Earnings Call: H1 2021

Aug 2, 2021

Good morning, everyone, and welcome to our half year results for 2021. I'm pleased with the first half performance overall, including a return to profitability, delivering an underlying profit of 1,500,000. The decisive actions we undertook in 2020, including streamlining our cost base and developing stronger sales and supply chain platforms, have substantially benefited us. This is despite the impact of component shortages, extended lead times and other logistical challenges that we experienced in the first half. The group continues to operate with a priority focus on health and safety at all of our sites. This will continue despite many regions lifting restrictions. Before I hand over to Clive to take you through the financials, on behalf of the Board, I would like to thank Stephen Bird for his nearly 9 years of service to Dialyte. He's been a terrific Board member, and we wish him all the best. Thank you, Farry Al, and good morning, everyone. I'm Clive Jennings, Interim Chief Financial Officer at Dialight, and we'll be covering the highlights of our financial performance in the period. Dialite reports its results in sterling, but our main trading currency accounting for 83% of revenue is the U. S. Dollar. We therefore report performance on both the constant and actual currency basis. My commentary will focus on the constant currency performance. The group has returned to profit, delivering an underlying EBIT of £1,500,000 in the half, driven by improvements in both revenue and gross margin. This compares to a loss of £5,700,000 in 2020. Revenue for the 6 months was up 17% on a constant currency basis and up 9% on a reported basis. This reflects some recovery in our end markets and, we believe, some recovery in our market share. Our lighting business grew by 10%, with CapEx projects only accounting for 20% of revenue and maintenance, repair and operations 80%, a higher than normal share of revenue. We've yet to see much of a recovery in CapEx projects, although quoting activity is improving. Our signals and components business saw strong growth with revenue up 37%. The strong demand for optoelectronic components seen in late 2020 has continued, and the business enters half 2 with a strong order book. Gross margin increased by 800 basis points, driven by the increase in revenue along with lower cost of materials and production overhead. Margins have benefited from no factory closures in 2021, unlike 2020, with increased production volumes leading to a better overhead absorption, and we saw the benefit from cost saving programs initiated last year. With broadly flat costs, these revenue and cost improvements delivered an impressive £7,200,000 increase in underlying profit. Lastly, we incurred non underlying costs of £700,000 on the ongoing litigation with our former outsourced manufacturer, Sammina Corporation. I'd now like to take you through how these improvements drove the year on year increase in EBIT. In half one twenty twenty, underlying EBIT was a loss of £5,700,000 Our 17% revenue increase drove a £2,400,000 increase in EBIT, with the improvement in gross margin to 35%, adding another £2,300,000 Increased production volumes led to a further rise of £2,600,000 and with costs broadly flat, the result was a significant improvement over last year, with the group back into profit at £1,500,000 Turning to our cash flow. We saw a marginal increase in net debt to £12,000,000 from £11,400,000 in December. Our profit improvement gave rise to EBITDA of £4,500,000 and excluding inventory, we had a net inflow from working capital of £2,700,000 with £0,800,000 reduction in receivables and a £1,900,000 increase in payables, driven by improved supply of payment terms and increased purchases of raw materials. Our inventory of critical components has been increased by £4,000,000 to mitigate the ongoing challenges on availability of raw materials, coupled with extended delivery lead times. These issues are not unique to Dialite, but we will continue to maintain above average raw material and finished goods inventory until shipping and lead time for raw materials return to more normal levels. We invested £1,600,000 in new products, partly for 2 product launches scheduled for half 2, along with a further £900,000 in maintenance and other CapEx. And we paid 700,000 in interest higher than 2020 due to the additional funding taken out last year. So at the end of June, we had £3,000,000 in cash and £15,000,000 in bank debt with a further £18,000,000 in undrawn facilities. These comprise a £25,000,000 revolving credit facility from HSBC that expires in February 2023 and is extendable for a further 2 years, along with £8,000,000 under the COVID-nineteen large business interruption scheme, which is being repaid over the next 24 months with £2,000,000 repaid in half 1. We were fully compliant with our bank covenants at June and expect to remain comfortably so through half 2. Lastly, I'd like to take you through some details on half 2 twenty twenty one planning assumptions. Net interest will be broadly in line with last year, both on a cash basis and a reported basis, with the effective tax rate to be circa 25%. We will continue to invest in new product development with half two spend expected to be around £2,000,000 alongside £3,000,000 in maintenance CapEx. We are targeting a year end inventory position in the £32,000,000 to £34,000,000 range given the supply constraints mentioned earlier, and we remain focused on our working capital efficiency as revenue continues to grow. As we progress through the balance of the year, we'll provide amendments to these planning assumptions should circumstances change. Lastly, I'd like to emphasize that as in previous years, our trading performance