Earnings Call: H1 2021

Feb 19, 2021

Thank you for standing by, and welcome to the SDI Limited First Half FY 'twenty one Results. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Ms. Samantha Cheatham, Chief Executive Officer. Please go ahead. Good morning, everybody, and apologize for the technical delay. Thank you for joining us on our half yearly results investor conference call for financial year 2021. My name is Samantha Cheatham, the Chief Executive Officer, and with me today is John Sliviro, our Chief Financial Officer and Chief Operating Officer. The last 6 months began with incredible uncertainty with the pandemic taking hold globally. As we moved into the Q1 in the new 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 have been put on hold and then gradually we began to ramp up production to make the return of strong demand. While not uniform, as you will see when we talk about the region, we have finished for the year we finished the year with strong momentum and are pleased to report a record first half profit for the group. The comparable period from FY 2020, as you may recall, was a particularly strong 6 months with record sales for the first half. This half, despite not all regions returning to normal, has been particularly pleasing. And with the remaining regions showing signs of recovery, we are confident for the rest of the financial year. As I've done previously, I always like to recap from where we 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'll begin with a summary of the last 6 months and 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 me to talk about our strategy and the outlook for the remainder of the year. Let's begin with a summary of the last 6 months. I'm now on Slide 4. As mentioned in my opening remarks, this was a record half for the group with net profit after tax up 30.9 percent to $4,600,000 in line with our trading update given last month. The first half sales were weaker, down 8% compared to last year's record results. But importantly, a key region, the UK was very weak and direct exports from Australia were down materially. Gross margins continue to be a strong feature reflecting product mix, but also from the regional exposures and was in line with the period prior period when adjusting for currency. As always, costs were well managed with year on year operating expenses down 12.9%, driving EBITDA performance up 21.8% on the prior period, despite some uneven performance in certain key regions. I'll spend some time talking about the product performance on the next slide, but the demand catch up I spoke about was evidenced with our whitening products, up 19.3% in local currency, aided by new products and some targeted marketing activity. Pleasingly, the Board has rewarded shareholders with an 11.1% increase in the dividend for the 3rd half with a fully franked dividend of $0.015 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 the last 6 months was the whitening category, up 19.3% in local currency. We saw strong demand supported by further initiatives, including the release of a new polar light and an investment in rebranding the complete range. Another highlight, although the smallest product category was equipment with good traction of the Radia Expert hearing lights for dentists. The take up has been impressive and drove a strong outcome for the period. While the aesthetics category on the face of it appears to go against the trend in this half with sales down 7.3%, This category was impacted by the poor UK market and slower direct exports from Australia. However, we saw strong performance from those regions where lockdowns were eased, including Australia, North America and parts of Europe. Finally, the Amalgam product continues its recent trend, although the trend was accentuated by government restrictions in some regions and slower government tender activity as a result of the pandemic. Turning to the geographies. Slide 8 breaks down the sales by business units as disclosed in our accounts. Sales by business units in the 6 months to December 31st reflect the regional differences we saw in government policy in response to the pandemic. European unit was down 6.9% in local currency and overshadowed by the UK, which was down 41.7% due to restrictions and the challenges with Brexit. Brazil, while up 3.1% in local currency, was down 27.7% in Australian dollars, reflecting the devaluation of the Brazilian real. As shared at the AGM, the review of this country is now complete with the implementation of the strategy currently in progress. This change will remove some of the volatility in currency we have experienced. But importantly, the restructure sets the business unit up with a lower cost base. For a more detailed look on what's going on in the region, let's look at customer behavior by region shown on Slide 9. This slide shows the regions where sales were in Australian dollars. Key regions of the Americas, Asia Pacific and Europe excluding the UK performed well as mentioned previously. This performance was a function of the different approaches by government