Dialight plc

Good morning, ladies and gentlemen, and welcome to the Dialite PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish their responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to submit the following poll. If you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Dialight PLC. Steve, Mark, good morning.

Good morning, and thank you, everybody, for joining. We're going to go through this fairly rapidly, but in the first half. But in the early 2000s, Dyalite saw a first mover opportunity to move into industrial LED lighting. Over the period sort of mid-2000s up until 2014, the business grew very rapidly, reaching a positive cash position, inventory around the $35 million mark, and profitability around about the 17% return on sales. So everything was going very well for Dylite at that point. On this slide, you can see a couple of examples. water treatment facility but you can see the quality of the lighting is really important to make sure that people and personnel are safe on those sites so we have a very good market position very good brand recognition and then the business lost its way a little bit between 2014 and 2024 so I stepped into February 24, at which point we had a net debt of 24 million. We had a legal case with the Sanlina Corporation hanging over our heads. We weren't growing and we weren't making any profit. Now there were many reasons for that. Largely a lot of complexity had come into the business land planning very difficult. It makes understanding what the market requires very difficult. And in terms of manufacturing, it means you have very, very low efficiency in manufacturing because you're continually changing the different types of product that you're manufacturing. So when I stepped in, we set up And our first port of call, which really galvanized all of the other changes in the business, was reducing the SKU count so that we could focus on profitability and selling products that we could make money on and stop selling those products that really made no money. Just to give you an example of the progress we've made over the last 18 months, we manufacture power supplies, we manufacture light engines that drive the LEDs, we manufacture the LED circuit boards and optics, and we design and manufacture the housings. Over the last 18 months we've reduced All of those components by 83%. So an example is the power supply. We were manufacturing 126 different power supplies 18 months ago. We're now manufacturing 12. That sort of reduction really improves our efficiency in the factory. It means we're changing lines less often. It means that we have much greater buying power. It also means that our demand planning is easier and All of these changes have really brought benefit to the business. And I'm going to move to the next slide and just show you some of the progress we've made. So we've started delivering profit. We've started generating cash. And there's a long way to go with the annualization. the future to further improve the business. and the like, their investment decisions can swing wildly depending on the tariff situation. So what we've seen on these larger projects is a bit of a slowdown, which has impacted our revenue. But that said, our approach has been to bring quality of earnings to the business in anticipation of preparing for gone from a very difficult place to a far, far better position in terms of our net debt, in terms of our profitability, in terms of our return on sales, and in our ability to generate cash. We have a number of key We offer a 10 year warranty, so essentially for any customer, it's fit our product and literally forget about it. We control our own designs, particularly around the power supplies, which give us the confidence to then offer that 10 year warranty. And certainly all of the testing we've done and all of the in-service and a tremendous set of people and that's really it's the quality of the people and their knowledge of the industry and our business that has really helped us quickly turn around the performance of the business i talked about the transformation plan and fundamentally it's built around five key pillars that generating margin, generating cash, decent revenue but good margin because that is what is allowing us to improve the quality of the business. that we have available for growth within our factories. The fourth piece is the margin improvement and cash generation. So we've improved a lot of our processes, we've brought a lot of efficiency into the overhead part of our business and that's allowed us to reduce our costs quite considerably. Those four to do to really get the business quality back. And then within the last sort of six or eight months, we turned our attention to creating a platform for future growth. And here we're looking at short, medium and long term opportunities for growth. We have a board directed committee called the Strategy and Innovation Committee, where we're looking strategically So in summary, we've had a good last 18 months. We've turned from loss to profit. And as we look forward into the second half, we continue to expect to deliver strong and tangible progress on the transformation plan. We want to accelerate the transformation of our sales team and put in place to be more successful. We do intend to improve our working capital position, although right now we are back to where we were in the heyday of our deliver for the remainder of this financial year. So hopefully that was a useful summary and a useful introduction and I'll hand over to Mark now to take you through some of the more financially appropriate elements of our business.

