RAK
18/09/2015 13:07
ADDRESS
PRICE SENSITIVE
REL: 1307 HRS Rakon Limited
ADDRESS: RAK: 2015 ASM - Managing Directors Address
18 September 2015
Rakon Limited (NZX:RAK)
2015 ANNUAL SHAREHOLDERS' MEETING - MANAGING DIRECTOR'S ADDRESS
Welcome everyone to the Rakon Annual Shareholders Meeting of 2015. I'd like
to start by firstly thanking you all for being here today.
As we have already announced in our FY2015 results, we had a strong 2015
financial year where we delivered on our promise of returning the business to
profitability. This was no small feat and I'm personally very proud of our
team for what they've been able to do. But of course, it doesn't stop there.
The future success of the business requires continuous improvement to keep
growing market share and remain ahead of our competitors through our ability
to innovate.
Rakon is once again in a strong position in core markets and dominant in key
market sectors - all of which have long term growth opportunities.
The business itself is robust; operating costs having reduced significantly,
margins are up and we have a clear strategy and path forward.
We have stuck to what we said we would do and have clearly defined our
markets and product offering.
Our move away from the mobile phone market has proven to be a success.
We are committed to higher margin products with long term viability and are
seeing the benefits from this now.
Our underlying margins are further improving due to product mix, technology
transition and currency benefit thanks to a favourable NZD:USD.
Margins have overall increased from 19% in FY2014 to 32% in FY2015 and we
expect them to further jump in FY2016.
Not only are our margins up, our decision to shift the bulk of manufacturing
back to New Zealand and close the Lincoln, UK plant is showing benefits.
The efficiencies we're seeing from streamlining the manufacturing process
globally are solid and we're seeing increased revenue being generated
directly from New Zealand.
After bringing a lot of manufacturing back to NZ, it's pleasing to see that
more than 46% of our revenue is coming out of our NZ base. Furthermore,
current forecasting indicates that NZ will account for in excess of 60% of
revenue for FY2016.
One of our greatest strengths at Rakon is our ability to adapt and innovate.
Our competitors do not have the same level of sophistication in their product
offering that we do. The strong relationships we have with our customers
enable us to solve problems alongside them - pushing us to continually update
our product offerings to meet the market need.
Rakon has a very efficient global footprint that enables us to service
markets effectively.
Our manufacturing operations suit the environments we are in, with NZ
covering medium volume, China factories for mass volume, India focused in
smaller volumes with high labour inputs and the French facilities servicing
European markets in space & defence.
From New Zealand, we are in the centre of the Pacific Rim where over 60% of
our customers exist, and this is supported with regional sales offices to
give the best local service.
A strong regional presence in Europe with manufacturing, R&D and sales, fits
well for our continental customers.
We continue to grow our portfolio of customers, focusing on where contracts
are larger and our sophisticated technology is best suited. Our customer base
is incredibly loyal to us at Rakon - a testament to our quality products and
service delivery.
In telecommunications infrastructure we're proud to be working with some of
the largest companies in the world; partnering with them as they lead the way
in the future of networked connectivity.
We're also seeing increased interest from new and emerging players. There is
an increased mix across the markets we serve as companies add positioning and
networked functionality to their previously stand-alone products - also
needing the robustness and precision that our sophisticated products can
offer.
Our products are focused on serving telecommunications infrastructure, space
& defence, and global positioning markets.
We are continuously releasing new products to market to serve changing
technology, while also producing our core existing product lines to keep up
with demand.
8.5% of revenue is going toward R&D and our focus is on adaptation and
keeping products ahead of market expectation.
While it's still early, we are expecting profit results to be similar to last
year for both Underlying EBITDA and Net Profit After Tax (NPAT). The first
half year (H1) of FY2016 is looking higher than H1 of FY2015, while the full
year profit for FY2016 (for both Underlying EBITDA and NPAT) is likely to be
a similar result to FY2015, which is softer than expected. Current market
conditions are challenging globally and are pointing to a temporary slowdown
- largely impacting our telecommunications markets. As an example, across
Northern America the providers have a short term strategy of acquisition and
spectrum buying, in place of infrastructure investment.
This situation is not unique to Rakon, it is market-wide. However, as the
overall demand for upgraded services has not subsided, it will pick up again
and our preferred supplier arrangements will keep us in good stead.
Even with the slowdown, our expectation is to be consistent with last year,
and maintain a modest net profit after tax.
I will cover more of the market specifics shortly, where we're seeing high
demand and huge potential for long term growth.
