27 February 2017                

 

 

Dialight plc

 

Full Year results 2016

 

Positioned for long-term sustainable growth

 

Dialight plc (“Dialight” or “the Group”), the leading LED lighting technology company, today announces its Preliminary Results for the year ended 31 December 2016.

 

Financial highlights	2016 £m	2015 £m
Revenue	182.2	161.4
Underlying gross profit	69.5	56.2
Underlying1 operating profit	13.1	6.1
Underlying1 basic EPS	26.9p	13.3p
Statutory loss from operating activities	(3.3)	(3.4)
Statutory loss before tax	(3.8)	(3.9)
Statutory EPS	(8.4)p	(6.4)p
Net cash/(debt)	8.0	(3.8)

 

Progress with plan to ‘rebuild, lead and grow’

·      Rebuild phase largely complete

·      Growth initiatives underway

‒    Higher quality sales teams with broader international presence

‒    Three automation partnerships in progress, broadening our channels to market and value proposition

·      Investment in product roadmap: 37 new products launched

·      Revenues diversified, by sector and geography

 

Financial highlights

·       Revenue up 13% (2% at constant currency)

·       Lighting division order intake³ up 8% at constant currency

·       Underlying profit growth reflecting management action to reduce cost base and improve operating model

‒    Profit in Lighting and Signals & Components grew by £6.7m and £2.2m respectively

·       Operating model changes reflected in non-underlying items charge of £16.4m; additional £2 – £3m final costs in 2017

·       Strong balance sheet supported by good working capital management and new five-year credit facility

 

 

Michael Sutsko, Group Chief Executive, said:

“2016 was a year of change for Dialight.  We are making good progress with our three-year plan to return to sustainable profit growth.  Phase one of the plan, to rebuild our operating model, is largely complete. The sustainability benefits of reduced energy usage, lower carbon emissions, reduced maintenance and improved safety offer real value to our customers. This progress underpinned our encouraging financial performance in challenging market conditions.

Phase two of the plan – growth initiatives to capture the long-term opportunity in LED lighting – is underway, and on track to deliver against our strategic plan.  We remain confident of the Group’s prospects for 2017 and over the medium to long-term, based on current FX rates.”

Results presentation:

A presentation to analysts and investors will be held today at 10.00 GMT at Investec Bank Plc’s offices at, 2 Gresham Street, London EC2V 7QP, United Kingdom. The presentation and an audiocast will be made available on the company’s website,dialightdev.wpenginepowered.com.

 

Contacts:  

Dialight Plc

Michael Sutsko – Group Chief Executive

Tel: +44 (0)203 058 3542                     

Fariyal Khanbabi – Group Finance Director    

Tel: +44 (0)203 058 3542     

MHP Communications

Tim Rowntree / Jamie Ricketts

Tel: +44 (0)20 3128 8100

 

About Dialight:

Dialight (LSE: DIA.L) is a global leader in energy efficient LED lighting for industrial applications. Dialight’s LED products and solutions enable sustainability for our customers through lower energy usage, carbon dioxide emissions and maintenance requirements, as well as improving safety.

The company is headquartered in the UK with operations in the USA, UK, Denmark, Germany, Malaysia, Singapore, Australia, Mexico and Brazil.  dialightdev.wpenginepowered.com.

 

Notes:

1.     Underlying operating profit (Underlying EBIT) is defined as profit before interest, tax and non-underlying items.

2.     The financial information for the year ended 31 December 2016 has been derived from the audited financial statements of Dialight plc for that year.

3.     Order intake is the value of orders received in a given period

4.     Cautionary Statement: This announcement contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Dialight plc and its subsidiaries is not warranted or guaranteed. These statements typically contain words such as ‘intends’, ‘expects’, ‘anticipated’, ‘estimates’ and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Dialight plc believes that the expectations will prove to be correct. There are a number of factors, many of which are beyond the control of Dialight plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. This announcement contains inside information on Dialight plc.