Thanks, Steve. So for those of you that didn't know, I was CFO at Dialight from 2010 to 2014, and I rejoined in January this year. So looking at the overall financial summary for the half, the group made five and a half million of operating profit for the half. That's both up on the full year last year when we made $4.2 million of profit and the second half in which we made $3.3 million. What I think is slightly disappointing is the revenue performance in those very difficult markets, as Steve has said. The tariff impact on major capex projects with high tariffs on steel and copper, which make up a large part of the installation costs for a new facility. Our lights are typically 1% to 2%, so it's not the cost of the lights, it's the cost of the other commodities. They have up to 50% tariffs on them currently, so that's delaying capexes. That said, whilst overall volumes were down 4%, signals and components was actually up 10%. And the components element, which has a very strong correlation with data centers and AI, was actually up 20% in the half. As Steve said, we're focusing on the higher margin products. The top 300 SKUs that we manufacture have about a 15% higher margin than the average across all our SKUs. So we're concentrating on those top 300. That is seen as add 230 basis points to the gross margin. In the half, we generated 35.3%. gross margin and we see that increasing further going forward we've reduced almost all lines of cost half on half the overall level of labor has reduced significantly in our main facilities in both ensenada and in in penang in malaysia Ensenada, particularly, we've reduced from about 560 heads and will exit the year with nearer 400 heads. Overall, labour costs reduced from $7 million in the prior half to $6 million this half. The production overhead reduced from $14 million to $13 million. and the overhead reduced from $29 million to $25 million. So the combination of the increased gross margin and the reduced cost is what's seen as six-fold increase in the operating profit for the half. On top of that operating profit, we had a small $0.4 million profit on non-underlying items. but a very significant part of that was the receipt of $2.9 million from the US IRS and this related to employee retention credits because we continued to work our engineering function through COVID and we applied for credits for that and we received those in the first half of the year. We've used those to afford the costs of the transformation plan and also costs of buying in our two main pension schemes, which were defined benefit pension schemes. A real financial highlight is the group in the last 10 years has significantly built up its level of working capital. It needed to do that, particularly through COVID. but now we need to get back to the historic levels that we had in 2012-13. So in this time six months ago, we were talking to our shareholders about targeting a reduction of at least $5 million for the year. But we did say that we thought we could reduce inventory by up to $10 million. And actually, we've run ahead of that. We've saved $10.8 million in the first half So just moving then to the income statement, you can see that small 4% reduction in sales, but despite that an overall improvement in the working capital, the reduction in the overheads and the profit on the non-underlying items. and closing for the half with an underlying EBITDA of just under $10 million. I hope you can all see this slide. It seems quite small to me, but over the last two years and closing off with the second half of last year, the gross margin for the group has improved by 10 percentage points from 28 to 38%. and you can see the group has gone from being loss making to now generating a nice profit on an upwards increasing curve. The first half margin at 35% looks disappointing compared to the second half of last year. The reason for that is we have felt that the group has been capitalizing too much overhead into inventory. And so in the last 18 months, we've reduced the overall capitalization from about $11 million down to $6 million. And that's had an impact of about $3 million in the first half of the year. if we hadn't taken that reduction the operating profit would have been eight and a half million dollars And you'll see that later on a slide. But that was just, I think, to demonstrate we are making good progress. If we hadn't have had that inventory reduction in the capitalisation, the margin would have been 39.1%. So the same as last year. But I should also add this is the last half in which the group has been manufacturing traffic lights. We sold that business 12 months ago to Leotech and we had to run off a manufacturing agreement we only make a 7% margin on traffic lights. As I say, that activity is now finished. If you took out the impact of the stock valuation and the traffic lights, we actually generated a gross margin in the first half of 42%, which is getting near to the target, which I'll share with you for what we want to be generating going forward. I've included this income statement just to show the last 12 months, which I guess has been really the first 12 months of the significant impact of the transformation. hitting the group and the benefits of that. And you can see there that the underlying