"Any learnings to pass on to fellow SDI holders?" @Warrigals,...

"Any learnings to pass on to fellow SDI holders?"

@Warrigals,

Not too much of substance.

I was accompanied in the meeting by an analyst from the stockbroking firm that hosted the meeting and much of the meeting was taken up by him asking some detailed questions about SDI's products and what the company was doing in various geographies around the world. (The analyst in question had only recently initiated coverage of the stock, so his familiarity with the some of the fundamental aspects of SDI's business model and history was not as well-honed as it might otherwise have been.)

Because I am a long-term owner of businesses, I tend to not pay too much attention when the discussion becomes focused on short-term issues arising from questions such as "How are things currently going in the US?" or "How are sales travelling so far this financial year?" or "How'd you go at the dental conference and expo in Germany?"

I see SDI's global geographies being like the cylinders of a car engine; they will almost never all be firing simultaneously... in any given financial period, at least one of them will be performing sub-optimally... for whatever reason.

But for those who are interested in those sorts of things:

1. They seemed happy and comfortable with the senior sales people that they had appointed in the US (but then again, what are they going to say? That they feel they have hired some duds?)

2. Europe and the UK continued to be going well.

3. Brazil was an attractive market in terms of rapid demand growth from a small base, but bureaucratically it was a bit of a nightmare (nothing new here). I sense the model of servicing the rest of South America from their Brazilian operation has been wound back, as the indicate that it is just as easy to ship product to Argentina or Paraguay or Chile from Melbourne as it is from Brazil.

4. Asia was presenting some good opportunities (new info to me; I had not heard them talk about Asia much in the past. But I don't expect to see any major fireworks from accelerating sales to Asia in the near-term).

5. In terms of year-to-date performance , there was nothing to report. For starters, it which basically includes only July and August - they probably only just received the management accounts for August. And also, the December half is SDI's weaker half and within that, the September quarter is its weakest quarter, so it is very difficult to know how the full-year is going to pan out based on how it starts off.

6. So, the message in terms of outlook was - unsurprisingly - the same, namely decline in amalgam more than offset by increases in the sale of non-amalgam products.


My points of discussion related mainly to "holier-than-thou" matters such as governance and stewardship of capital.

For me, the most relevant issue is the current state of the balance sheet (being debt-free today, and likely to be in a $2m to $3.0m net cash position in 9 months time when they report their FY2018 results....compared to having $10m of Net debt when I first started acquiring shares in the company in 2012), and the capital flows into, and out of, the business over the coming years.

Here's my take on the situation, which I relayed to them:

This year, SDI will generate some $12m to $13m in EBITDA, based on my reckoning (in essence, it means no growth on FY2017... as always, it is somewhat exchange rate dependent, but if exchange rates remain where the currently are, that figure might prove to be a tad conservative).

And then, assuming:
- $0.5m to $1.0m investment in working capital,
- $2.5m to $3.0m in tax payments
- $2.0m in capex (which was confirmed as being a reasonable estimate),
- $2.0m to $2.5m in expenditure on intangibles (i.e., capitalised R&D. Again, confirmed as a fair guess.)
- 2.5cps dividend iro FY2018 (FY2017: 2.3cps), which comes to just under $2.7m

So the surplus capital the business will generate over the next 12 months will look something like the following:

EBITDA = $12.5m

Less: Working Capital = $0.7m
=> Net Receipts = $11.8m

Less: Tax paid = $2.7m
Less: Interest Paid = $0.1m
=> Operating Cash Flow = $9.0m

Less: Capex = $2.0m
Less: Investment in Intangibles = $2.5m
= Cash Flow Before Servicing of Equity Capital = $4.5m

Less: Dividend Payments = $2.7m
=> SURPLUS CAPITAL GENERATED = $1.8m

Net Cash Balance @ 30 June 2017 = $1.6m
=> Projected Cash Balance @ 30 June 2018 = >$3.0m

(Note: At the 31 December 2017 balance date, the current cash balance is likely to be largely drawn down, given the company generates 80% of its Operating Cash Flows in the June half)

The company is currently carrying more net cash than it has in the 25-odd years that I have gone back to study SDI's financials.

And, as the above simplistic exercise demonstrates, this record level of cash holding will be beaten again at the end of this year.

The response to my question about what will happen to the growing surplus capital was largely as I had wished: surpluses will be given back to shareholders.

Then there was a few minutes of discussion about the mechanism by which that would occur, whether via an increased dividend payout ratio (noting the excess franking credit balance of some $4.0m (3.5cps)), or - given the current attractive valuation metrics of the stock - via a share buyback (but the scope for the latter is clearly limited by the low levels of liquidity in SDI's stock).

Then there was some discussion about governance matters. At the 2016 AGM the company received a first strike in terms of a >25% vote against the Remuneration Report.

In this regards there was a bit an exchange of expectation about matters like the composition of the board, the degree of its independence, its overall effectiveness, appropriateness of remuneration levels (especially for Executive Directors), reporting lines into the MD/CEO and the COO/CFO, respectively (it is a somewhat unique arrangement), and the degree of ongoing engagement of the "new" Non-Executive Chairman (i.e., the founder of the company and the former Executive Chairman).

Oh, there was one new bit of information, about which the MD/CEO appeared to be reasonably animated: research trials are being conducted by some or other Victorian health authority, which is investigating the use of SDI's Riva Star product as a low-cost alternative treatment to treatment that requires children to have to undergo general anaesthetic procedures. There's a short paragraph in the latest Annual Report devoted to this (see Managing Director's Report of the Annual Report... second-last paragraph on page 3). But, again, I tend to not get too excited by this sort of thing - i.e., SDI developing new products for new applications - because I see that as is just a normal part of what the company is supposed to be doing, anyway.


So, all-in-all, there was nothing overly dramatic to emerge from the meeting from my point of view (again, this should not be in any way surprising) and, anyway, my interest in meeting them was more for me to put across my tuppence ha'penny view about the fact that I did not want to see the company ever being debt-funded again, that I wanted excess capital to be given back to "the good guys" (i.e., us shareholders), and about the governance issues that I listed above.