A steady as she goes update from SDI today, though maybe there is more below the surface of the reported numbers.

We got guidance of $53.1m revenue, up 3% on last year mostly driven by favourable currency movements (constant currency actually down 1.2%). The legacy Amalgam segment continues to drag, down 19% on last year, but now just 10% of sales so it should have a weaker effect on headline numbers moving forward.

Back of the envelope calculations show non-Amalgam segments growing at ~6% a year, not quite the high single digit/low double digits I'd hope for but still solid. Gross margins continued their strong recovery, now back to pre-Covid levels at 66.1%. This means gross profit grew 7%, or $2.3m incremental dollars.

Despite the extra $2.3m in gross profit, guidance is for NPAT to be flat, with the mid-point of guidance in line with the $3.8m NPAT reported last year. I suspect part of this will be some modest growth in operating costs (though they have been steadily controlled between $27-28m per half for a couple of years now) and SDI management putting out conservative guidance.

However I think the biggest headwind to reported statutory numbers will be currency impacts on cash balances that flow through the P&L. In 1H25 this was a ~$300k benefit, and with favourable currency movements for operating results will likely mean a similar sized loss in 1H26.

We'll have to wait until late Feb for full results to confirm but I think this will be one where the underlying results will be much stronger than the reported.

https://www.merewethercapital.com.au/blog/will-this-stock-have-investors-smiling/

In a nutshell SDI is the classic investment thesis of a good segment being muddied by a poor segment as SDI have grown their high margin (~70% gross margin) Aesthetics and Whitening brands by a CAGR of 12% over the last decade, including the disruption from Covid.

Unfortunately this growth was muddied by the terminal decline of Amalgam (-3% revenue CAGR over the last decade) which also has lumpy gross margins fluctuating with commodity (primarily silver) prices. With Amalgam <15% of revenue in the latest half year the dilution from this poor segment should no longer be a material impact moving forward.

On top of this segment transition, SDI was battered by Covid as they export ~95% of their products manufactured in Melbourne, with higher logistics and warehousing costs impacting gross margins through FY22 and FY23. The gross margin fell from 66% pre-Covid to as low as 52%, putting a significant strain on profitability. However with the recent half showing a gross margin improvement back to 62% (improving through the half, it was 59% at the AGM update), there is evidence these headwinds have eased.

Given the substantial revenue base the improved gross margin provides significant leverage to operating profits, with profit before tax increasing 67% and on track to maintain that growth through the full year. That would leave SDI trading on less than 10x normalised earnings, which I believe is far too low for a business with the underlying quality of SDI that has been masked in recent years and offers steady growth in a very defensive industry.

Just caught @Wini on Ausbiz pointing out some interesting stats on SDI.

Maybe it's just the beard, but it's got me thinking I need to take another look!

I've just emailed Sam to see if she'd be keen to come and present to members again (the first interview can be accessed here)

Thank you @Strawman for organising today's chat with SDI. I wasn't able to listen live but have listened back to the recording. Just thought I'd write down some thoughts coming from Dentist's perspective. I have done another forum post a while back in regards to what I thought about their products which I will link here.

SDI are at an interesting transitional period in which there is increasing phasing out of amalgam fillings and the shift towards more aesthetically pleasing dental materials. This has hurt SDI as they were the largest manufacturer of amalgam capsules in the southern hemisphere and I believe amalgam sales still make up a very large part of their revenue mix. With the transition towards aesthetic materials, more competitors have arisen and Samantha outlined them briefly towards the end of the meeting in particular 3M which is the 1000 pound gorilla of the industry.

However, no company has been able to create a direct dental material (materials that are placed directly onto the tooth as opposed to lab made) that has been able to replicate the strength of amalgam to this day. Composite Resin's are the closest comparison however they suffer from reduced strength especially compressive strength and they are also very technique sensitive; they must be placed with next to 0 exposure to moisture. If you've been to the dentist recently you have been been subjected to a dental dam. This is placed to reduce the amount of moisture that comes into contact during placing of the filling. Amalgam's did not have this issue. They were strong and could withstand high levels of force, and they were not moisture sensitive. The drawback was that they were silver in colour making them unaesthetic and also over time, it was found that amalgams would expand ever so slightly thus causing subtle cracks to adjacent tooth structure.

