Dialight plc

good morning and welcome to the dialyte plc investor presentation throughout this recorded presentation investors will be in listen only mode questions are encouraged and can be submitted at any time by the q a tab situated on the right hand corner of your screen simply type in your questions and press send before we begin i'd like to submit the following poll and i'd like to hand you over to steve blair ceo good morning sir

Good morning, everybody. Thank you very much for joining us today. We announced our results on Tuesday, so we're very happy to have the opportunity to talk to you today about some of the highlights of the progress that Dylite has been making over the last couple of years since Mark and I joined the business. I'll be talking first and then I'll hand over to Mark Fryer, our CFO, who will talk to the numbers later on in the presentation. So this presentation is all about our shifting focus on medium term growth. We've spent the last couple of years really putting the business back in shape and really focusing on the operational and margin performance of the business. And now we're moving towards how do we get growth? Just to say a couple of words about Dialight for those of you who are not familiar, we essentially operate as two divisions. The largest division, which is about 75% of our revenue is the solid state lighting division. that provides hazardous area lighting predominantly in high value industries like oil and gas petrochemical mining and so on as you can see from these photographs on the first slide the second division is our signals and components division um and here we supply leds we supply indicators predominantly in ai and data center type applications so this has been a very good opportunity for us uh with the the rise in ai data centers and so on um We have a lot of strength in the business, and it's predominantly built around our brand awareness and the quality of the products that we're supplying. As a business, we're known for very high quality, very reliable industry leading products where we offer a 10 year warranty. So basically a fit and forget. This has led us to a completely 100 led native portfolio so we don't have any other lighting devices other than led based and for the solid state lighting business we have roughly a 20 market share in the hazardous industrial lighting space mentioned that we're very focused on end markets where our high added value and safety critical products really are appropriate for those opportunities it's not possible to offer commercial uh lighting devices into the oil and gas market except in very um commercially commercial areas like in in the offices and so on if you're out on the site you need the type of products that we supply to be able to operate in those hazardous locations we have a really i would say strategically valued valuable platform um we see all around us the industry is consolidating we actually have a small number of competitors in the hazardous lighting space and we actually see our platform as a leading business within that space we have restructured the management team we've now got a really strong width and depth of team and all focused on delivering the next phase of our transformation which is the growth and i think we're at a inflection point i think growth we saw in the fourth quarter of the last financial year we saw growth coming back and we continue to see that moving forward just a reminder that when i came in two years ago we set out a transformation plan the first four pillars of the plan were the key things we put in place uh... immediately to bring performance back into the business the first pillar was winning hearts and minds if you can't persuade the people in the team that they should get behind you and all row in the same direction it's going to be extremely hard to bring about change in any business and i'm really pleased to say that by over communicating with people and really making sure they understood the strategy and direction of the company we've actually had a big engagement from everybody within the team um they understand where we will understand where we are going and they're supporting everything that we're trying to achieve we've transformed the sales team we have a much more disciplined approach we have a pay for performance remuneration scheme for the sales guys that rewards not only volume but also margin a lot of effort has gone into transforming the operations where we have optimized every aspect of our manufacturing our engineering and our design And then we've had a big focus on improving margin and cash generation by essentially removing unnecessary cost from across the business. and then just recently we introduced the fifth pillar which now that we have a strong base we can now look at profitable growth coming in the future and the pathway to get there so just a quick executive summary of how we performed in the last financial year we had a very strong underlying profit and cash generation even though the u.s market conditions have not been helpful i'll talk a little more about that later because we are seeing things improve tariffs put a real shock into the system last year but i think the whole market is now starting to be comfortable with the fact that tariffs are here to stay and that cannot stop progress and new projects um coming to the front so we are actually seeing a loosening uh in the market and we're hoping that that will help us drive growth going forward the long-running situation with san mina we lost the san mina court case we were facing a significant cost in in terms of legal costs in terms of the actual award and in terms of interest we had a good conversation with san mina we came to an agreement we have now paid off and completely settled that san mina situation so everything is now clear we are out of that and firmly looking at that as being in the rear view mirror i mentioned earlier that we have a new hr leadership and we have put in place a top to bottom uh management team where everybody's goals and objectives are aligned from myself all the way down to every single individual within the company we have a bonus scheme and long-term incentives that reward people who are playing uh you know a really big part in the senior roles of driving the business forward and we feel that we have a good succession in place and we're able to really take this business forward now