In FY2016 we're forecasting an effective NZD:USD exchange rate of 0.7000. We
have returned hedging back to policy levels and we've further increased our
levels of cover at lower rates again in the current financial year. Benefits
from the lower spot rate today won't be achieved until FY2017 due to the
existing levels of hedging cover already in place.
Our current revenue split is now 54% telecommunications. This is a big shift
from 2014. We expect this trend to continue, and predict further growth as we
move deeper into emerging markets in the coming years and leverage the growth
in data demand driven by the Machine to Machine (M2M) and Internet of Things
(IoT) markets.
We continue to place a high focus on the telecommunications infrastructure
market. There is an insatiable appetite for fast, reliable networks from
consumers - and Rakon's precision products enable that.
A key area of our telecommunications offering is servicing the small cell
network - a huge market growing at 20% and where we currently have a dominant
share in this market.
As mentioned, there's a slight slowdown across the entire market right now,
but the overall drive for data from consumers is not slowing at all.
It's important to note that each new wave of telecommunications
infrastructure comes approximately every 10 years. 4G/LTE is only 3 years in
right now, giving us a long lead time until full penetration, all while
developing countries are still rolling out 3G. This is an important factor
for Rakon, as our product offering supports all of these uses and the upgrade
cycle at an infrastructure level guarantees longevity and better protects us
against market shifts.
The global positioning market continues to be an area of interest. And again,
as we keep to our strategic focus for higher margin products, we're seeing a
lot of promise from specialised uses across aviation, marine and agriculture.
While revenue is flat, margins are showing improvement due to the shift from
personal navigation to industrial.
Rakon's patented technology application enables GPS to work in harsh and
rugged environments, servicing advancements such as self-driving tractors in
farming.
The appetite for space exploration continues, however government budgets are
more conservative toward investment. As such, we are diversifying our
customer base with the additions of private companies such as Space-X who in
addition to travel, are also working on putting a satellite internet network
in space.
While defence budgets in general are constrained, the available budget
allocation is weighted predominantly toward technology, which is where we
stand to benefit.
We are introducing three new significant space & defence products this year
and continue to work closely with our customers to meet future needs.
A big goal for us right now is to move further into the US, India & China -
reducing our reliance on the European market.
As M2M connectivity continues to grow and the Internet of Things heads toward
the predicted 50 billion connected devices by 2020, so too will the data
traffic. At Rakon, we have positioned ourselves to take advantage of the
increased demand as we supply the infrastructure layer with our timing
devices.
We are also anticipating growth as the 'Other 3 billion' (O3b) currently
without access to the internet get connected.
More than just global, our products are used across land, sea air & space in
all manner of devices. We've evolved into being in all parts of the planet as
the need for the measurement of time continues to grow.
In summary, in 2015, Rakon delivered consistent earnings growth, increased
returns to our shareholders and generated strong operating momentum as we
moved into 2016.
Our focus remains on continuing to improve our product offering for maximum
customer benefit and we believe that focus is positioning us well for long
term growth.
This is an exciting time for Rakon and we see a great future as we work to
create a brilliantly connected future for everyone.
- Managing Director's Speech ends -
About Rakon
Rakon is a global high technology company and a world leader in its field.
The company design and manufacture advanced frequency control and timing
solutions. Rakon has six manufacturing plants including three joint ventures
plants and five research and development centres. Customer support centres
are located in eleven offices worldwide. Rakon is a public company listed on
the New Zealand stock exchange, NZSX, ticker code RAK.
Disclosure of Non-GAAP Financial Information
Rakon has used 'Underlying EBITDA' as a measure of non-GAAP financial
information in this announcement and it is defined as:
"earnings before interest, tax, depreciation, amortisation, impairment, loss
on disposal of assets, employee share schemes, non-controlling interests,
adjustments for associates and joint ventures share of interest, tax &
depreciation, and other non-cash items."
'Underlying EBITDA' is a non-GAAP measure, with its presentation not being
in accordance with GAAP. The Directors present 'Underlying EBITDA' as a
useful non-GAAP measure to investors, in order to understand the underlying
operating performance of the Group and each operating segment, before the
adjustment of specific non-cash charges and before cash impacts relating to
the capital structure and tax position. 'Underlying EBITDA' is considered by
the Directors to be the closest measure of how each operating segment within
the Group is performing. Management uses the non-GAAP measure of 'Underlying
EBITDA' internally, to assess the underlying operating performance of the
Group and each operating segment.
The use of 'Underlying EBITDA' in this release for the full years of FY2014
and FY2015 has been extracted from audited financial statements. The use of
'Underlying EBITDA' in this release for FY2016 is based on a forecast and is
unaudited.
End CA:00270409 For:RAK Type:ADDRESS Time:2015-09-18 13:07:39