 

OVERVIEW

 

We have executed phase one of our plan to rebuild, lead and grow Dialight to capture the industrial LED market opportunity. This strategy is progressing well and has fundamentally improved the Group’s operating model, positioning it for long term sustainable growth. This progress is reflected in our financial results. 

 

The need for enhanced light and energy management – via controls and sensors – drives demand for our products.  This plays to Dialight’s strengths and differentiators: proven technology and a market leading position in industrial markets built over a decade as a group purely focused on LED lighting. 

 

In the year, we delivered an increase in underlying profit and cash flow on revenue growth of 13% (2% at constant currency).  This was a particularly encouraging result in the context of uncertain market conditions.  Group revenue was £182.2m (2015: £161.4m), including a favourable currency exchange impact of £17.9m. The US and Europe, which generate the majority of our revenues, were broadly flat on a constant currency basis.  Underlying operating profit increased to £13.1m (2015: £6.1m), including a favourable exchange impact of £1.5m.  Our lighting order intake for 2016 was up 8% to £139.8m (at constant currency) over 2015, reflecting early signs of progress in our strategic initiatives. Non-underlying costs totalled £16.4m (2015: £9.5m); further details are provided in the Financial Review section.

 

The first phase of our plan – to rebuild Dialight – is almost complete.  Our operating model supports scalable and cost efficient production.  By switching to ‘platform engineering’ (standardising the design of our product parts to be used as the foundation for all of our finished products), we have fundamentally improved supply chain management and streamlined our operations.  Platform engineering our products reduces the number of discrete product lines, which in turn has improved forecast accuracy for manufacturing planning and reduced inventory.  During 2016, 10 out of 12 product groups moved to platform engineering. The remaining two will follow in mid-2017.

 

The shift to platform engineering has enabled us to secure a manufacturing partnership with Sanmina (a Fortune 500 company with 44,000 employees worldwide based in 25 countries), giving us greater focus on our design capability. This first phase of the switch to a manufacturing partnership is progressing well, and supports our drive for scalable operations.  Three product lines were transferred during 2016, with the balance to be completed by during 2017. We have closed our factory in Newmarket, UK and are in the process of scaling back the facilities in Mexico.

 

Innovation in the LED industrial market is increasingly combining lighting systems with network sources, into a single platform.  This moves beyond energy and cost savings to providing meaningful improvements in safety and productivity.  Dialight is capturing this trend by adding industrial automation systems and enabling the “Internet of Things” into its product portfolio. This allows factory owners to control individual systems within their plants via a single platform, and to collect data as part of the evolution towards smart buildings.

 

Three automation partnerships are now underway with Rockwell Automation, Honeywell Tridium and INEM (controls and maintenance system for Obstruction Lighting allowing connectivity with network operations centres).

 

Further growth initiatives are underway. With continued expansion of our distributor coverage, 47 new distributors were added in 2016. We have also continued to invest in our product roadmap to maintain our technological lead; 37 new products were launched. We have refocused our commercial teams to diversify our sector and geographic exposure and increase the sales to strategic accounts. This has seen a reduction in the reliance on the oil and gas sector from 24% of revenue in 2015 to 16% in 2016. We have a higher quality sales team with broader international experience which has increased our revenue per sales head from£1.2m in 2014 to £1.5m in 2016 (at constant currency).

 

Dialight has a strong balance sheet supported by good working capital management and a new five-year credit facility.  The Group’s continued focus on working capital management delivered net cash from operations of £16.3m (2015: £8.7m). We continued to invest in long-term growth with net investment in capital expenditure of £3.9m (2015: £3.3m). The critical part of our strategy to rebuild for long-term growth resulted in non-underlying costs of £16.4m. These costs were predominately non-cash with £5.1m relating to intangible assets.  Further details are in the Financial Review. We finished the year with net cash of £8.0mand the Group refinanced its existing revolving credit facility of £25.0m with HSBC for a further 5 years ensuring significant financial flexibility.

