Earnings Call: H2 2021

Aug 20, 2021

Thank you for standing by, and welcome to the SDI Limited FY 'twenty one Results Briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Ms. Samantha Chatham, Chief Executive Officer. And with me today is John Swaziro, our Chief Financial Officer and Chief Operating Officer. In recent times, we have seen incredible uncertainty with the pandemic taking hold globally. As we move through the financial year, we began to see several key regions emerge from the harsh lockdowns that affected the dental industry. We initially saw a catch up in demand that had been put on hold and then gradually we began to ramp up production to meet the return of strong demand in most key regions as we exited the financial year. While not uniform, as you will see when we talk through the regions, we have finished the year with strong momentum and are pleased to report a return to growth and a record full year profit for the group that is ahead of our guidance provided in May. As I've done previously, I always like to recap on where we have come from, particularly for those that are less familiar with our business. 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 a summary of the last financial year and then spend some time talking about the product category and the key geographies we operate in. I will then turn over to John, who will run through the financials before returning to me to talk about our strategy and the outlook for the coming financial year. Let's begin with the summary of financial year 2021. I am now on Slide 4. As mentioned in my opening remarks, this was a record year for the group with net profit after tax up 111 percent to 8,900,000 dollars and ahead of our guidance range of $7,500,000 to $8,500,000 issued in May this year. Total sales of $81,600,000 were up 21.2% on last year, driven by strong sales in key product categories, successful new product releases and the gradual normalizing of most dental markets. Operating expenses increased 1.2% in the year due to careful operating expense management. I will spend some time talking about the product performance on the next slide, but the demand catch up I spoke about and the impact of new product releases was evident with whitening and aesthetic category sales up 55.3% and 27.2% respectively in local currency. Pleasingly, the Board has rewarded shareholders with a 2 30 percent increase in the final ordinary dividend with a fully franked dividend of $0.0165 per share. Let's now turn to the product categories. I'm now on Slide 6 to talk about the product performance. As mentioned, the category highlights for last year was the whitening category, up 55% in local currency. We saw strong momentum in sales supported by the release of the new PolarLight and PolarRapid products and the rebranding of the Polar products. Another highlight, although the smallest product category was equipment, up 31.1% in local currency, with the ongoing successful traction of the radio LED curing lights. Aesthetic products sales were also rebounded in the second half, with growth of 27.2% in local currency for the full year, assisted by the easing of restrictions on dentistry. In markets where restrictions were progressively eased, Australia, North America and parts of Europe, growth was strong. Finally, the amalgam product sales were up 3.8% in local currencies with the North American market offsetting declines seen in other regions. Turning to the geographies. Slide 8 breaks down the sales by business units as disclosed in our accounts. Sales by business units were consistent with the gradual easing of government restrictions, seeing a return to normal operating conditions in many key markets. The European unit sales were up 39.9% in local currency for the year, driven by strong demand in its key markets and assisted by the UK, where conditions rapidly improved in the second half of the year. The Australian unit sales, which also captures the Australian direct export markets was up 9.6% with the domestic sales up an impressive 44.6%. However, this was offset by direct exports, which were down 3.3% over the year, with many of these regions yet to return to normal conditions. Brazil sales increased 20% in the Australian currency move by 33 point 4%, reflecting the significantly with Brazilian real. As we indicated, the provisions are being completed with the restructuring expected to be made at the center of 2021. For more outlook, what is going on with the customer in many of our key rigs returning to normal operations. I will now hand over to John to talk through the financials. Thanks, Sam. I am now on Slide 11, the profit and loss. As Sam mentioned, sales were up 21.2% in the period, underpinned by strong demand in key regions, with gradually easing up restrictions and successful new product launches. On gross product margins, the positive mix effect during the year from the strong growth in the higher margin widening on aesthetic product sales were offset by regional factors and the increase in freight and production costs driven by the logistics global logistic turmoil. Reflecting of this, when adjusted for these movements, the gross margin increased by 1.8% compared to last year. However, in Australian dollars, the gross margin declined by 3.2 percent to 61.6% compared to 64.8% for the corresponding period last year. Total operating expenses in Australian dollars increased by 1.2% when compared to the previous cost funding period. After adjusting for currency maintenance and the government assistance programs, underlying operating expenses increased by 8.8% compared to the 2020 year. However, when compared to the pre pandemic levels in the financial year 2019, operating expenses increased by only 1.4%. The result is evidence of key of the careful financial management operating expenses over this period. Finally, both EBITDA and net pay were up strongly to a record level as we return to gross financial year 2021. Turning to the balance sheet on Slide 12. The company's net cash position increased by $5,900,000 to $10,600,000 for the 12 months. The remaining net of $1,500,000 was paid down. There was further investment in plant equipment of $2,300,000 and product development expenditure was $1,200,000 for the year. Further, we actively increased inventory by $900,000 to mitigate the continued global freighting delays. Finally, the company has unused bank facilities of $10,000,000 Turning to the cash flow statement on Slide 13. The increase in cash was driven by strong operating performance of the business over the period, underpinned by the return of strong trading conditions. We received $3,900,000 from government assistance programs in the 12 months ending 30th June, 2021. Dollars 1,900,000 was allocated to operating expenses and $2,000,000 to the manufacturing departments to supplement the company's commitment to keep its global employees employed, while the group recovered from the reduced demand caused by the pandemic. The payment of dividend reflects a strong net cash position and the Board's commitment to shareholders. I will now hand back to Sam to run through the strategy and outlook for the coming financial year. Thanks, John. Turning to our strategy on Page 15. The company's strategic priorities remain focused on four things. 1, the key product categories of aesthetics and whitening products number 2, further manufacturing efficiencies and driving sales and marketing teams 3, the ongoing investment in research and development and 4, the company's amalgam replacement product, which is on schedule for release in 2023. Finally, as mentioned in February this year, we have undertaken a comprehensive review of our footprint, looking at looking to drive efficiencies and to manage future growth and expect to provide more detail on this in the coming period. Turning to the outlook on Page 16. In managing any global business, there are uncertainties and SGI is no different. I'm encouraged by the strong rebound in our key markets and see genuine momentum in our business underpinned by the opening of markets and new product releases. In the near term, the challenges we face are with the increased cost and delays of freight, the potential for further lockdown and the slow opening of the remaining regions we operate in. On balance, we expect another year of growth and look forward to the return of normal operating conditions in most key markets. Thank you for listening to our presentation. I will now turn to the operator to moderate for your questions. Thank Your first question comes from Peter Store, Private Investor. Please go ahead. Hello. Thanks for taking my call and congratulations on a good result. I've got two questions. One is regarding the amalgam replacement product. At this stage, do you have any feel for what the margins are likely to be on that product? The margins will be in line with our current margins, hopefully a bit more. We haven't really got to the detail on that, but they're usually in line or slightly higher. As we release the aesthetic products, generally they're a little bit higher, but it will be definitely what we've got. Okay. And the second question is regarding the strong cash flow and balance sheet. As we get through the COVID period, which hopefully is at the end of this year, are you considering any capital management initiatives given the strong cash balance? Look, we're always looking to the future. We will invest more in plant equipment and a bit more in sales and marketing and definitely more in R and D. So that's where our focus is at the moment. Okay. Thank you. Thank you. There are no further questions at this time. Your next question comes from Michael Byrne with Kamen Equity. Please go ahead. Good morning, Samantha. Good morning, John. I thought that was quite a big statement, the amalgam replacement product statement, which sort of could you expand more on the R and D behind that? What the product looks like? How it's going to replace amalgam? I'd like to sort of obtain more color on that. It sounds like a bigger deal than just one sentence in the slide suggests. And obviously, recognizing the commercial sensitivities around it. Sure. Well, it's basically the idea of amalgam goes in the back teeth and this is a product for the back teeth. It's very, very strong. It looks tooth colored. This is the product that we have been in collaboration with Universities of New South Wales, Sydney and Wollongong, and it's where we got the government the $3,000,000 government grant a few years ago. So we've been working in conjunction with their teams. And it's a new type of product. It's very strong, looks like a tooth. And it's nearly coming to fruition. We're getting we're testing it at the moment. So exciting, Mark. Yes, very exciting. And if I'm still online, can I ask a question relating to it's an accounting question? So I think it's probably meant for John. It relates to the R and D spend that has been accounted for through the P and L. In this result, it was quite a big number, €1,300,000 in the half compared to a half year run rate normally of around about €800,000,000 or more €800,000,000 Does that reflect a change in an accounting treatment of R and D expense? Or is that project specific? No, there's no accounting treatment change. We were very conscious throughout the year and probably the previous year that our R and D wasn't slowed down. And if anything, we invested a bit more into it. So it was purposeful. Okay. And then on the Mr. Starra's question, the first question about the what's perceived to be a surplus capital in the company. I know that there was some talk or there seemed to be a pattern of a progressive dividend established before COVID struck, which was obviously very shareholder value accretive. Is there any I don't think the Board have articulated the dividend strategy, I think it's a progressive dividend, but is that still desirable to repeat that pattern? Is that still in the forefront of mind? Yes, absolutely. We're very committed to increasing the dividend and we're being conservative at the moment. It's an increase on 2019 by 10% and the Board is pleased with that. I think, Mike, we've talked about this before. Board are very focused on ensuring that the dividend is maintained and is not maintained increases every year. So we've been treated for that. Okay. Thank you. Thank you. Your next