will be half 2 weighted. And I'll now hand you over to Faryal, who will go through the business review. Dialight's first half performance demonstrates the progress we have made in building a higher quality technology based group. Our primary goal is to accelerate growth across our global industrial markets. We believe that the combination of our products, strong ESG credentials, people and culture differentiate us from our peers. We continue to focus on developing new routes to market as well as continuing to lead the market in innovation. Our next generation technologies are heavily focused on the sustainability needs of our customers. Our customers are increasingly seeking more environmentally friendly products to help meet their net zero commitments. And as a market leader, we are at the forefront of providing their solution. With strong order growth and trading outturn in the first half of the year, the group remains on track to deliver year on year profitable growth. Dialect's sales model is a direct specification sale to end users, transacting through distributors. Direct sales enables our value proposition to be articulated to our customers, And distributor inclusion enables simplified contracting and support for larger supply contracts. We have 2 types of orders. Firstly, maintenance, repair and operations referred to as MRO, which tend to be smaller in order size but offer regular flow business secondly, CapEx projects, which consist of full or partial lighting upgrades to a plant. The order growth in the first half reflects some recovery in our end markets, but we also believe it represents ongoing recapture of market share. We have seen a significant increase in MRO activity. We have yet to see much of a recovery in CapEx projects, although quoting activity is improving. Total orders in H1 2021 were 23% higher than the prior year on a constant currency basis. Lighting order growth was 15%. The majority of lighting order growth was generated in our core U. S. Market, which had an increase of 18% compared to the prior period. We have seen various upgrade projects changing from CapEx to MRO, which means they will be completed over time rather than as a onetime project. Orders in our ME region were 9% ahead on a constant currency basis compared to the prior period. Our APAC region was 3% ahead on a constant currency basis, driven by a strong performance in Australia, offset by the impact of continued lockdowns in Asia, which made the first half challenging for this region. We continue to focus on providing an uninterrupted supply to our customers, and this has been successful in the first half. We have increased our targeted marketing campaigns, focusing on key sectors and promoting the benefits of using our fixtures in a wide variety of industry specific applications. Our operations continue to perform well. Our focus in the first half is centered around managing our supply chain, Worldwide shortages of key components such as semiconductors, LEDs and specialty cables have impacted production across the group. A number of our suppliers have still not fully recovered their own operations from the impacts of COVID-nineteen, and we are seeing increased delays in shipping from Asia. Although we are a nimble organization and adapt at managing these sort of issues, we are not underestimating the potential impact these challenges could pose. We entered the second half with an order book higher than usual due to the supply constraints, but we are pleased to report that we have been able to maintain on time delivery at 80%. We're assuming that the supply constraints will not significantly improve for the remainder of this year and maybe even into early next year. To mitigate the impact of the ongoing challenges, such as the availability of raw materials, coupled with extended lead times, we've increased our inventory of critical components by 4,000,000 during H1 2021. Further actions are underway to reduce underlying stock levels. However, we will maintain above average raw materials and finished goods safety stock until shipping and lead times return to normal levels. The group continues to operate with a high level of safety across all sites. Despite many regions lifting restrictions, we continue to employ rigorous safety protocols to ensure our team's protection. At 35%, our gross margin benefited from the non recurrence of costs associated with the factory closures or the significant disruption to production we experienced in Q2 2020. The combination of increased revenue and improved margins enabled the group to achieve an underlying profit for H1 2021. The recent economic downturn as a result of COVID-nineteen illustrates the importance of maintaining business units that service a variety of markets. In our case, our Signals and Components segment provided greater financial stability during a volatile period for the Lighting business. Signals and Components is a high volume business operating in highly competitive markets. The resurgence of this division that we saw in H2 2020 continued in the first half with order growth of 41% at constant currency. Within this division, optoelectronic component sales have been very strong, fueled by increased demand in the electronics market related to remote working. In addition, demand for traffic lighting has continued to be strong. Raw material shortages have impacted conversion of orders to revenue, but the division enters the second half with a strong order book. Dialight is a technology company with 50 years of experience in the LED market. We have been and continue to be a pioneer of innovation through continued development of technologies to help our customers achieve their sustainability targets. Our products last up to 5 times longer than legacy lighting technologies. With over 2,000,000 fixtures worldwide, we have the largest installed base within the industrial market. Our primary goal is to deliver significant growth. We believe the combination of our products, strong ESG credentials, people and culture differentiate us from our peers. Our growth strategy is focused on 3 key objectives: 1st, to protect and grow our core heavy industrial market, which offers a significant growth opportunity. We have a leading position in this space. And combined with the strength of our highly qualified sales team, we will continue to expand within this segment. 