Ann: FY22 Investor Results Presentation, page-3

"I'd be curious to now what 3.3M (freight) was in % terms? Double perhaps? Seems punchy given that there product is not bulky at all.

It's not diamonds or rubies that they needed transporting to other parts of the world; they are relatively low valued products.

Measured in dollar value per unit of volume - a typical metric of the economics of air freight logistics - their products would be certain considered to be bulky.

And when you need to suddenly air freight product around the world because you can't book a container spot on a ship, the cost differential is very significant.

And remember, this was at a time when there were very few passenger flights that would also carry light commercial cargo, so they would need to book space on commercial freight airlines at a time that capacity was acutely tight.

So, in the context of almost $80m in CoGS and SG&A expenses, a figure of $3.3m for extra freight costs should come as no surprise.


Could they have passed these costs on to protect gross margin?"

They did put through price increases in DQ2021 and also in JH2022.

But the margin recovery from doing so isn't instantaneous, not in the very same period; there's inevitably a bit of a time lag involved.

For signs of that pricing adjustment working, you need to look at the Gross Margin experience by half-years, presented below (the blue columns correspond to the period spanning Covid):





Mid-JH2020 was when Covid initially struck, but it had not caused supply chain bottlenecks yet. The freight cost pressure started to appear in the GP Margin in JH2021, and then proceeded to get worse in the next two half-years.

The freight cost impost was actually the most acute in the most recent half-year (JH2022) but that isn't reflected given the GP Margin's recovery. The reason for that improvement is the start of the benefits of the price adjustments that were put through, as well as some moderation in freight rates.

I expect those price increases to make their debut full-year contribution in FY2023 and, combined with container freight rates which - while nowhere close to pre-Covid levels - have more than halved from their DH2021 peaks (see below), will cause SDI's GP Margin coming in closer to the long-term average of around 62%/63%.







And it's not only at the GP Margin where there is evidence of this business having been significantly impacted; the balance sheet has also needed to flex to absorb the Covid knocks.

The business has had to make a $10m investment in additional working capital levels over the Covid period ($6m of that increase represented by additional inventory and raw materials):





It warrants noting that, despite that $10m working capital drag, management also continued to invest in the business over the past 2 years ($3.8m on PP&E and $4.4m on R&D... very similar levels to the preceding two years).

And shareholders didn't go unfulfilled, either: $6.1m in dividends were paid.

So just for some context:

- $10m increase in working capital
- $8.2m investment in PP&E and Intangibles
- $6.1m in dividends


So, pretty sizeable calls on capital

And how, one might ask, have these calls on capital impacted the solvency metrics of the balance sheet over the Covid period?

The balance sheet has barely blinked:

Current Ratio
End JH20 =3.7x
LAtest = 3.8x

Net Current Assets (Current Assets Less Total Liabilities):
End JH20 = $29m
Latest = $38m

Net Cash:
End JH19 = $6.1m
Latest = $7.0m


So, in summary, the company enters FY2023 pregnant with probably 300bp to 400bp of GP Margin tailwind and with a likely boost to Operating Cash Flows to the tune of $5m or $6m from working capital liberation.

That, combined with the removal of the funding risk around the expansion of the factory, bodes well for the performance of the stock over the foreseeable future.

(Just have to hope that those Europeans and Americans have a little money left over after paying their energy bills, to be able to afford to look after their dental health)

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