 

Board changes

The Board is committed to the delivery of the Group’s strategy. In light of the Group’s plan for future growth, we reviewed the composition of the Board to ensure that it has the correct balance of skills, experience and knowledge. As a result we are pleased to appoint David Thomas, Martin L. Rapp and Gaelle Hotelier.

 

Market conditions

The Group has the world’s largest installed base in heavy industrial LED lighting, with over 750,000 LED fixtures worldwide. Dialight fixtures have contributed to a reduction of 1.1 billion kWh of energy consumption. There is 97% of the industrial lighting market available for conversion to LED. The US and global industrial markets continued to be challenging, led by the oil and gas sector. To counter this, Dialight’s efforts to develop new opportunities have been successful and we have seen an 8% increase at constant currency in the lighting order intake compared to 2016. There was continued growth in non-US markets with Australia up 15% and Brazil up 129%.

 

Growth prospects

We have demonstrated success in rebuilding the Group’s operational capabilities. We now expect growth to be driven by

·      greater adoption of LED lighting by industrial firms globally;

·      innovative solutions that increase the return on investment for our customers;

·      focus on additional ways to add value by integration with automation controls and building deeper relationships with end customers.

 

Outlook

2016 was a year of change for Dialight.  We are making good progress with our three-year plan to return to sustainable profit growth.  Phase one of the plan, to rebuild our operating model, is largely complete. The sustainability benefits of reduced energy usage, lower carbon emissions, reduced maintenance and improved safety offer real value to our customers. This progress underpinned our encouraging financial performance in challenging market conditions.

Phase two of the plan – growth initiatives to capture the long-term opportunity in LED lighting – is underway, and on track to deliver against our strategic plan.  We remain confident of the Group’s prospects for 2017 and over the medium to long-term, based on current FX rates.

 

FINANCIAL REVIEW

In the year, we delivered an increase in underlying profit and cash flow on revenue growth of 13% (2% at constant currency). This was in the context of challenging market conditions. Group revenue was £182.2m (2015: £161.4m), including a favourable currency exchange impact of £17.9m. The US andEurope, which generate the majority of our revenues, were broadly flat on a constant currency basis. Underlying operating profit increased to £13.1m (2015:£6.1m), including a favourable exchange impact of £1.5m. Our Lighting order intake for 2016 was up 8% (at constant currency) over 2015, reflecting early signs of progress in our strategic initiatives.

The significant increase in the Group’s underlying profit was a result of the fundamental shift in Dialight’s operating model, which has reduced costs and enabled scalable, efficient production:

·      Procurement programmes resulting in £2.7m improvement in cost of sales

·      Production efficiencies of £1.7m from lower operating costs at the Mexico plant including direct labour savings of £0.5m

·      Freight cost savings of £1.0m due to a new freight contract being negotiated at the start of the year

·      Headcount savings of £1.6m due to the headcount reduction programme of 2015

 

Currency impact

Dialight reports its results in Sterling. Our major trading currency is the US Dollar with 70% of revenue denominated in US Dollars. The Group has both translational and transactional currency exposure. Translational exposures arise on the consolidation of overseas company results into Sterling and this is the major currency exposure. Transactional exposure is more limited with natural hedging on revenue and purchases mitigating the majority of the currency risk.

The strengthening of the US dollar in the second half of the year has been the main driver for the currency impact. The average rate for the US Dollar against Sterling has moved from 1.53 in 2015 to 1.36 in 2016.

The performance of each business segment is reviewed individually below. Allocation of overheads in each segment was based on directly attributed costs plus an allocation based on segmental revenue.

 

Lighting segment

Lighting	2016 £m	2015 £m	Variance
Revenue	136.6	120.6	+13%
Gross profit	57.4	48.3	+19%
Gross profit %	42%	40%	+200bps
Overheads	(43.9)	(41.5)	(6%)
Underlying EBIT	13.5	6.8	+99%

 

The Lighting segment represented 75% of the Group’s revenue and 73% of the Group’s underlying segmental EBIT.

