REL: 1654 HRS Rakon Limited
ADDRESS: RAK: 2013 ASM - Managing Directors Address
RAKON LIMITED - 2013 ANNUAL SHAREHOLDERS MEETING
MANAGING DIRECTOR'S SPEECH
Good afternoon and thanks Bryan.
I will begin by recapping the results for the 2013 financial year and then
outline the realignment of our resources and global operations.
Reviewing the financial results for the 2013 financial year, Rakon Limited
reported a full year net loss after tax of NZ$32.8m and EBITDA of NZ$5.1m.
This is clearly an unacceptable result.
Over half of this number results from an impairment charge of NZ$17m recorded
against the goodwill of Rakon's China-Timemaker joint venture and New Zealand
'cash generating units'. This impairment charge was driven by aggressive and
rapid market price reductions in the Smart Wireless Device segment from late
2012, when projected forward, resulted in a reduction in 'value-in-use'
calculations that no longer supported previous valuations for goodwill.
While the write down negatively impacts on the result reported, goodwill is
not a tangible asset and it is important to note that the impairment charge
has no bearing on the company's
Revenue was in line with the previous year in both New Zealand and US dollar
terms, US dollars being the company's underlying trading currency.
The reduction in Gross Profit on the previous year reflects the intense price
sensitivity in the Smart Wireless Device market.
Our total units sold over the year increased significantly; up 35% (from 87m
units to 118m units) with that increase coming mainly from Smart Wireless
Device products volume growth
and increased capacity from the Chengdu plant.
The results of the last financial year have required the Directors and
Management to look very hard at the underlying cost structure and margins of
the global business.
While we planned for and experienced the explosive growth in demand for our
products in the Smart Wireless Device market segment, we also experienced
un-paralleled market price
reductions from late 2012. This was due to an aggressive policy of YEN
devaluation by the Bank of Japan against the USD, which was down 33% between
January 2012 and May 2013. This situation enabled our Japanese competitors to
gain a significant competitive price advantage - an advantage which they took
by lowering market prices to gain market share.
The impact of rapid margin erosion and the deteriorating trading conditions
meant the Board and management had to review the capital requirements needed
to continue to support our strong volume growth in the Smart Wireless Device
market. It was concluded that under the current capital structure RCC would
have required more capital either from our own balance
sheet or outside sources. Consequently, after an extensive search for a
suitable partner we reached an agreement with ECEC to become the corner-stone
partner in the joint venture by
purchasing 80% of our equity in RCC for USD$18.8m. It is this agreement that
we are considering at the special meeting to be held after this meeting.
We recognise the announcement about restructuring our joint venture
investment in China is a strategic change in direction for our business and
this action requires having to write off
a large percentage of our investment in Rakon Crystal Chengdu - but it
reflects market realities and our capital base. Also, it realigns Rakon's
resources to focus on the high margin markets
where we see growth and profit opportunities that can be capitalised on from
our significant technical strengths and market position.
With this change in strategy, the business will no longer suffer on-going
losses and a turnaround plan is well into its implementation and we are very
confident that we will become
profitable next year.
There are three key elements to the plan:
The first is the divestment in the China Manufacturing operation RCC.
Secondly, the New Zealand operation has been bearing significant supporting
costs of the China venture, however, under the new agreement, support
delivered to the operation will be borne by the joint venture company. This
reduces overhead exposure on the NZ business considerably.
Going forward, the NZ business unit will be focused on manufacturing high
margin products which will be targeted at the Telecommunications market.
Thirdly, France; Rakon has had operations in France since the strategic
acquisition of C-MAC in 2007 and Temex in 2010 which has allowed the business
to expand into the Telecommunications and Hi-Reliability markets and cement a
world leading position in these sectors.
However, to support these opportunities and drive profitability we are
intending restructuring operations in Argenteuil, near Paris, which involves
shifting all manufacturing to
our joint venture operation in Bangalore while retaining a supporting R&D
site in Argenteuil.
Also, we are consolidating from Paris our High-Reliability and Space business
into the Pont Sainte Marie manufacturing and R & D site.
