DTI GROUP LTD — AGM Information 2018

Nov 19, 2018

ASX announcement

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20 November 2018

Chairperson’s Statement 2018 Annual General Meeting

Ladies and gentlemen, I am delighted to address you today as the chairperson of DTI. As chair, I will provide an overview of the Company’s performance for the year ended 30 June 2018 (FY18), following which we will deal with the formal business of the meeting. At the conclusion of the formal meeting, the CEO Peter Tazewell will provide a detailed overview of the business performance for FY18.

FY18 Overview

FY18 was a milestone year for DTI in which:

• DTI achieved record revenue of $19.1 million, up 20 percent on the prior year, of which $9.9 million (52 percent) was derived from maintenance and other recurring work, and $9.2 million (48 percent) from project related sales;

• the contracted backlog and order book continued to strengthen, up 25 percent on the prior year;

• over $3.6 million was invested in new product development; and

• $6.2 million in new capital was raised to provide working capital support for product development and to deliver on committed projects.

During FY18, following a comprehensive review of the capitalised value of a number of R&D projects, the board took the decision to impair a number of projects. This does not necessarily reflect the board’s view of the future benefits to be derived from these R&D activities, however, the decision to impair these assets was made commensurate with the Company’s market capitalisation.

Also during FY18, significant effort was invested by senior management to better align the cost base of the business with expected near-term revenue levels. While having achieved this, DTI is a business with strong growth prospects, and as such, this cost base will be reviewed on an ongoing basis to ensure appropriate levels of resources, supported by sufficient working capital, are available to secure and deliver effectively on future projects.

Despite the challenges of FY18, DTI continues to operate in an attractive global industry, one in which large capital projects continue to attract investment from government and industry alike; and the incentive to assure passengers of higher safety and security while delivering improved operational performance, remains stronger than ever.

31 Affleck Rd | Perth Airport WA 6105 T +61 8 9479 1195 | F +61 8 9479 1190 DTI Group Ltd | ABN 15 069 791 091 www.dti.com.au

FY18 Performance

There is no masking the fact the FY18 was a disappointing financial result for DTI. While the reported revenue of $19.1 million was materially (20 percent) above FY17, project cost over-runs and a significant investment in engineering resources had an adverse impact on margins and earnings.

On the positive, DTI continues to build its recurring revenue base, driven by recurring sales to long term customers and growing maintenance and support services. During FY18, over half (52 percent) of DTI’s revenue was derived from recurring sources (34 percent recurring sales, 18 percent maintenance services) with the balance attributed to new project sales.

DTI reported negative EBITDA of $10.1 million compared with negative EBITDA of $3.0 million in the prior year. Reported EBITDA was adversely impacted by a number of significant impairments totalling $7.4 million (comprising intangible assets $5.2 million, inventory $2.1 million and trade receivables $0.4 million) and the flow through of several low margin contracts. After adjusting for the above non-recurring impairments ($7.4 million), DTI produced an underlying negative EBITDA of $2.7 million.

During FY18, DTI undertook a comprehensive review of its balance sheet with a focus on asset recoverability and valuation, and as a result the board approved impairments to inventory deemed to have no future commercial benefit ($2.1 million), to long-standing receivables determined to be unrecoverable ($0.4 million) and to capitalised R&D projects ($5.2 million).

The balance sheet continues to be re-based, allowing management to continue their focus on growth by leveraging the investment that the Company has made in new products for new markets.

As at 30 June 2018, DTI had a cash balance of $5.1 million and $0.1 million of borrowings (equipment finance). Cash flow from operations was negative $0.3 million, due primarily to the Company’s continued investment in product development, and the adverse timing of invoicing milestones for rail projects, which are generally capital intensive.

Product development is a key part of DTI’s DNA and while we remain committed to continuing to extend our range of transit products and solutions, the level of development expenditure is expected to be significantly less in FY19 as our new products move through the commercialisation cycle.

As at 30 June 2018, net working capital had been managed down to $8.4 million, a reduction of $2.8 million from FY17, despite the 20 percent increase in revenue.