I believe that SDI poured an enormous amount of R&D into developing Glass Ionomer Cements (GIC) in the late 90s and early 2000s as it was seen as a potential replacement for amalgam at the time. GICs are known to have aesthetic properties, ease of use in which they were moisture tolerant, and they also chemically adhered to the tooth thus making them "stronger" in adhesion to the tooth. This may explain the massive run up in share price between 2000-2004. Unfortunately, with increased research and use of GIC's, it was found that they had very poor wear capabilities and were also not acid resistant. The chemical bond strength was also poor compared to the bond between adhesive and composite resin. And thus their use case in recent times has mainly been as a temporary filling material. This may also explain why there are only 2 main competitors in the GIC range compared to over 200+ just in the composite market in the US alone.

Their new product "Stela" which Samantha showed to us in the meeting is being marketed as an amalgam replacement. There doesn't seem to be much marketing or information yet on the Australian website however on the Central and South American website I have found this information (I have used google translate to translate back to English):

My first thoughts on this product just looking at this information are:

• If this product is an alterative to amalgam, why wouldn't you compare the strength of it to an amalgam material (the comparison materials are GIC (Equia Fort) and other composite resin materials)?
• The material is chemically cured but takes 4 minutes, where as I could use Filtek Bulk Fill (a composite resin material) which only takes 20-30s to set with a curing light?
• How technique sensitive is the material going to be? Will it be less moisture sensitive than composite resin?
• Is the material going to expand over time as has been discovered with amalgams?

Obviously the material hasn't launched yet so more information will be released but these are just my initial thoughts. Will be interesting to see the take-rate of this material in the dental surgeries. Dentists, much like doctors, are quite stubborn and don't like change. They will need to market this well in order for it to sell.

Disc: Not held.

For anyone interested I see "Coffee Microcaps" are hosting SDI Ltd management on Thursday 26th.

I looked at this about 2 years ago - ticked quite a few boxes (family run, large invested interest, patented producs, decent yield) but I found management underwhelming and lacking a clear strategy.

The business has also been facing a large headwind in terms of continually declining amalgam sales (still about 20% of revs?). Not sure how much further this has to fall - possible upside from the products you mentioned @jwrostagno27 once this bottoms out.

There is also quite a bit of currency movement and I dont think they are fully hedged.

Half Year Results Announcement for FY21

Record first half result underpinned by strong demand in key regions.

H1 2020 Highlights

•  Sales in the December half FY 2021 of $36.9 million were down 8.0% (3.9% in local currencies); however, this compares to a record first half in FY 20200 and is despite the continued impact of the pandemic in key markets, with UK sales down 41.7% and Australian direct exports down 29.7% in local currencies.
•  Earnings were underpinned by continued strong gross margins, with EBITDA up 21.8% on a strong comparable period in HY20.
•  Operating expenses were carefully managed, down 19.0% in local currencies, or after adjusting for government assistance programs expenses were down 12.9%.
•  The strategic review was completed on the Brazilian operations, and implementation is in progress. The Brazilian Real devalued by 31% against the Australian Dollar in the last 6 months, resulting in $0.7 million of realised currency losses.
•  Cashflow was strong, underpinned by solid operating conditions and a reduction in working capital.
•  No debt for the group.
•  Interim fully franked dividend of 1.50 cents per share, up 11.1% on the same period last year was declared.

Presentation

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02343540-3A561711?access_token=83ff96335c2d45a094df02a206a39ff4

A good result for SDI.

Sales were up 7.7% in the first half to $40m, with Net profit up 11.9% to $3.9m as the higher margin aesthetic products continue to dominate a larger part of the sales mix. This was despite a 12% lift in operating expenses due to an increased invesment in sales & marketing and R&D.

Amalgam sales -- which are now ~20% of the total, and will continue to drop -- decreaed by 13.6% in constant currency, but aesthetic and whitening products saw a 11.5% and 12.9% increase, respectively. Importantly, these rates of growth were well above that of the wider industry, suggesting increased market share.

The dividend was increased 12.5% to 1.35cps, which gives SDI a trailing 12-month yield of 2.8%, fully franked -- or just shy of 4% when grossed up to account for the tax benefit.

Brazil saw a strong improvement with a 21% lift in sales, with past manufacturing investment giving SDI a better competitive position. However, the US (which is >3x the size of the Brazil unit) saw a 5% drop in sales -- although a weaker AUD helped offset this. Amalgam represents a 1/3rd of US sales, so the structural decline in this product has a more pronounced effect. However, whitening sales were also weak, which management said they are addressing with a new marketing campaign.

The balance sheet remains debt free with $6m in cash. Cash conversion was good.

SDI expects the usual seasonality, with second half sales to be stronger. Assuming usual half-year splits, I'm expecting FY sales of 87m, which should translate into NPAT of $8.5m (or EPS of 7.2c) as margins continue to increase (contsant currency).

Results presentation is here