on the restrictions imposed in these regions and the lifting of some of the restrictions in others. The performance also highlights the demand catch up when dentists return to normal operation and bodes well for the remainder of the year. I will now hand over to John to talk through the financials. Thanks, Sam. I am now on Slide 11, the profit and loss statement. As was mentioned by Sam, sales declined 8% in the period compared to a record first half twenty twenty, underpinned by demand in key reasons offset in part by government restrictions. Gross product margins in Australian dollars fell by 1.3% to 64.9%, but when adjusting for currency movements were in line with the previous corresponding period. Total operating expenses in Australian dollars decreased by a pleasing 12.9% when compared to the previous corresponding period after adjusting for currency and government assistance programs. Finally, following the devaluation of the Brazilian real, we incurred a R700000 realized currency loss. Turning to balance sheet on Slide 12. The company's net cash position increased by $4,900,000 Debt was eliminated and we have a $10,000,000 headroom in unused bank facilities. Inventories were well managed with a fall of $2,600,000 underpinning a strong cash flow performance for the half. Finally, as we mentioned, our investment in research and development continued. Turning to cash flow, second on Slide 13. The increase in cash was driven by strong operating performance in the business over the period with the lower payments and receipts reflecting the level of activity in some regions. The payment of dividend reflects a strong net cash position and the Board's commitment to shareholders. In this period, we were the recipient of the JobKeeper in Australia, which ensured that we retained our staff in the period and avoid strategies to manage costs. I will now hand back to Sam to run through the strategy and the outlook for the coming financial year. Thanks, John. Turning to our strategic priorities. Our new product development focused on our highest hydrogen products being aesthetics and whitening. Consistent with this focus, we continue to look at further manufacturing efficiencies where possible through automation or simply doing things smarter and driving ourselves and marketing teams to prosecute sales in our markets. Secondly, we have an ongoing commitment to R and D with plans to release 1 to 2 products per year. And SCI's amalgam replacement product remains on schedule to be released in 2023. Finally, we are undertaking a comprehensive review of our full financial results will follow similar trends to previous years, highlighting strong growth in both the aesthetics and whitening products and a continued decline in amalgam products. While the outlook remains uncertain with logistic challenges in some markets and uncertainty on some ongoing government restrictions, we are quietly confident that the trends we have seen in the first half of the year will continue into the second half. Thank you for listening to our presentation. I'll now turn to the operator to moderate for your questions. Thank you. Your first question comes from Scott Milson with Milson Capital. Please go ahead. Hi, Sarah. Could you just give us a bit more detail about the review of the footprint in your manufacturing, please? Certainly, Scott. We're looking right now, we're scouting out the idea to perhaps move to a greenfield site and we haven't really we're really on stage 1 just looking into all costs and ideas and plans. So certainly for the future, we're really looking to improve our efficiencies. So I think, Scott, you've been to SCIFR and recall. And I think you might remember there's lots of rooms here and there that probably aren't the most efficient in terms of production flow. Okay. Thank you. Second question is for John on the accounts. I know that we stated that $2,400,000 received from JobKeeper. In the notes to account, there's a figure of 3.26. Dollars Can John just clarify the difference whether Yes. Sure, Scott. The $2,400,000 was the physical cash received. So the balance between the $2,400,000 and the $3,000,000 is what's in our accounts. So the $3,000,000 is in our accounts, but $2,400,000 was physical cash received. And then we got the balance of that after balance date. I should also mention that of that $3,000,000 roughly about 50 percentage goes into the valuation of our goods because it relates to our factory, a bit more than 50% actually, probably closer to 55%, 60% goes into the valuation of our goods because it supplemented our production workers' wages and then the other 40% is against operating expenses. Thank you. Your next question comes from William Hanna with Janner. Please go ahead. Hi, Sarah and John. Just wanted to question the $700,000 loss from the Brazilian real. I know there's currency exposure to all different types of countries and continents, but is there any kind of hedging activities or expectations in the future that limit currency losses in the future? Yes. Look, we can't hedge the Brazilian real. It's not a traded