Dialight strategic initiatives driving continued recovery

Dialight plc (LON:DIA), the global leader in sustainable LED lighting for industrial applications, announces its half year results for the period ended 30 June 2022.

Key points

· Revenue growth of 27% at constant currency over the prior period comparator, driven by strong demand for Lighting and Opto-Electronic products (34% at reported currency)

· Gross margin maintained at 35%, despite raw material availability and input cost pressures, with price increases successfully implemented, which make an increasing contribution over the second half

· Underlying operating profit doubled to £3.1m, representing a margin of 3.8%, up 110bps year-on-year at constant currency (130bps at reported currency)

· Strong customer demand, with Lighting orders up 28% and total orders up 10% (at constant currency) was coupled with good progress on key strategic initiatives:

o  Initial large project orders delivered by the strategic sales team

o  Further new distribution and specifier relationships established

o  Successful new product launches

· Substantial order book, 4% ahead of last year and marginally ahead of December 2021

· Inventory increase of £7.6m in H1, with £4.5m driven by foreign exchange movements, £1.3m due to component price increases and £1.8m increased holdings of critical components

· Net debt at 30 June 2022 of £20.2m (1.3x LTM EBITDA), driven by higher inventory levels and foreign exchange movements on USD borrowings, which is expected to reduce by year end

· Strong commercial momentum and continued operational execution provide confidence in delivering good progress in 2022, with the Board’s expectations for the full year unchanged

Fariyal Khanbabi, Group Chief Executive, said:

“The first half of 2022 has seen continued strong sales and a resilient operating performance, with profit doubling to £3.1m compared to the prior year. We expect further strong revenue growth with modest gross margin improvement in H2 as price increases and efficiency improvements offset headwinds including inflation and

supply chain constraints. Our confidence in growth is underpinned by a clear organic growth strategy, robust order book, an excellent pipeline of projects and our customers increasingly focused on their need to deliver against their sustainability targets. Our full year expectations for delivery of meaningful progress in our turnaround remain unchanged. Longer term, we see significant opportunity to be captured as the established leader in the growing heavier industrial lighting market.”

Notes:

1.  Net debt excludes lease liabilities under IFRS 16

2.  Constant currency impact is calculated by re-translating the prior year numbers at the exchange rate prevailing in the current year.

3.  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 are 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

The first half of 2022 saw a significant increase in revenue, driven by volume growth particularly with Lighting and Opto-Electronic products. Group orders increased by 17% (10% at constant currency) which has helped maintain a record order book for the Group. Despite the ongoing supply and cost headwinds, the Group maintained 35% gross margins through sustainable price increases coupled with actions taken to actively manage component shortfalls. The Group remains on track to deliver significant year on year growth and improved profitability.

The increased volumes reflect a combination of recovery in our end markets together, we believe, with an improving market share, as well as expanding our market reach. The Maintenance, Repair and Operations (MRO) market remains robust, but we have been very encouraged to see customers proceeding with larger capex projects, despite increasing construction costs. Like many industries, we expect continuing supply chain disruption and cost inflation to continue over the next 12 months but are confident we will navigate these challenges by adjusting inventory levels, leveraging increased production volumes, and managing costs tightly. The price increases implemented to date will continue to protect margins, and the lag effect means the benefits will accelerate through the second half of the year.

Results

Overall Group revenues in H1 2022 were 27% higher than the prior year (34% reported currency).

Underlying operating profit doubled to £3.1m, compared to £1.5m in H1 2021. This reflected strong drop through from increased revenues, having held gross margins at 35% despite challenges from significant cost inflation and supply chain disruption. Our focus on strong cost controls continues.

Lighting only order growth in H1 2022 was 28% (reported currency 37%) and represented c.71% of first half revenues. The majority of Lighting order growth was generated in our core US market which increased by 36% (reported currency 46%), with EMEA increasing by 21% (reported currency 29%). APAC increased by 1% (reported currency 7%) against a strong comparative performance in 2021 with first half trading also impacted from continued COVID-19 lockdowns. Our newly created strategic sales team has already signed several multi-million-dollar orders for delivery in the second half and has a strong prospect pipeline that will benefit 2023. Obstruction orders fell by 23% (reported currency -18%)  as higher steel prices have led to lower levels of tower construction.

Signals & Components is a high-volume business operating within highly competitive markets. The good performance of this division in 2021 continued in the first half of 2022 with revenue growth of 14% (reported currency 22%) and represented c.29% of first half revenues. Within this division, opto-electronic component sales have continued to be strong, fueled by growing demand in the electronics market related to home-working, but traffic and vehicle sales were lower. In line with expectations, o rders were 13% lower (reported currency -7%) as demand for opto-electronic products has returned to normalised levels following exceptionally strong demand during COVID-19.

We enter the second half with a Group order book higher than both June and December 2021, with a greater weighting to Lighting. On-time delivery at 78% was ahead of 2021 and above, we believe, the current industry standard. 