 

Revenues were 2% higher (at constant currency) compared to the prior year. Overall there has been a rise in order intake of 8% compared to last year (at constant currency). There was continued growth in non-US markets with Australia up 15% and Brazil up 129% compared to the prior year. We have increased market penetration within key vertical markets and the top three market verticals now account for 42% of revenue compared to 54% in the prior year.

Gross margin increased to 42% with operational inefficiencies from 2015 being eliminated and better commodity management lowering our input costs. Overheads were in line with the prior year. This resulted in the overall underlying EBIT in the Lighting segment being doubled.

 

Signals and components

Signals and Components	2016 £m	2015 £m	Variance
Revenue	45.6	40.8	+12%
Gross profit	12.1	7.9	+53%
Gross profit %	27%	19%	+800bps
Overheads	(7.2)	(5.2)	(38%)
Underlying EBIT	4.9	2.7	+81%

 

Signals and Components are high-volume businesses operating within highly competitive markets. There is significant competition
from low-cost producers but margins improved by 8% as traffic production was relocated from the US to Mexico. There was
some increase in overheads due to impairment of development costs as product lines became obsolete. Overall there was an
improvement in underlying EBIT of £2.2m (81%).

 

 

Central overheads

Central overheads are not allocated to these segments. In 2016 they amounted to £5.3m, an increase of £1.9m from 2015. The main increases related to management incentives and Board transition costs.

 

Non-underlying costs

The Group incurs costs and earns income that is non-underlying in nature or that is otherwise considered to not be reflective of the underlying performance of the business. In the assessment of performance of the components of the Group, management examines underlying performance which removes the impact of non-underlying costs and income. The table below presents the components of non-underlying profit or loss recorded within cost of sales and administrative expenses. 

Non-underlying costs	2016 £m	2015 £m
Employee severance and restructuring costs	5.3	1.8
Intangible asset impairment	5.1	1.0
Disposal of tangible assets	(0.2)	–
Inventory costs	3.7	6.0
Executive director replacement costs	–	0.8
Production transfer costs	2.4	–
Settlement of legal case	–	(0.5)
Other	0.1	0.4
Non-underlying costs recorded in administrative expenses and cost of sales	16.4	9.5
Total cash impact	4.9	2.4

 

The non-underlying costs in 2016 relating to our strategic initiatives amounted to £16.4m with cumulative cost savings of approximately £12m expected over the next two years. The strategic initiatives will be completed in 2017 and the final costs relating to this will be £3.0m.

The Group is substantially advanced on a programme of product platform re-engineering and transferring lighting product assembly to its manufacturing partner. As part of these programmes the UK production facility was closed in September 2016. It has also been announced that the Mexican production facility will be reduced in scale by mid-2017. The £5.3m costs of redundancy relating to staff at both of these plants have been recognised in 2016.

The product lines that were manufactured exclusively in the UK production facility were reviewed to assess the viability of transfer to our manufacturing partner. The review concluded that the European Traffic business was no longer viable and production would cease. This has resulted in a goodwill impairment of £4.0m. There has been a full review of all product lines and any development and patent costs associated with obsolete product lines have been impaired, resulting in a further charge of £1.1m. The total charge for intangible asset impairment is £5.1m, all of which is a non-cash cost.

As part of the fundamental shift in Dialight’s operating model, the UK production facility and assets have been sold resulting in a profit of £0.2m.

The switch to platform engineering which standardises the design of our product parts to be used as the foundation of all our finished goods has resulted in some of our inventory being obsolete. This amounted to £3.7m in the year; we expect a further £1.0m of obsolete inventory in 2017.

The transfer of lighting assembly to our manufacturing partner incurred set up costs relating to project management, legal costs, and dedicated engineering time; this amounted to £2.4m. The final phase of this will be completed during 2017 and the balance of the costs will be £2.0m.

 

Finance arrangements

The Group re-negotiated its revolving credit facility with HSBC Bank plc during the year. The new facility is for £25m with a further £25m “accordion” feature and has a five-year term. The Group has no borrowings against the facility at the balance sheet date and is fully compliant with its covenant requirements. This ensures significant financial flexibility.

