Ann: 2016 AGM Presentation, page-134

"That's the IP they have on the capsuling system and the fact that 3 of SDI's competitors now actually send their products (including from Germany and Japan) to Bayswater to be packaged. That speaks volumes for both SDI's commitment to excellence - even to the small things - and to their respect for quality in the industry.

Secondly, the observation of staff longevity, particularly within the R&D team, indicates a loyal commitment to the company from the ground up and a seamless focus on improving products and honing system efficiency over the long term.

The sense I got from the article was SDI has a small, yet focussed, talented and committed team that will continue to be a tightly run and well-respected innovator within the industry."


@long_haul

Your comments reflect someone who invests with a business owner mindset (as opposed to someone who tries to interpret how the "buy and sell side stack up" relative to one another, or what volume of shares trade on any given day, or based on some supposedly-special feature of the share price graph).

The one thing I'd add to your comments relates to the fiercely independent nature of the company and its management. My strong sense is that they want to be as self-reliant as they can possibly be, without being at the beck and call of any critical suppliers/creditors/customers.

For example, some time back they came to the view that the sourcing of specialised glass powder (used to make ionomer cements) could become a business risk. So they simply spent the money and developed their own glass milling capability. Now, instead of being reliant on a limited amount of specialist suppliers, they are in a position to source raw glass feedstock (which, being commoditised, is far more widely available), from which they manufacture the high-spec, milled product in-house.

There are many other such examples of SDI management being happy to allocate capital to areas that preserve and enhance self-sufficiency.

This is part of the reason that the company generates less free cash flow that one might expect ... Over the past ten years, the company generated, cumulatively, $60m in Operating Cash Flows, net of a $15m invested in working capital. Out of that $60m of OCF, $24m was re-invested into plant & equipment (a la the sort of modernisation and technological improvements in the example discussed above) and $18m was invested in Intellectual Property (predominantly product R&D).

Of course, this apparent high degree of capital intensity can be viewed in two opposing ways:

A. Negatively, if the view is that this level of investment is merely a necessary cost of doing business in order to merely maintain their competitive position.

Or,

B. Positively, if it results in an increasing unique product/service offering that confers on SDI increased pricing power and/or market share gains.


The only way I am able to objectively judge on that is to consider the financial performance of the business over time, notably wrt Gross Margins (as a reflection of the degree of pricing power) and Revenue growth (as a reflection of gains in market share).

In terms of the former (i.e., the GP Margin experience), enduring benefit from all the investment activity is difficult to establish definitively, mainly because of the significant influence that exchange rate fluctuations have on GP Margins (fluctuating from the lows of around 57% in 2011 /2 when the A$ was above parity with the US$ and the silver price was 3 times higher than it it today, to near-record highs (~68%) last year.)

But on the latter measure (i.e. long-term growth in Sales Revenue), it is unequivocal: the significant investment in the business is paying off, given Revenue growth has compounded over the long-term at some 7% pa.


I think it is in terms of this high level of investment in SDI's business where equity markets - whose participants are predominantly focused only as far as the very next profit result - are out of step with SDI's business model that involves decisions that are almost exclusively made with the long-term sustainability of the business at the forefront of mind... sometimes even at the expense of short-term profits.

And I think this is the difference between listed companies that are run as normal public enterprises and those that are run as essentially as private businesses.

So, while your comments about SDI being run by a focused, talented and committed team could be accused of sounding like something people often say about the companies in which they own shares, in SDI's case there is ample evidence to prove that it is true.

Trouble is, sometimes the market doesn't fully understand it.


The other thing the article didn't give much coverage to is the average tenure of non-managerial staff. I recall a stat from a few years back that said the the average service tenure of the 180 SDI employees that work at their Bayswater facility was at that stage something like 12 or 13 years (I forget the exact figure), with many employees boasting over 20 years' service and a few with more than 30 years'. That, I think, speaks loudly as a proxy clue about the nature of the enterprise.

Another of my personal favourite little factoids that provides some insight into the sort of attention to detail that exists withing the company is the astonishing credit control in the business: When you sell to many hundreds of discrete customers based in a multiple of geographies across the globe and yet Trade Receivables amount to around $13m out of Total Sales of some $75m, then that reflects very good payment terms, especially when one considers the length of the supply chain.
But, there's more: the management of those credit terms takes it to another level altogether, with the annual value of receivables written off measured in just a few tens of thousands of dollars (in FY2016 just $46,000 of receivables (equivalent to less than 0.3% of the period-end Receivable balance) was written off, and in FY2017 $72,000 couldn't be recovered (0.57% of the closing Receivables balance.)) Like I say, when you have a highly granular customer base operating in all far flung geographies around the world, and you routinely recover around 99.5% of what those customers owe you, then you are obviously doing the little things right. It's another little proxy clue of that attention to detail I encounter very often with this company.

Sure, they might be a big clumsy when it comes to managing market expectations, but that's not really what I - as a shareholder - pay them to be good at. I pay them to be good at managing the company's assets in order to grow the intrinsic value of the business.

I think that in the fog of war that erupted following the "Trading Update" (bit of a misnomer, some might say), the market is totally overlooking the new range of products currently being released, and the impact that those releases are likely to have on Revenue growth in during the course of calendar 2017 and 2018.

It might be a bit of a hyperbole, but the phrase, "exponential growth", was heard to be uttered.
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