Improvements in our operational performance helped maintain gross margin and successfully mitigate significant inflation, particularly related to component cost, as well as wage, increases. H1 saw over £1m invested to a rapid improvement programme to upgrade machinery and increase sub-assembly automation in our Mexico factory. This increased overall capacity and will support future growth. Investment will continue in H2 at a similar level, focused on further sub-assembly automation and replacement of end-of-life production tooling.

Inventory increased by £7.6m in the first half, with critical component holdings up by £3.1m (constant currency) to ensure availability, which we see as important to our long-term success. Component price increases and a £4.5m impact of foreign exchange rates on USD denominated inventory drove the remainder of the increase. We anticipate an inventory reduction by the year end but expect to maintain above average raw material and WIP stocks until shipping and lead times for raw materials return to more normal levels. 

Global industry-wide shortages of key components are severely impacting our supply chain along with significant inflation and continued challenges in shipping times and cost. Microchip availability is particularly problematic as suppliers struggle to deliver either on time or in the required volumes, with orders now placed for the whole of 2023. We have focused considerable resources to sourcing and testing alternative components and suppliers, which has enabled us to successfully overcome shortages, albeit at a financial cost. These shortages and global inflation have led to significant raw material cost increases that we have been partially able to pass on through higher selling prices although there is a lag to fully recovering this. While these challenges are expected to continue for some time, we continue to mitigate their impact, including implementing additional dual sourcing strategies and localising key component supply chains.

We continue to invest in product development and improvement with £1.7m spent in H1. H2 will see a similar spend with two new major product launches planned; a new Prosite High Mast / High Output Floodlight and the battery backup for the Area Light. Other developments are underway that will deliver cost reductions for existing products and processes, a new more efficient power supply, improved wireless options and products able to withstand volatile organic compounds.

Market conditions

The macro-economic backdrop presents considerable uncertainty at the moment and Dialight has taken an active approach to targeting market niches with more resilient demand dynamics and where growth is driven by structural, safety and sustainability factors.  

The Group’s natural resource markets in oil & gas and mining are expected to show continued solid demand in the short to medium term. Global energy market shortages have seen an expansion in oil extraction activity, with US on shore drilling up 60% year over year, and with 3 times the number of rigs in service from 2 years ago.  Mining customers are benefitting from the demand for Lithium and Nickel in battery production, which should benefit Group customers in Australia.

Legislative changes that ban the purchase of fluorescents will take effect in the EU (2023), Australia (2025) and several US states (2025). The inability to order replacement fluorescent lamps will require customers to transition to LED, providing a significant opportunity for Dialight. In addition, increasing investor and Board level engagement on ESG will drive companies to identify net zero projects, with upgrades to lower carbon and energy consumptive lighting solutions being viewed as a short lead-time projects.

The Group is also seeing increasing success, led by the strategic sales term, in expanding its customer base into a wider range of process industries including aerospace, electric vehicle and food & beverage. Facilities in these markets can be very significant in scale and often have demanding operational requirements which lend themselves to Dialight’s highly engineered product range.

Strategy 

Dialight’s core strengths centre around our products and a long history of innovation within the industrial lighting markets. Our fixtures meet the needs of our customers to enhance safety, reduce energy and maintenance costs and critically, help them achieve their corporate objectives of being carbon net zero. Our products also provide the best cost of ownership to industrial customers, with paybacks based on energy savings and maintenance cost avoidance. Our in-house custom designed power supply is the key to our market leading 10-year warranty and field reliability. Our optimised optics ensure improved light illumination, providing uniformity and quality whilst enabling our customers to use fewer lights to illuminate the target area. Their integrated design significantly reduces the burden of installation and maintenance. Our products have the ability to withstand extreme environmental conditions such as very high or low temperatures, humidity, high vibration, and corrosive environments. The addition of sensors and controls brings an additional element to the value proposition for our customers.

Our overall strategy is focused on organic growth underpinned by product innovation. We have three key objectives:

• Convert our core heavy and harsh industrial markets – which has low levels of LED conversion. We believe that sustainability will be a major driver in the conversion to LED and this has accelerated post COVID-19 with a return to corporate discretionary spend. Dialight will continue to grow its leading position through market share gains in MRO together with capex projects as the market recovers.

• Expand our market reach – by leveraging corporate sustainability goals and our differentiated products. We continue to identify and successfully engage with new key accounts through our strategic sales team, in addition to developing new routes to market. In particular, increased targeting of EPC/engineering firms and electrical contractors. We are continuing to work on strengthening our branding and focusing on vertical market applications, with good progress made during H1.

• Product innovation – we continue to lead the market in innovation. Our next generation of technology is heavily focused on building on the sustainability needs of our customers, with the goal to have the first fully recyclable industrial LED lighting fixture. Our “source and sell” initiative will address the 20% of the customer lighting schedule that is not highly specified. This initiative protects our market leading position with key strategic accounts and increases our relevancy to the large accounts we are targeting.

