Ann: Half Yearly Report and Accounts December 2015, page-24

Well, yes, if you exclude a loss-making division from any company's results, by mathematical default that company's overall profit situation will improve. The correct question to in fact ask ourselves (which you basically alluded to earlier in the thread), is: does it make sense to exclude a certain division's loss (i.e. does the fact a given division generated a loss in any given period accurately reflect that division's steady state, or is it an abnormality we should ignore)? In SDI's case, i'd argue the former - i undertook a cursory (i.e. 10 minute) look at the performance of SDI's operations by segment (excluding external sales) going back a decade via simply noting down external sales revenue and segment profit (EBIT) straight out of SDI's annual reports since 2006 (by the way, i ignored SDI's former Asian operations which were closed down in 2010-2011 after years of losses). Below are the results:

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11	Column 12	Column 13	Column 14	Column 15	Column 16	Column 17	Column 18	Column 19	Column 20	Column 21	Column 22	Column 23
0		2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	10-yr
1		Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT	Ext. sale	EBIT
2	Aus	14.36	7.366	15.497	3.937	15.223	3.171	18.633	7.155	18.32	3.043	20.893	2.004	19.531	1.673	18.996	4.582	22.418	7.093	23.76	8.21	187.631	48.234
3	Europe	14.075	0.544	16.131	2.412	15.857	1.141	16.58	1.035	15.891	1.835	14.896	1.595	15.833	1.344	16.59	2.116	19.51	1.809	19.175	2.099	164.538	15.93
4	USA	11.616	0.39	11.88	0.738	12.563	0.642	15.096	-0.352	13.773	0.805	13.409	0.926	15.413	0.706	16.225	1.053	17.643	0.907	19.689	1.195	147.307	7.01
5	Brazil	4.551	0.741	4.573	-0.151	4.836	-1.026	5.865	-1.295	5.109	-1.001	5.561	-1.169	5.537	-2.571	4.684	-1.064	5.65	-0.824	5.9	-0.27	52.266	-8.63

There's obviously a bit of noise in there because of currency volatility, but the thing that i find remarkable about SDI's Brazilian division over a decade is its consistency - revenue has never been higher than $5.9m and never been lower than $4.5m, and it has generated an EBIT profit in only one year (2006) - since then it's been bleeding red ink for 9 years for a cumulative EBIT loss over the decade of ~$9m. With that as context, do you still think it makes sense to just ignore the Brazilian division's loss from the company's most recent results? I'd argue no. At least one could say the losses in Brazil since 2012 are becoming smaller so the trajectory appears positive, but i personally choose to assume the operating loss will carry on given it has a remarkably consistent 10-year history of doing just that - if disconfirming evidence arises to the contrary (e.g. the Brazilian manufacturing strategy starts to bear fruit and the division turns a profit), i'll change my opinion.

Don't get me wrong here: i think SDI is potentially an investment grade company in the making for a variety of reasons (in a growing market, high margin product / favorable economics, management is aligned with shareholders via large family shareholding etc.) and that's why i'm looking at it in detail and posting on it, but there's a few things nagging away at me that i'd need to see positively resolved before investing:

- Success in Brazil (defined as it becoming standalone profitable with manufacturing up and running)
- Some sort of clearly articulated strategy from management as to how they are going to win market share from the majors (there's no doubt in my mind that the competitive dynamics of the industry are a big part of the reason why it's taken them so long to get traction in Brazil, why they had to close Asia etc.). As part of this, i'd like to understand how they're planning to combat the nascent dynamic in developed markets of dental corporatization - as a shareholder in ONT i guess i see both sides of this (independent dentists are rolling up into corporate groups partly so they have better bargaining power against the dental suppliers such as SDI). It's a fascinating industry arms race going on in dentistry - the global supplier market appears to have become much more concentrated (witness Dentsply/Sirona's growth via acquisition over the last 10-20 years), and to fight back dentists themselves are increasingly rolling into corporate structures.
- Some evidence of increased competitiveness in the US/Euro markets. As was touched on earlier in the thread, SDI now has a big tailwind at its back as an exporter given the AUD decline vs. the USD/EUR - they should be able to parlay this into sales growth if their product is good.

The way i look at SDI is basically thus: if they crack LatAm over the next ~12 months, they have potentially a long runway of growth ahead of them and i'd look to invest - by that stage, i'll probably have missed some of the upside because the market's valuation of SDI will likely run a bit, but i'll also feel far more comfortable that the key risks to the investment case have been mitigated. I've seen enough examples of manufacturing facility ramp-up problems occurring in other businesses to know that the successful commissioning of a state-of-the-art manufacturing facility in some far-flung part of the world is far from a fait accompli.