with the right people in the right places with the right remuneration I mentioned the transformation plan. The first phase of that is now complete and we're starting to see a lot of the financial and operational benefits coming through. That's not to say we're stopping. We still have a lot of runway to go and I'll talk a little bit more about the next phase over the next couple of years in specifics of what we're doing. So revenue slightly down year on year, but a big improvement in operating profit, excellent cash generation, net bank debt finished at 1.9 million. I'm pleased to say as of today, we are cash positive. And so we felt confident that we could upgrade our medium term ambitions. And I'll give you a look at that when we get to slide nine. so what happened last year when in terms of the factories and supply chain we had a lot of cost-saving projects going on we reduced our direct labor by around 30 percent that was really important because we're incredibly inefficient in our factories we've now got a much more efficient operation where we're focusing on really the high running products whereas historically there's been too much emphasis on special products we're now constraining the sales people and making sure that their first thought is to sell the things we want to sell at the margins we want to sell them at and you know this has actually been one of the bigger contributors to the improvement in performance we had a very favorable global price product price variance last year which contributed a couple of million dollars into the kitty as it were and we were able to reduce our inventory by 16.6 million which really helped with the net debt uh mark will talk more about that later and as i mentioned we've reorganized and strengthened the management teams in terms of the products and and looking at new business our finished goods sku uh reduction was around 30 percent those of you who attended the prior year we talked about sub-assembly reduction of 90 so now that we've reduced the sub-assemblies we've been able to reduce the finished goods skus and again that's allowing the sales team to prioritize and focus on the higher margin skus in order to fill out our portfolio we've taken the view that we will source and sell rather than design and build ourselves because being able to fill out the portfolio allows us to pull through more of the high margin skus that we actually want to sell we've launched new products lower cost better features and better margins and that has actually extended into signals and components so it's not just the solid state lighting but actually we're now looking at what more we can do in our signals and components division where as i said earlier the ai data centers are really really giving us good growth in that area So these were the ambitions we set in June, 2025. So only a year ago, we had set ourselves the ambition of a 45% underlying gross margin, 11 to 13% return on sales, eliminate bank debt and significantly reduce our inventory. what has happened is we we went backwards in revenue however we were very strong in all of the other areas as we come into this new financial year we come in with a very strong backlog a product portfolio that has been enhanced and will continue to be enhanced as well as looking at what comes next we've restructured the sales team we've removed non-performers and we've acquired new talent we have a pay for performance commission plan in signals and components we have new partnerships and products and we've created an epc engineer procure construct and strategic accounts and specification sales group bit of a mouthful but essentially what that is is focusing focusing on the major large projects from the strategic accounts that we follow and we think this is where we will see the most opportunity for significant revenue growth in the future so we're very confident based on how we finished q4 the backlog that we have coming into the new financial year I mentioned some of the initiatives that we still have in the hopper. Obviously we've got annualization of the cost reduction benefits that we've already banked with some of the changes that we've made over the last two years more of the cost reduction benefits will come through during this financial year. we decided that we will we have three factories two in mexico one in roxburgh north carolina actually we have a fourth factory in malaysia but what we decided to do is transfer all of the operations from our roxburgh facility into our mexico facility at which point we will then close the roxburgh facility that should lead to a very nice uh saving in the following financial year and it'll make us much more efficient at the moment we manufacture molded products in roxburgh we send them to mexico where they add value to them and they're then sent back into the us and canada for sale so it's a little bit of an inefficient process so we are fixing that over the next 18 months in signals and components we are cleaning automating and transferring the remainder of those products to penang in malaysia again most of the products that we supply parts come from asia we bring them into mexico we add value to them and then we send them back to asia which clearly is a very inefficient way of operating so we will fix that again over the next 18 months which again will lead to some significant savings which will go straight to the bottom line we're also looking at hybrid manufacturing which really means we want to find alternative sources for the manufacture of our products for a couple of reasons we want to make sure that for example with power supplies that as we grow we can scale quickly by having alternative sources of supply We also want to make sure that we have a disaster recovery opportunity in terms of not having a single source in this case ourselves. Making sure that we have partners who, if we do have a problem or they have a problem that we can pick up the slack and we can have an alternative source of supply. then we have some other opportunities to further automate and improve the manufacturability of our parts so we see opportunity for growth we certainly have opportunity uh to improve the performance of the operations and manufacturing and that has all led into just after a year uh the fact that we are updating our medium-term ambition for daylight We still think revenue growth of three to 5% is it's certainly what we're targeting. with everything going on with things improving that could actually be better although at this stage we have no evidence and therefore we're trying to be a little bit conservative but certainly looking at the progress of the underlying gross margin we are now targeting 45 plus and a return on sales of 15 plus as i mentioned we're cash positive and you know we think that we can achieve a return on average net assets between 25 and 50 percent had you asked me a year ago would i be doing this now i would have probably laughed because we didn't think that we could make the progress that we've made but i'm pleased to say the team has worked exceptionally well and we've come a really really long way in a year and i think we've got a long way to go a long runway ahead of us for further improved performance within dialight okay i'll hand over to mark and he will take us through the financials mark over to you

