H1 Results 2015 27 July 2015 Agenda Introduction Bill Ronald Financial Review Fariyal Khanbabi Business Michael Sutsko Review Q&A 2 On when it matters most. Products and solutions that protect your business Financial review Summary …but profitability decreased… Revenue grew…. …and reduced cash flow 11% 14% 18% Lighting revenue grew by 24% to £53.4m Lighting contribution margins at 44% Identified negative EBIT impact of £7.6m Reduction in operating cash flow of £4.3m (59%) 4 Income Statement Variance H1 2015 £m 2014 H1 2014 at constant currency Reported Constant currency £m Basic EPS Underlying Revenue 80.6 70.9 74.0 Direct costs (46.3) (39.8) (41.6) Contribution 34.3 31.1 32.4 (11.1) (7.8) (8.2) 23.2 23.3 24.3 (21.5) (16.8) (17.4) 1.7 6.5 6.9 Non-underlying items (1.5) (1.1) (1.1) Finance expense (0.2) (0.2) (0.2) Profit before income tax (0.0) 5.2 5.6 0.0 (1.8) (1.9) (0.0) 3.4 3.7 Production overhead Gross Margin Overheads Underlying EBIT Income tax expense Profit for the year 14% 9% 10% 6% (74%) (75%) Basic EPS Statutory (100%) Revenue growth driven by Lighting and US Obstruction Underlying EBIT of £1.7m, 74% below H1 2014 (100%) (100%) 5.4p 14.2p (0.1p) 10.5p Non-underlying costs £m (100%) H1 2015 H1 2014 H1 2015 Additional CEO costs 0.6 Employee severances 0.8 Other 0.1 Non-underlying items 1.5 5 Adverse Variances – H1 2015 vs. H1 2014 Component / Traffic Challenge Excess Overhead Costs Oil and Gas saw a cessation of Components -competitive market Increased indirect heads - £1.5m capital projects - £3.0m with low cost competition - £0.3m Tooling and maintenance - £0.5m £2m order moved to H2 2015 Traffic business impacted by Additional sales heads - £1.9m market and margin erosion- £1.3m External consultants - £0.4m Q2 Lighting Slowdown EBIT impact - £2.2m EBIT impact - £1.1m EBIT impact - £4.3m 80 % 6 Underlying EBIT Bridge 4.0 0.3 Revenue increase resulted in £3.2m increase in contribution (0.9) (0.2) (3.3) EBIT margin in H1 2015 vs H1 2014 reduced from 9% to 2%. As a result (1.3) of the following: (3.4) Production overheads - 3% 6.5 SG&A - 3% Contribution margin - 1% 1.7 R&D is a net charge to the income statement 7 Segment Results Lighting £m Revenue H1 2015 H1 2014Variance % 53.4 43.0 (30.1) (23.7) Contribution 23.3 19.3 Contribution margin 44% Direct Costs Overhead Segment result Signals 24% H1 2015 H1 2014 Variance % 17.9 18.3 (10.9) (10.7) 7.0 7.6 45% 39% (19.8) (12.2) 3.5 7.1 21% (51%) Components (2%) H1 2015 H1 2014 9.3 9.6 (5.3) (5.4) 4.0 4.2 42% 43% 44% (6.7) (6.2) (4.5) (4.6) 0.3 1.4 (0.5) (0.4) (8%) (79%) Lighting average selling prices remained robust and in line with prior year Lighting margins remain strong and within guidance to market US Obstruction revenues increased by 24%, with European Obstruction declining by 9% Traffic revenues declined by 22% Variance % (3%) (5%) (25%) Segmental results exclude unallocated overheads of £1.6 m 8 Balance Sheet £m 30-Jun-15 31-Dec-14 Fixed assets 15.4 15.2 Intangible assets 20.4 21.0 Net Working Capital 43.0 43.1 Net (debt)/cash (8.0) 0.6 Pension Provision (0.8) (1.2) Tax (current + deferred) (0.5) (4.4) Contingent consideration 0.0 (0.3) Other provision (1.3) (1.2) Net Assets 68.2 72.8 Strong balance sheet with low gearing – 10% £25m RCF with HSBC, plus £25m accordion Term to June 2018 Compliant with all covenants at end of June 2015 with significant headroom Net Debt to EBITDA 2.5:1 – tested at 0.4:1 Interest cover 4:1 – tested at 58x Capital expenditure £m 30-Jun-15 Production capacity Mexico 1.4 EMEA 0.4 1.8 Product development 1.5 Total 3.3 Gearing = Net Borrowings/Net assets excluding Net Borrowings 9 Working Capital and Cash Flow Cash flow bridge £m December 2014 Net cash 0.6 Operating cashflow 3.0 Tax (3.9) Dividends (3.2) Net working capital (0.6) Capital expenditure (3.3) Other (0.6) H1 2015 Net debt (8.0) £m Borrowings Working capital absorption reduced to £0.6m Strong management of receivables which reduced by £9.0m Jun-15 (13.5) Cash 5.2 Inventory increased by £4.6m Debt issue costs 0.3 Capital expenditure of £3.3m No interim dividend proposed Net debt (8.0) 10 On when it matters most. Products and solutions that protect your business Business review Initial View What I See Huge market opportunity and early adoption Strong brand built