Strategy execution in H1

Organic growth remains a key focus, both in terms of MRO but more importantly capex projects as end customers increase their expenditure on lighting. The focus in H1 has been on delivering for customers, expanding our market reach and developing strategic relationships. This encompasses three strands:

Strategic sales focus

The new strategic sales team are focused on building relationships with key large corporates, primarily in the US. This is a longer-term activity particularly focused on new customers, so prospects will take time to turn into initial orders and then preferred supplier status. The team have already won several multi-million-dollar orders for major US corporates for delivery in H2 and into 2023. They also have a sizeable pipeline of opportunities which should lead to further orders in H2 for 2023 delivery, including in the new verticals we are targeting.

Expanding routes to market

Expanding our market reach is key to wider penetration and growth of our market share. In H1 we have added over 75 new distributors and over 40 new consulting engineer and contractor relationships in Lighting. Signals & Components have added a new major distributor which we expect will generate over $5m annual revenue in the medium term.

Enhanced product range through innovation

In the period the sales team have delivered 27% growth in orders with capex projects accounting for 35% of orders (up from 29%). Our new product platforms launched in the past 2 years are expected to further strengthen our position within our heavy industrial verticals. These product platforms are the Ultra-Efficiency High Bay, the GRP Linear, the new Bulkhead, and new Flood lights. In addition, we have launched two Source and sell product lines (Wall-Packs and emergency lighting), with two more planned for H2.

Purpose and sustainability

We are actively working to deepen and accelerate the industrial evolution to greener solutions through our cutting-edge technology. As a company we are committed to being net zero by 2040. Creating a safer, cleaner, healthier future for everyone is the cornerstone of our approach to sustainability. We are focused on ensuring we can continue to serve our markets in a sustainable way over the long-term. Our products are well positioned to play a positive role in society, addressing issues which are fundamental to human wellbeing, are long-term in nature, and of global reach: ensuring safety in industrial environments while addressing key environmental challenges. We believe that lighting has a critical role to play in helping businesses’ journey to become net zero. Our customers rightly expect us to continue to provide leadership in this area, through developing high quality, reliable and innovative products.

Our sustainability strategy dovetails with our operational ethos and coupled with a business purpose that has always been centred on climate change, means that it is a natural extension of our existing growth strategy. During the half we made progress with training programmes run for all sales staff to align with our revenue growth strategy and increased focus on large corporate customers. This will be extended to operational and engineering staff in H2. Ahead of submitting our formal Science Based targets (SBT) next year, work is underway to analyse the major sources of Scope 1 and Scope 2 emissions by process at a factory level to quantify the potential for reductions and any associated capital investment required.

The Greenhouse Gas (GHG) inventory for 2021 has now been verified and contains only minor changes to the draft numbers published in our 2021 Annual Report. These will be published as part of our ESG Report during H2.

As part of our goal to produce the first Net Zero lighting fixture for the industrial market, research and analysis on potential new materials which would reduce the size, weight and environmental impact of new fixtures has been on-going and we are obtaining customer feedback on the experimental product design before moving to the next stage of development.

We are also concentrating on the end of life of our products and how they can be recycled. This is in two parts: firstly, partnering with companies that can recycle the product, and secondly using recyclable materials. The level of recycling that can be achieved varies across recycling processes, but our UK partner can recycle up to 96% of the components of the fixture. There are no similar schemes in the Americas or Australia currently, but nonetheless, we have recycling partners that can process the aluminium in these locations. Given the long life of our products we expect that this ability will be enhanced over the coming years and programmes like Waste from Electrical and Electronic Equipment (WEEE) will be introduced globally by the time many of our long-life fixtures reach end of life.

Analysis conducted by FTSE Russell on the nature of Dialight products and their environmental benefits results in 100% of Dialight revenue now being classified as Green Revenue using their classification criteria, and we are pleased that this is recognised through our London Stock Exchange Green Economy Mark.

People are at the heart of our business. We recognise that the skill and commitment of our employees plays a large part in the success of our company, and we recognise that each person has their own individual contribution to make. It is through our people that we will progress our strategy and ensure that we realise the  potential for growth. Developing a high performing and inclusive culture is a key enabler in our ability to deliver strategic growth. Engaged, motivated, empowered and appropriately skilled employees are integral to our success. We support all our people by creating a safe, inclusive environment, where every individual can work and contribute to the development of the business.

We are very proud of our Dialight Foundation, a non-profit arm of our company dedicated to helping the communities we operate within, with a focus on supporting children and women’s causes. With the overwhelming support from our employees around the world, the Foundation makes a meaningful difference in the lives of so many and we continue to build on this initiative.

Full year guidance for 2022

The first half of 2022 has seen continued strong sales and a resilient operating performance, with profit doubling to £3.1m compared to the prior year. We expect further strong revenue growth with modest gross margin improvement in H2 as price increases and efficiency improvements offset headwinds including inflation and supply chain constraints. Our confidence in growth is underpinned by a clear organic growth strategy, robust order book, an excellent pipeline of projects and our customers increasingly focused on their need to deliver against their sustainability targets. Our full year expectations for delivery of meaningful progress in our turnaround remain unchanged. Longer term, we see significant opportunity to be captured as the established leader in the growing heavier industrial lighting market.

Fariyal Khanbabi, Dialight Group Chief Executive