2nd, we believe that sustainability will be a major driver in the conversion to LED, and this will be accelerated post COVID-nineteen. Therefore, we are continuing to build a strategic accounts team focused on expanding our market reach, leveraging corporate ESG goals and our differentiated products. This is key to securing larger orders and multi rollout lysine upgrades. In order for us to increase our customer reach, we need to expand our sales channels. This means increasing the number of distributors and developing further channels such as EPCs, engineering firms and electrical contractors. 3rd, we will expand our market leading position by continuing to lead the way in product innovation. This will include filling any portfolio gaps to help remain strategically relevant to our customers. Our products focus on the increasing needs of our customers to enhance safety, reduce energy costs and support the transition to net zero carbon. We have a major and growing part to play in this transition. We have the best in class designs and are regarded as a premium product in the markets we operate within. We are working on our next generation of technologies and products. The overarching design philosophy centers around being able to bring the 1st fully recyclable product to the market. Our products provide the best cost of ownership to industrial customers by delivering high performance, long life solution that reduce or eliminate costly and dangerous maintenance over the lifespan of the fixture. Our in house designed custom power supply enables us to stand behind our industry leading 10 year warranty. Our optimized optics ensure improved illumination, uniformity and quality. Plus, they enable our customers to use fewer light to illuminate the target area. The addition of sensors and controls brings an additional element to the value proposition of our customers. Customers may be limiting their spending now, but the demand for new and innovative products will increase once the global economies begin to recover. By continuing to drive our focus on innovation, we will extend our long term advantage. Our ability to quickly react to the market At Dialite, we are passionate about playing our part in building a fairer and more resilient world for generations to come. Underpinning this purpose is the transition to net zero carbon, which is both an opportunity and an obligation for Dialite. Our products enable our customers to achieve net 0, and we are committed to working with them to achieve their goals. Diala itself is committed to being a net zero business by 2,040 and have registered our commitment with the science based target initiatives. We have recently completed a verification of our carbon footprint under ISO 14,064. And using this as a base, we will set appropriate interim targets and report them. We have reported under CDP in July, and we will report our full year results in accordance with the Task Force on Climate Related Financial Disclosure Protocols. In order to enhance our focus on ESG, we have created an ESG committee headed by myself with relevant VPs participating in their subject areas. The committee will monitor all aspects of ESG, evaluate current performance by feedback from CDP and EcoVadis ratings, manage improvement and awareness programs internally and externally. This will include management of the science based target initiative process, setting the internal targets needed to achieve this and monitoring progress against those targets. The committee will also focus on the full lifecycle impact of products via the output from the EPDs, which are currently being prepared for all major product lines. These will then be used to review the impact of material choices on the whole life emissions related to products, including the end of life disposal impact in order to guide our R and D strategy. We intend to publish our first ESG report in H 2 21, which will encompass the output from our 2020 base year carbon footprint analysis, plus an update on other environmental initiatives and our current progress on social and governance issues. The first half of twenty twenty one have been encouraging with a significant improvement in order intake and revenue as well as a return to profit combined with ongoing cash flow discipline. We expect our markets to continue to recover at varying rates while acknowledging that there are potential headwinds, including currency, inflation and supply chain constraints. We have made good progress in the first half with order intake ahead of revenue and a good pipeline of projects for the second half of the year. Our expectations remained unchanged at this stage. Longer term, the sales pipeline, product development, team strengthening and operational actions will help ensure we are well positioned to sustain significant growth as end market conditions normalize. We're also seeing the increasing requirement of our customers for more environmentally friendly products that help them meet their net zero commitments. As the market and technology leader, we are well poised to serve this need. I hope that this has been a useful summary. We look forward to your continuing support.