Dialight warns on profits as it struggles through turnaround

Industrial LED lighting specialist Dialight updated the market on its trading on Thursday, reporting that underlying operating profit for the year ending 31 December was now expected to lie between £10m and £13m.

The London-listed firm said it had seen a weakening in order intake in the second quarter, explaining that those trends could continue for the rest of the year.

It said that, after a “very strong” year in 2018, its Signals and Components business had weakened due to market uncertainty, and high levels of inventory in the distribution channel.

Given the potential impact on order intake, the board said it had adjusted its underlying operating profit expectations, with the new figure being before the incursion of around £4m of non-underlying costs.

The board said it believed the group was “increasingly well-positioned” for the 2020 financial year, with a stronger operational base, expanded product offerings and a wider addressable market.

On the operational front, it said that since its full-year results announcement on 25 February, the company had continued to focus on addressing its operational issues and had achieved “significant” progress.

The operational performance of Ensenada was said to be back to acceptable levels of service, while lighting production in Dialight’s new Penang facility was still in ramp-up phase, although production volumes were continuing to increase each week.

Dialight confirmed it had removed all of its equipment from Sanmina, while the CNC machines were now installed and the firm was in the process of installing its paint line at its facility in Tijuana.

“To facilitate our exit from Sanmina we have taken more inventory than we had previously anticipated, which has impacted the group in three ways,” the board explained.

“Firstly, our current inventory levels are higher than expected.

“Secondly, we have incurred £4m of additional costs relating to these items in the form of markup, freight and handling charges.”

Those costs would be treated as non-underlying, the directors said.

“Thirdly, we expect to have a small net debt position at year end to reflect these additional inventory and non-underlying costs.”

Dialight said it had initiated settlement discussions with Sanmina to address the costs related to the inventory transferred, and compensation for additional costs incurred during the relocation period.

Looking at its new product development, Dialight said it was continuing to execute on its strategy to address an expanded industrial LED market by increasing its capacity to develop new products.

In May, it launched the first of its new platform level products, saying that the product was its Reliant highbay, which was designed to specifically meet the requirements of EMEA and APAC markets, with sales expected to build over the following quarters.

The next significant new product line launch was due shortly, and a third new platform-level product launch in the forthcoming months.

Finally, Dialight noted that Martin ‘Marty’ Rapp, who had been a non-executive Director since April 2016, and had come out of retirement to become chief executive officer in January last year, had agreed that now was the time for the group to recruit a new CEO for the longer term.

The board said it had started a search process, with Rapp to step down as CEO and leave the board with effect from 9 August.

Rapp would remain as an adviser to the group for a period of six months, to ensure a smooth transition.

Fariyal Khanbabi, currently the group’s chief financial officer, would assume the additional role of deputy CEO immediately and become interim CEO from 9 August.

The board said it believed Fariyal was “well-placed” to continue to progress the group's recovery plans.