 

The Board is not proposing a final dividend payment for 2016 (2015: nil). The Group has a clear capital allocation discipline and is committed to returning any excess funds to our shareholders via either a future dividend or a share repurchase.

 

 

Michael Sutsko, Group Chief Executive

Fariyal Khanbabi, Group Finance Director

27 February 2017

 

 

 

Principal Risks and Uncertainties

 

The Board is responsible for identifying the nature and extent of the risks the Group has to manage in order to successfully pursue its growth strategy and generate shareholder value over the long term.

 

The Board uses a risk framework which is designed to support the process for identifying, evaluating and managing both financial and non-financial risk. The Group has identified the following key risks. This is not an exhaustive list but rather a list of the most material risks facing the Group. The impact of these risks, individually or collectively, could potentially affect the ability of the Group to operate profitably and generate positive cash flows in the medium to long term. As a result these risks are actively monitored and managed, as detailed below:

 

STRATEGIC OBJECTIVE	RISK CATEGORY	RISK DESCRIPTION	IMPACT	MITIGATION
Rebuild	Production capacity	Production capacity needs to be scalable in line with growth Concentration of Lighting production at a single third party location reduces control and changes the order fulfilment process	Inability to fulfil demand due to lack of product availability	The Group has partnered with a world class manufacturing partner in order to ensure scalability of operations on a global scale   The Group has developed new processes to ensure that order fulfilment will be unaffected. Our manufacturing partner has a business continuity plan in place to deal with significant production disruptions
	Operational program risk	There is a risk that operational capability could be impacted during the period of transformation of the products and production platforms and changes to demand planning process	Inability to supply existing markets on a timely basis   Unforeseen liabilities	The Group has robust plans and controls to ensure that changes are seamless.   This is monitored and reviewed regularly to ensure milestones are being met
	IT systems	The Group uses IT systems to operate and control its business, any disruption to this would have an adverse impact on the business. The Group also needs to ensure the protection and integrity of its data	Inability to supply customers   Loss of revenue and significant business disruption   Loss of commercially sensitive information	The Group is continually reviewing its IT systems to ensure that they are robust and scalable in line with the expansion of the business.   There are back-ups built into all Group systems and the spread of systems offers good protection from individual events   3rd party suppliers are used to provide data protection software
	Political conditions	The Group’s main manufacturing plant is in Mexico and its main market is North America. Proposed import tariffs could impact the Group’s business model. Brexit has introduced uncertainty to the level of tariff on goods imported fromEurope	Reduced financial performance   Loss of market share   Unforeseen liabilities	The Group is preparing contingency plans for alternative production locations in the event that significant import tariffs to North America are introduced   The Group is considering production locations within the EU
Lead	Succession planning and staff calibre	Group performance is dependent on attracting and retaining high quality staff across all functions	Without good calibre staff, the Group will find it difficult to expand and achieve its strategic goals	Group’s development programmes enhance the skills of executives and middle managers   Comprehensive recruitment process and ongoing evaluation assist high-quality hiring and development   Considerable time is spent assessing middle and senior management in order to identify succession plans
	Intellectual property	Theft or violation of intellectual property (IP) by third parties or third parties taking legal action for IP infringement	Proprietary technology used by competitors leading to loss of market share    Unforeseen liabilities	All intellectual property is protected by patents and potential violations are pursued through legal process   Patent office screening used to avoid infringing existing patents
	Market trends	To continue to lead the market, the Group must be able to identify where customer demand is trending and ensure we have the products to match. The Group’s sales strategy is based on the cumulative LED adoption rate being 6% in industrial lighting markets by 2019	Loss of market share   Lower margins and revenue	Feedback from customers is fed through a product strategy board to evaluate market intelligence   Internal and external marketing resource are used to review market trends and ensure the Group’s products remain at the forefront of the market
	Compliance	The Group needs to ensure that as the business expands, proper controls are put in place to ensure compliance with regulatory requirements relating to tax, trade and general code of conduct	Fines and penalties for non-compliance	The Group uses 3rd party specialists to deal with local fiscal requirements   Requirements on material traceability will be provided through our manufacturing partner’s systems   Training is provided for all staff on bribery/corruption legislation
	Reputational	Corporate profile and products need to retain brand equity	Loss of market share	Corporate profile is protected using external advisors   Brand quality is central to the product development and product build quality is rigorously imposed           is rigorously imposed
Grow	Competition	Failure to deliver technologically advanced products or to execute sales strategy could result in loss of market share	Loss of market share    Lower margins and revenue	The Group continually invests in research and development to push the boundaries of product development. The Group develops new products based on an ROI process to mitigate the risk of abortive expenditure
	Economic conditions	The Group’s operations are located across a number of jurisdictions which exposes the Group to a range of economic conditions	Reduced financial performance   Loss of market share   Unforeseen liabilities	The Group’s geographic diversity limits its exposure to economic risk in any one country   The Group does not have significant operations, cash or assets in economically uncertain regions
	Supply chain	The Group’s ability to supply high quality finished goods is dependent on having a robust supply chain	Unable to meet customer demand through failure of a key supply chain partner   Delays in meeting customer demand	The Group has an on-going programme to ensure that all critical components have dual suppliers and dual components specified   Critical suppliers are subject to due diligence and on-going monitoring
	Funding	The Group needs to ensure that it has access to sufficient cash in order to fund working capital and expansion	Curtailed trading   Inability to execute M&A opportunities	The Group has an undrawn £25m revolving credit facility (RCF) with an additional accordion feature for another £25m
	Foreign exchange	Foreign currency risk is the most significant treasury-related risk for the Group. In times of significant volatility this can have a material impact on performance	Volatile financial performance arising from translation of profit from overseas operations   Most of the Groups profit earned is not in the reporting currency	The Group uses natural hedging to cover operational exposure as the majority of revenue and costs are in US dollars. As the business expands geographically, the use of forward contracts will be reviewed to limit operational exposure on a selected currency basis   Translational exposure is not currently hedged but the Group reports key financial indicators on an actual and constant currency basis