EBITDA at 17.3 million and an operating profit of 13.6. The current share price were valued at about six times EBITDA. This is just a summary of the non-underlying costs, so these are very clear to everyone. I think the most important aspect of those is overall we made a small profit, but more importantly the ongoing benefit of the two major activities, the transformation plan costs, 1.3 million of costs, These have got a payback of about threefold. So we should see a reduction in operating costs going forward of $4 million on an annualized basis. And only about $1.5 million will hit this year. An incremental $2.5 million will be next year. Then secondly, the defined benefit schemes, they have now both been bought in and they will both be bought out in about May, June next year. In terms of the balance sheet, you can see there the inventory reduction from 40 million at year end down to 30 million is the biggest generator to the debt reduction in the half. The net debt improved to 10.5 million at the end of the half. We've continued to generate cash. The net debt now is around eight and a half million. And it's that really which has enabled us to agree with Sanmina to pay them early. They've been good enough to give us a reduction in the amount. We should have paid them $6 million and they've agreed to accept $5.65 million and we'll make that payment in the second week of December. that removes the contingent liability and that draws a conclusion to that whole outsourcing and litigation. So that removes that uncertainty on the group. Overall then, with about 50 million of net assets the group is generating a run rate of about 17% return on capital. I'll share with you later the targets for the group. We're looking to target 25% plus and just to put that into context back in 2012 the group was generating 50% return on capital. So we don't see any reason why we shouldn't get back to that level. In terms of the cash flow, the operating cash flow in the half was 13.9 million. Steve referred earlier on to the start of the year when I joined. We had 24 million of debt then. We've generated 14 million of cash. And as I've said, we've moved further on. We're now down to about 8.5 million. That isn't just about reducing inventories, it's reducing trade receivables as well. One aspect though, we were squeezing our suppliers too much and you'll see that we have caught up now on those payments and the overall level of creditors has reduced by is obviously also reduced. Finally, I think the group has been running with capital expenditure at about $10 million a year, which was about $6 million of CapEx and $4 million of capitalized R&D. Going forward, I think we'll look to be reducing the level of actual CapEx by about half to about $3 million a year, but we will still continue to invest in R&D to have the best products in the sector because that's one of the differentiators that we have over our competitors. So this is my final slide. So on the left hand area here, this shows you the margins that the group was making in 2012. And on the right hand side, we set these ambitions, I think in about March, And frankly, it probably seemed slightly unbelievable to many people, but basically what certainly I found was a business here, I sort of very much bought into Steve and Neil, the chairman's ambition for where they wanted to take the group, the delivery of the transformation plan, and we really need to just get back to where we were. And back then, the group was generating an underlying gross margin of about 40%, generating an EBITDA margin of 20%, a return on sales of 17%. The EBITDA was virtually 100% conversion to cash. Therefore, the group didn't have any debt, it paid high dividends, and it generated in excess of 50% return on assets, and it was relatively working capital light. In terms of our ambition, we'd like to get to 3 to 5% growth. We are targeting to get to 45% gross margin. That actually is the same as, it's hard to get your head around, it's the same as the gross margin of 39% in 2012. And that's because in 2012 sales commission was expensed in the gross margin and now it's included in overheads and the sales commission is 6%. But 45% gross margin, 15% plus EBITDA margin and a return on sales of 11% to 13% plus. We expect to eliminate bank debt next year. We're going to target 25% plus return on assets and we set out to target to achieve 35 million of income for three years and actually we've hit that now. I think we probably need to revisit that. I think we will probably reduce inventory a little bit further. And in broad terms, whilst the delivery of the transformation plan is ahead of where we would expect to be at this point, we're still only about halfway toward achieving each and every one of these three-year ambition. The transformation plan annualization you won't see the full benefits probably until the 2027 financial year is when the full benefits will be felt. And we think we can do that very largely through self-help and the annualization of those benefits. the revenue growth of three to five percent would make the task of getting there easier and would enable it to be quicker so i think that hopefully specs out where we expect the group to get to um and with that i'd hand back to steve thank you mark