The factors affecting these three manufacturing sites have impacted Rakon's
FY13 financial results. However, the actions currently being undertaken are
designed to turn around these
business units and focus them on high margin markets where Rakon has a
leading position in technology, price and capacity.
Turning to our strategic position and the current market environment that we
are operating in...
While the dramatic volume growth and sophistication of devices like
smartphones and tablets are relentlessly increasing, component pricing on the
other hand, is moving relentlessly
downwards! The Smart Wireless Devices market experienced a rapid price
reduction due to the deliberate and significant YEN devaluation. Rakon's
decision to shift focus from the high
volume commoditised markets to opportunities further up the value chain will
likely just be an early example of expected industry consolidation.
Looking at the Telecommunications infrastructure sector, which is one of our
key core markets;
Investment in 4G is now accelerating in major markets globally and it is an
exciting market as this new infrastructure requires a number of Rakon's
products, for example; high specification
Oven Controlled Oscillators (OCXOs) for timing applications - which only very
few companies can manufacture.
Rakon has strong global market share, designed into over 50% of the new 4G
macro base stations. This is reflected in an improving EBITDA from Rakon's
India Joint Venture.
With our quality reputation and preferred vendor status, we expect to see
continued demand from the Telecommunications market for our high
specification and high margin products.
In 2010 you will recall we acquired a French Space and Defence business
formerly called Temex. Over the past 3 years we have integrated Temex into
Rakon France and have invested in research and development and product
management to enhance the performance of our product range.
The results of this effort has been rewarded this year by Rakon France
signing contracts with the French space agency - CNES and with the European
Space Agency (the ESA) for space grade oscillators.
Both these deals greatly strengthen Rakon's position in the High-Reliability
market which is fuelling a renewed space oscillator product range which will
drive revenue growth for Rakon
Consequently, we expect growth to be driven from our relationships with
market leaders and developing design-in partnerships with major international
space programmes and defence companies.
To support these opportunities we are currently consolidating and
streamlining our High-Reliability and Space business into the Pont Sainte
Marie manufacturing and R & D site to
drive operational efficiencies.
The consumer Positioning (GPS) market is rapidly becoming a mature market as
personal navigation device applications have been integrated into smart
phones. However, as GPS is designed into a broader range of new devices, new
business opportunities can be generated to leverage our market position and
capture margin. i.e. emergency and personal locator beacons, telematics,
geo-surveying, agriculture and asset tracking are markets requiring
increasing GPS accuracy.
In conclusion, the financial performance reflects the fact that Rakon has had
a very tough year and delivered an unacceptable result for all.
We recognise and acknowledge the restructuring our joint venture investment
in China is a strategic change in direction for our business, but it reflects
tough market realities... realities
that our balance sheet was simply not able to sustain. However, the
transaction with ECEC greatly reduces capital demands and will provide Rakon
with an almost debt free balance sheet.
Rakon's Board of Directors and management are working on a number of
initiatives to improve our financial results and are realigning Rakon's
resources to focus on the high margin
markets where we see growth and profit opportunities that can be capitalised
on from our significant technical strengths and market position.
Rakon's core focus will be the on-going design, manufacturing and supply of
crystal and oscillator components into three major market segments:
o Global telecommunications network infrastructure, targeting the new
architectures required to transport and deliver data that's increasing at
exponential rates and to capitalise
on the accelerating technology migration from 3G to '4G' LTE along with the
o High reliability and precision products used in the avionics, space and
o Specialised GPS devices sold by global navigation and mapping
Rakon has a well-established and highly regarded reputation with customers in
these industries which offer higher margins and leverages our core
In the 12 months to 31 March 2013 Rakon's core business (which excludes Smart
Wireless Devices) accounted for 70% of the company's $176.3 million sales
I believe that the mid-range outlook will improve as our outlined plans are
implemented and this will be reflected in improving financial results for
Rakon as there are a number of positive developments which support a brighter
mid-range outlook. For example, growth in 4G/LTE telecommunications
infrastructure is finally starting to kick-in and this is reflected in the
growth of OCXO sales over the period and a stronger financial result coming
from the Centum Rakon joint venture.
To our shareholders and staff - my thanks for your persistence in another
End CA:00240840 For:RAK Type:ADDRESS Time:2013-09-06 16:54:51