So on the financials, the revenue decline is disappointing, but about a third of that is the fact that we've exited the traffic business, which we exited in October 25. So the revenue in the prior year for traffic was 13 million. In the current year, it was eight, and that is now completed. the real highlights was the the 3.4 percent improvement in the gross margin to 39 you can see that if we exclude traffic which is a low margin business the margin would actually have been just under 41 and what we've seen as we've introduced the new margin-based commission scheme for the sales people is the margin has been increasing through the year so in in q4 we actually achieved our 45 percent uh target the actual was 45.7 percent in q4 and for q126 we're actually at 47 and when we look at the salesforce crm we can see that our pipeline, which isn't in order, but we've got roughly a $300 million pipeline and that's at about 52% margin. So the margins are moving up. Just to reference that 52, two years ago, the gross margin was 28%. so as well as increasing the gross margin we're also reducing the overheads the overheads are down by six and a half million in the year we expect those to continue reducing going forward Steve talked about pay for performance for the sales people within this profit figure we've also provided the best part of three million dollars and every employee in the company this year will get a bonus uh from shop floor to management um and that's been provided so other than that the overhead would have reduced to 52 million um the profit obviously is up about 250 percent um to 10.3 the market expectation was nine and a half million so we've come out on the upper end of market expectation the non-underlying items although they've reduced significantly as san mina has been settled we have still spent four million pounds on non-underlying and really in these results we're signaling that for the purposes of non-underlying accounting treatment there will be no further use of the non underlying line going forward as the rationalization plan is completed in that regard. so moving on then those costs that we've incurred 4.4 million has been on the transformation plan um that has seen the group uh take out 300 heads as steve had as steve said we've exited the year with uh just over a thousand heads um and the annualized saving that comes from that four million uh dollar spend is about nine million dollars six million of that was uh in the prior year and there is a further annualization uh benefit which is about three million dollars which was on the earlier slide that steve showed that annualization is worth three million of extra profit this year over the prior year The next line of cost is defined benefit pension scheme. The group has two old closed schemes. The final costs to do the GMP equalization and wind down those schemes has been incurred in the year. And the wind up is now in process with the pensions regulator. So those costs will now stop. the the other big cost there was a little bit of cost on san mina the big benefit that we received in the year is we received two employee related credits which related to 2023 and they were filed in 2023 for the 2022 period when our workforce continued to work through covid on product development and we applied for those credits from the from the irs and received those in year terms of the ebitda bridge the group is generating just under 20 million of ebitda we include this certainly banks like to see ebitda as do financial people but there is quite a lot of depreciation amortization and our really our goal that we're guiding to is back in 2012 2013 the group continued through those years to generate 100 cash conversion of ebitda and that will be our goal going forward this is a bit of a busy slide the main highlight as steve said is the reduction in the inventory of 16.6 million we set ourselves a target of getting to 35 to 40 of of inventory over three years and we've got it down to 30 in the first year so that's an astonishing performance by the factories and the supply chain team driven really by the reductions in uh skew count and those sub assemblies uh also exiting from uh from traffic um and the with that and the near five million reduction in receivables um that's been used to pay down the bank debt um which at its peak was at about 24 million in december 25 um uh sorry december 24 um and we've paid uh some mean the 7.7 million in in the year but 11.7 million uh in total um and as steve said that's now done and gone um in terms of obviously return on capital we we are um almost approaching the 25 target and as you will have seen earlier we're targeting now to 25 to 50 percent um which um with broadly 50 million of net assets is guiding you to a 25 to 30 million profit figure which comes from um the four bullets that steve showed you earlier the annualization of cost savings closure of roxburgh the hybrid manufacturing for power supply the move of oe to penang a five percent price increase which we imposed in march 26 and which has stuck and then a little bit of growth here you see the cash flow of the ins and outs of how the bank uh were paid back and as steve said we're now positive cash we've got about a million cash in bank today um and how we paid off san mina we've also broadly halved the level of capital expenditure in the business so the business was running at about 10 million uh that's down to about five of which half is capitalized r d and the rest is maintenance capex