currency. Any sort of protection from that point of view is extremely expensive. The part of the restructure is which we're implementing is dealing with Brazil in Australian dollars and selling over there in real. That will take up quite a bit of exposure on the intercompany transaction which we're dealing with real. So we expect that to be on board around the 1st July to start that as the final stage of that restructure. So we believe that, that exposure will be quite significantly reduced. Okay. Thank you. Your next question comes from Jeffrey, a Private Investor. Please go ahead. Hi, there. My question is in regards to the almost 13% operating expense reduction that you experienced this past. Just wondering, is that or is any of that an ongoing savings that you guys have found? And if not, how should we think about the cost going forward for next 6? Yes. Look, Jeffrey, look, it's a difficult case. I don't believe that, that once COVID and the pandemic is totally gone from the world, I don't believe that that will continue, that savings. It will continue for the half full year. It really depends on what's happening. As you understand, we're not traveling. There's no exhibitions. Certainly, people are still on reduced work hours. So probably a better guide is to go back to the previous financial year, not the 2020, but 2019, if you're looking at the trend in expenses. It's very difficult to compare 2020 with 2021, I mean, it's especially in the last quarter of this flying through year when the last quarter last year, it is dramatically really not as fast. Yes. So most of it is, I guess, COVID related and you're thinking none of it will be ongoing savings like I'm thinking for instance office space? No. We own our premises here in Bayswater, so there's no rental here. And then we only have rental in the 3 overseas offices, which are not material. We've certainly cut the rental in our Brazilian operations. But once again, when you're dealing with Brazilian real, it's not that material. So I don't see any savings from that point. There might be some, but nothing material. Okay. Thanks a lot. Your next question comes from Brendan Harrington with Harrington Partners. Please go ahead. Hi, John, Sam. Great result in the circumstances. Just wanted to maybe hear from yourself, John, a bit more. I see the receivables have blown out a little bit. And I'm just wondering with the ongoing Brazilian restructure, are we putting up any provisions for that? Or what sort of Yes. Look, the auditors part of the audit program is they look at our receivables very closely. And yes, we've had provisions already in our accounts for any doubtful debts. The receivables, when you say blown out what compared to the previous year or compared to June, that certainly increased since June because of our sales activity. If you remember, the last quarter of last financial year, our sales were virtually flat. And therefore, as sales get back to normalized, our debtors will go up. Okay. All right. And with that with the Brazilian restructure, I mean, what sort of costs you were expecting to make that? The cost to do the restructure, look, it's fairly material, there's a bit of legal costs there. There is not too much else cost. The most cost we've incurred is legal advice because Brazil's legal system and the corporation floor is so much different to ours. This branch structure that we're looking at is relatively new in the equivalent to our corporations area. It's only been allowed in the last year or 2. Prior to that, there was no such structure. So we're taking advantage of it. So there's been probably around possibly around $50,000 to $100,000 in costs in legal costs. Okay. I see. I see. And maybe yourself, Sam, just looking at the strong growth there in Australian domestic sales, do you feel as though that's something that will continue? I mean, if you manage to obviously, I imagine people here haven't had anywhere else to turn, do you think that's sustainable? No. Look, I think that will definitely the growth won't continue at that level. As this question, when the job keeper finishes, perhaps less people will go to the dentist. But people have been investing in their house and themselves. So that's really why the great increase has happened then. But look, I think we'll still have the double digits, but not as high as that. Okay. Thanks, Scott. There are no further questions at this time. I'll now hand back to Ms. Cheatham for closing remarks. Thanks, Ashley. It's fabulous to hear of all the vaccine rolling rollouts happening around the world, especially in our key markets. We're beginning to see most of the regions open up and that's really exciting. The dentists globally seem to be getting back to normal. But like what happened in Victoria in the last 5 day lockdown each week can change. So there's certainly uncertainty. But look, I look forward to meeting some of you in the next few weeks for further discussions. But thank you very much for listening here today and have a lovely day. That does conclude our conference for today. Thank you for participating.