 

Consolidated income statement

For the year ended 31 December 2016

 

Twelve months ended 31 December 2016					Twelve months ended 31 December 2015
	Note	Underlying £’m	Non- underlying £’m	Total £’m	Underlying £’m	Non- underlying £’m	Total £’m
Revenue	2	182.2	–	182.2	161.4	–	161.4
Cost of sales		(112.7)	(3.7)	(116.4)	(105.2)	(6.0)	(111.2)
Gross profit		69.5	(3.7)	65.8	56.2	(6.0)	50.2
Distribution costs		(32.7)	–	(32.7)	(30.7)	–	(30.7)
Administrative expenses		(23.7)	(12.7)	(36.4)	(19.4)	(3.5)	(22.9)
Profit/(loss) from operating activities	2	13.1	(16.4)	(3.3)	6.1	(9.5)	(3.4)
Financial income		–	–	–	–	–	–
Financial expense		(0.5)	–	(0.5)	(0.4)	(0.1)	(0.5)
Net financing expense	4	(0.5)	–	(0.5)	(0.4)	(0.1)	(0.5)
Profit/(loss) before income tax		12.6	(16.4)	(3.8)	5.7	(9.6)	(3.9)
Income tax (expense)/credit	5	(3.9)	4.9	1.0	(1.3)	3.2	1.9
Profit/(loss) for the year		8.7	(11.5)	(2.8)	4.4	(6.4)	(2.0)
Loss for the year attributable to:
Equity owners of the Company				(2.8)	(2.0)
Non-controlling interests				–	–
Loss for the year				(2.8)	(2.0)
Earnings per share
Basic	7			(8.4p)	(6.4p)
Diluted	7			(8.4p)	(6.3p)