on differentiated technology Operational and process deficiencies Critical Actions Exercise strong leadership Immediate corrective actions and controls Ensure profitable and scalable operations Business strategy to deliver sustainable growth 12 Large Market Early Adoption Stage Industrial Market Size * Market Study Freedonia IMS 2010 £60b TAM McKinsey Lighting the Way 2012 £50b TAM US DOE LED Adoption Report 2013 £60b TAM IHS - The EMEA Market for Hazardous Area Equipment 2013 £90b TAM Dialight Consensus ~£70b TAM * Market size based on Dialight’s interpretation of data in the market studies Mass Market Early Adopters 1%-2% Penetration Market size between £60b - £90b Dialight has retained its share position Lighting grew 24% versus prior year Total sales indicate less than 2% penetration Innovators 13 Differentiated Position Market Positioning Niche and Differentiated Segments Unique Technology LED Systems Experts Small competition base Total systems, not components Full LED product portfolio required Heat management key to long life Global certifications Maximises light efficiency Customer Wide Adoption Specification by engineering firms Large customers like Ford Global Opportunities Power Supply and Controls Technology Maximum efficiency and reliability Ability to provide longest warranty Compatible with installed base Testing and Product Validation Largest potential markets outside U.S. Vast reliability test data available Global and regional companies In-house testing capabilities 14 New Products New products launched in H1 in H1 New Products Launched Most Efficient and Highest Lumen Systems Designed for Application Vigilant® 140 LPW LED High Bay SafeSite® LED Area Light w/ Stanchion & Wall Brackets Industry leading 140 Lumen per Watt efficiency Designed to significantly reduce installation time & costs Vigilant® 60,000 Lumen LED High Bay Vigilant® Passive LED High Bay Replacement for up to 1,000W HID New 480V fixture designed for high voltage applications 15 H1: What Happened, Why, and Actions Component / Traffic Challenge Q2 Lighting Slowdown • Upstream drilling business declined on crude oil price drop • • Market slowdown Asian competition Excess Overhead Costs • • • Operations inefficiency Hiring outpaced results Organisation complexity SALES RE-FOCUS MANAGE & REVIEW CONTROL & OPTIMISE • • • • Down stream opportunity Auto, Industrial, Food and Beverage Strategic review of portfolio • Immediate operational controls Optimise organisation to deliver profitable results 16 Operations Improvement Plan • Demand forecast & supply reconciliation • Connected to shop floor scheduling • Factory layout • Lean – Elimination of waste Platform Product Design • Fewer product platforms • Fast & flexible configuration Design for Manufacturing • Product & components designed for process • Controlled changes to factory floor Global Commodity Management • Upgraded supplier management • Focus on: delivery, quality, cost Executive Analysis Manufacturing Efficiency External Consultants Demand and Supply Planning • Overhead cost controls • Mexico ‘tiger team’; global footprint Action Taken Sustainable Cost Control 17 Strategic Review End to end strategic review is focused on delivering value Governance Organisation & Operations Leadership & Strategy Assessment and prioritization of market opportunities: Market sectors Global geographies Product groups Invest in best areas of growth Platform for global, scaleable and efficient operations More sophisticated product management and sales approach Ensure that we have the right leadership and culture to deliver Culture Predictable and high growth with sustainable profit 18 Outlook • There is an increase in the number of new sales opportunities in our H2 2015 pipeline however there is uncertainty remaining on the timing of projects. • We are not anticipating any recovery from the oil and gas sector in the balance of the year. • The focus for the sales teams will be on our other target vertical markets. • Operational issues remain in the company, although a number of actions have begun to remedy them. Dialight has very strong brand, notably in the US market that has been built on products that stand apart from the competition and there is still an immense global market opportunity. 19