry, I should also say that the Stela is absolutely, it's a blockbuster product, that's a really different innovative product compared to what's on the market. We believe that will be a super product for us.
Yeah. Okay. All right. Terrific. Thanks very much for that, Sam.
Thank you very much.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I'll now hand back to Ms. Cheetham for closing remarks.
Thank you, Chad. Thank you everybody for listening. Look, we're very excited. Most markets are back to normal. We've had some super sales results. The costs are normalizing, and we're investing for future growth of SDI.
We've got several new products coming, which, we're very excited about. Really putting us on, you know, back in, well, in the market, very serious contenders to the big manufacturers. We're really looking forward to catching up with some of you over the next few weeks. Thanks everybody for listening, and I'll pass you back to the Operator.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Take care.