question comes from Tobi with Selective. Please go ahead. Good morning, Sam and John. Good morning. My first question is, can you give us a little more context of result? A bit of a catch up in terms of getting into our activity coming back to you and I'll just try and I'm interested in the comments about forward momentum? How do you see it? Or do you think this is a normal level of activity? Look, it's some of it sort of same starting to operate as well in other Chile and the others because we're dealing with the 100 markets in countries and some are somewhat behind. And hopefully by this current financial, most markets will be back on track, but it's because I don't know what's going with the debt. Jenny, we're in that most markets are back to normal, but we just don't know what their risk is. Yes. Conditions are happening in the market, whereas some knockdown. Yes. I guess I was thinking also, was there some catch up like people had been delaying treatments or things that you do you get any sense of that or Yes. I'm sorry. Yes, absolutely. For example, this lockdown in Melbourne right now that we're having all over Australia, I guess, one of my key regions, patients can't go to their dentist, so therefore dentists don't enter. So the mirror opens up, the core dentist will be in overdrive just to catch up because most of the time the dental problems for a patient don't go away. So it's not lost business or anything like that. But in all the markets, that's sort of what we've been seeing. Cool. And I suppose on a positive side, looking at the wobbly Australian dollar, how are you kind of saving the benefit in this next financial year from that beneficial depreciation? Yes. Well, there's been better men than me to try and predict what's going to happen in the currency because I think probably around 6 months ago, many people were forecasting for forecasting the Aussie dollar would be about $0.80 and now it's down to about $0.72, dollars 0.73 Look, it's difficult. We just have to ride through it. They're very turbulent times that really you'd have to be a brave man to try and predict any sort of currency forecast, I would say. Are they getting some good benefit though? Or how do you Yes, there is. We get benefits on our margin and we lose a bit on the expenses, on the operating expenses. Most of our sales are invoiced in U. S. Dollars except pretty much the Australian and a few export customers. But the overseas offices are in they've got the expenses in those currencies. Yes. So we lose some margin and we're going to be sorry, we're going to be on margin and we lose some of the public expenses. And in terms of selling to the dentists, I suppose just the other part, the confidence is coming back or how is this process of expanding for some, the widening sales, product going with dentists? How do you see this going to go in this current year? Will you be able to conduct more face to face sort of meetings overseas with dentists or build like that? Yes, yes. It seems to be getting more and more face to face meetings. Generally, our sales teams, they haven't been going and this is overseas, they haven't been going door to door to dentists like they would normally. There's a lot more appointments happening, so the dentist is prepared for them, but it's definitely increasing. And the businesses overseas seem to be getting back to more normalized levels where the countries are just dealing with COVID not and not even talking about it sometimes. They just business as usual, whereas here we talk about it and with every increased case, it seems to be a big thing. So definitely more face to face. But it's been great with the whole change with Zoom, where it's definitely getting more efficient and there's more Zoom calls happening. So our teams don't always have to go and fly to a customer. Right. Okay. That's good. And just an update perhaps in terms of the plant move. Anything to add there in terms of your progression of that project, if you like? No, not at this stage. We probably can't update. We're looking at every single functioning in our footprint here. And it's a big job to get to the end of that process. So yes, we don't have anything further update on that at this time, Mark. Fair enough. All right. Well, thanks again and congratulations on results and look forward to more. Okay. Thanks, Mark. There are no further questions at this time. I'll now hand back to Ms. Cheatham for closing remarks. Pardon me. We do have a follow-up question from Michael Byrne with Canisette Equity. Please go ahead. John, the talk of the logistics and supply chain pressures and the cost of getting stuff around, how much of that had the impact on the reduction in the gross margin in the second half specifically? In the second half, I don't have that figure market in front of me. But overall, yes. Order of magnitude, are we talking about 100 basis points, 50 basis points? Do you have any fuel for that? It's probably close to 100. Yes, it was quite significant. The issue we've got was not just the cost of freight, but was the delay in freight. So for example, we had a 40 foot container totally full that arrived in the U. S. In February and that didn't go into our warehouse until June. So in the meantime, we had to do air freighting to supplement them. So it put enormous pressure on our factory. It's not the efficient way to manufacture goods. We're planning more and more of that. And at the moment, what we're seeing on freighting is containers are being delayed. For example, at the moment, we've got 3 40 foot containers sitting here that should be picked up this week and we've been told it could be up to a month's delay. So if that happens, then we have to supplement it with airfreights. So it's a tough environment out there on the which doesn't help to our production efficiencies. It's very difficult to plan. But it was substantial. I can take that on notice, Michael, and I'll just have the numbers in front of me. Well, you're not alone in that regard. There are a lot of companies that around the world are suffering on that. And then I guess my one question, which I'm sure you'd be very disappointed if no one asked. Brazil, the Brazil