In relation to safety, I am greatly pleased to report DTI has strong safety metrics with a zero LTIFR. DTI is a company committed to the health and safety of its employees and we are proud of our safety record.

1H FY19 Performance

DTI entered FY19 with an order book in excess of $45 million which is expected to underpin stronger revenue in FY19. Forecast revenue continues to be weighted to the second half of the year, however less so than in previous years.

DTI recorded revenue of $9.1 million in the first months of FY19 to 31 October 2019, a 150 percent increase over the corresponding period in FY18, and the Company is well placed to continue to deliver year on year revenue growth in FY19.

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Earnings for FY19 over FY18 are also expected to improve as a result of stronger revenues and the reductions in operating costs undertaken in FY18.

Tendering Activity

DTI’s tendering activity continues to strengthen with tenders submitted and awaiting award valued at over $200 million, supported by a total identified opportunities pipeline of a healthy $336 million.

As at 31 October 2018, DTI’s contracted order book remains strong at over $35 million.

North America, the United Kingdom and Europe remain the largest target markets for DTI’s products and services. Mr Tazewell will provide further commentary about contracted backlog and opportunity pipeline in his presentation.

Achievements

During FY18, DTI successfully exploited its new product range, securing a number of key projects including:

• a $5.9 million refurbishment project for Metro Trains, Melbourne;

• a $1.6 million supply for new buses in Oman; and

• a $3.5 million supply for a train refurbishment project for London’s Central Line.

In addition, during FY18 DTI:

• commenced installation of CCTV system on the UK’s Northern Line trains;

• completed supply for 68 Light Rail Vehicles (LRVs) for Dallas Area Rapid Transit, USA (DART) and was subsequently awarded an extension for a further 115 LRV’s for completion in FY19; and

• secured a maintenance contract with Broward County in Florida, USA.

Corporate Governance

The board of DTI continues to be committed to a high level of corporate governance and fostering a culture that values ethical behaviour, integrity and respect.

As part of our ongoing commitment to best practice corporate governance, the board will continue to review its governance policies and practices and will continue to make changes to ensure DTI has an appropriate governance structure.

As a result of an overall evaluation undertaken during the year of the functioning of the board and the various committees that exist, the board agreed to dissolve its Audit, Risk and Compliance Committee and Nominations and Remuneration Committee. This was on the basis that the size and complexity of the underlying business did not warrant the costs and additional time input of the committee members.

The board has recently expanded its capability with the appointments of Steve Gallagher, Andrew Lewis and Greg Purdy. The skills and experiences of each of the new board members will be critical to the future growth and development of the business.

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Outlook

The board continues to have great confidence in the outlook for DTI for FY19 and beyond. While FY18 was a disappointing financial result, DTI continued to make significant progress in stabilising its new product suite in order to meet the increasing demands of its customers and the market. The board has ensured there is a pipeline of new products and technologies to drive future revenue growth and overseen a substantial increase in the contracted backlog and opportunity pipeline.

DTI develops sophisticated technical products for the transit industry which are recognised for their quality and reliability. DTI is proud of this reputation and is prepared to continue to invest the resources required to ensure that DTI products continue to be recognised globally for their quality, reliability and technical innovation.

Conclusion

On behalf of the board I express my thanks to all of the DTI team for their efforts over the past 12 months, however improving financial performance remains the prime focus in FY19. DTI’s innovative range of transit solutions and services, supported by strengthening tender activity and a positive revenue outlook, puts the Company in a strong position for growth.

As advised earlier, I am stepping down as chairperson following the conclusion of this meeting and Greg Purdy has been elected by the board to succeed me. Mr Purdy recently joined the DTI Board and has substantial and relevant experience with the delivery of technology solutions in the transit industry that will benefit DTI immediately.

I would also like to thank the DTI investor base which continues to be patient and supportive as the Company implements its growth strategies. The board looks forward to shareholders being rewarded for their ongoing support and confidence.

Neil Goodey CHAIRPERSON

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