result was quite a starting result. It was very strong. Now I'm assuming, number 1, we shouldn't annualize that number. I'm talking about the half year number. We shouldn't annualize that. But what's driving that? Is that a fine is that an outworking of the restructuring process that's underway? No. The growth over there, it's worked out very well for our team. We have cut down a lot of salespeople and office people there. And but the sales growth from the growth in the market and also just very good relationships with the distributors. Okay. So it's good quality growth. It sounds like it's good quality organic growth as opposed to Yes. And of course, our new product releases as well. Okay. So to my next question, can I annualize the second half number? No, I wouldn't. Okay. Very, very high. Okay. I mean, it seems like sorry, again, Mike has come out of the pent up just a bit of experience. I mean is it I know you pulled capital out of that business or you've rationed capital to that business. But if I look at the and it's hard to know, you're just seeing a snapshot of the accounts, but we got assets of X and liabilities of Y. So there's negative net assets in that business. Is it got enough capital to support its growth? Yes, it does have, Mike. Because most of the growth you support are biased here in Australia. So it's not what we're seeing with that real growth in their own currency, we're finding the margins improving and the cash flow returned back to Australia. Yes. What's changed there? Because it's been like calling over broken glass for many years. Suddenly there seems to be something has anything structurally changed? Does it just seems to be a very good number in the context of history? Yes. Look, I think it's a very buoyant market for sure. Our whitening products are doing very well. Our aesthetic products are doing well. We've got a great team over there and a very committed team because it's not been easy for them seeing the results each year. And they're very dedicated. And as I think we've mentioned before, we've moved our office down to the south sorry, our warehouse down to the south with both the office. And it's all going very well. There's and another thing is that the dentists are operating pretty much fully. We're attending trade shows, the big trade shows. It's scheduled for February. We've got hands on happening everywhere. So it's almost like business is usual there except the market price is always good. Okay. Well, congratulations, long may it last. Yes. We're very happy about it, right? Okay. Thank you. Thank you. Thank you. The next question is another follow-up from Peter Store, Private Investor. Please go ahead. Thank you. Just a follow-up question on the manufacturing, and this is probably something I should know. Is all of the manufacturing carried out in house in Australia, including the equipment? Or is some of it contracted out? No. All of it's done here in Bayswater. Right. Yes. And so there's a little bit in Brazil that's actually we send them raw material sorry, semi finished good and they pack into packages. Right. Okay. Thank you. Thank you. Your next question is a follow-up from Mark Topley with Celeste Equity. Please go ahead. I just want to follow-up just on the cash flow and the government assistance payments in the current financial year, showing the cash flow there. Could you just maybe clarify, did any of that go through the P and L or what's the direction of it? Yes. I think maybe starting in one of the in the announcements, in the commentary that about $2,000,000 went through operating expenses. Also, it might be a little around, just let me find it, Mark. Is that a job keeper still? It's more than JobKeeper. It's also some U. S. Government assistance. So it's more than JobKeeper. The $1,900,000 went through to the operating expenses and the 2 million went to the manufacturing departments, All mainly around the first half because our manufacturing was not back at full board, really started to come online quite strongly in the second half. And the way we see that is supplementing people's salaries, which is wages, which is that's what it was there for. Otherwise, they'd be short paid. So in the U. S, what that subsidy was about or assistance was about because the U. S. Hadn't was not back on track in that first half and also partly in the second half, under those provisos to get that subsidy, you had to keep the people employed full time and you couldn't terminate any people. So it was basically it's a difficult one because if we hadn't got it, we probably would have taken a different road in our expenses, both the PPE and sorry, they call the American one the PPP and JobKeeper. We would have had to take a different course with employees. So it probably did what it was meant to do, I would say. Okay. Okay. So when we think about 2022, how do we think concerning that? I think you could look at when you that's why I sort of tried to compare to the 2019. I think you'd probably look at a more normalized expenditure level, especially in the second half of this year of the 2021 year. Year? So just to be clear on that, so you don't think there'd be any more government assistance, is that what you're saying? No. We won't certainly, wouldn't we? At this point in time, I very much doubt if we qualify for any government assistance anywhere. So I guess your salaries and the expenses will increase, but you've got the revenue that ties it to the normal if you like. Yes. Got it. Okay. Perfect. All right. Thanks, Matt. No worries. Thank you. There are no further questions at this time. I'll now hand back to Ms. Cheehan for closing remarks. Thank you very much everyone for listening and thank you for your questions. Just in summary, John and I are very pleased with the results. It's thanks to all our sales teams, office manufacturing teams all around the world. Everyone has contributed to our results. It's been a very, very tough year and it's been a really great outcome. And the future is looking rosy. We are very excited about our amalgam replacement, but that's in a couple of years and very positive outlook for the year. So thank you very much to everyone for listening.