RAK
06/09/2013 16:57
ADDRESS
REL: 1657 HRS Rakon Limited
ADDRESS: RAK: 2013 ASM - Chairman's Address
RAKON LIMITED - 2013 ANNUAL SHAREHOLDERS MEETING
CHAIRMAN'S SPEECH
Fellow shareholders, it is a pleasure and privilege to address you at this
the 8th Annual Shareholders Meeting (ASM) of Rakon Limited. The annual
meeting presents an opportunity for you, our shareholders, to talk to the
Board and management about the company. This is your opportunity to take the
time to ask as many questions about the business as you would like, as it is
important that you understand the company that we together own. As well as
questions during the formal part of the meeting, there will be plenty of
opportunity following the Special Shareholders Meeting (SSM) to ask any of
the Directors or the key management who will be manning the displays at the
back of the room, further questions about the accounts, the growth plans or
the products.
The last financial year is not one we ever want to repeat. It felt like for
every step forward we were forced to take 3 steps back. Almost exclusively
these disappointments were confined to our Rakon Crystal Chengdu (Chengdu)
manufacturing plant for the Smart Wireless Device (SWD) market, for which we
have a sale and purchase offer to be voted upon later today at the SSM.
However the energy and focus we had devoted to this segment made it feel like
we were being attacked all over the business, which in fact was not the case.
(SLIDE OF MARKET SEGMENT REVENUE BREAKDOWN (FY2013))
It is important to look at the other three market segments that make up
Rakon's business. As you can see in the slide some 74% of Rakon's revenue in
the 2013 year was from segments outside SWD where our operations are
performing well and the EBITDA contribution is positive. Rakon has and
continues to have a positive reputation as a specialised technology company
that designs and manufactures world leading frequency control solutions.
I would like to thank our global team on the way they have handled the
challenges this year and sought out the transaction with ECEC, which if
completed will see Rakon with no further capital demands for SWD component
manufacture, and importantly, provide a strategic partnership where we get to
profit from the sale of technical assistance and also derive a margin acting
as a sales agent for RCC's manufactured products.
This significant and important change will allow Rakon to avoid further
distraction and ensure our efforts are focussed upon those parts of the
business where we have excellent market shares, growth opportunities,
stronger profit margins and the manufacturing requirements are aligned to our
core skills.
You may ask why we as a Board didn't undertake sufficient and rigorous due
diligence and decline management's proposal to invest in SWD component
manufacturing in China. Let me assure you we spent a lot of time evaluating
the project with all sorts of price and volume variations, but the steep
declining price curves we had as worst case scenarios were not as bad as
actually what happened in price and currency movements downward. Let's also
remind ourselves, that the profit upside from this project if these severe
price cliffs hadn't occurred would have been significant.
(SLIDE OF INDEPENDENT GRANT SAMUEL QUOTE)
An independent appraisal of this decision to invest in the project is
provided in the Grant Samuel Independent Report that you have all received in
relation to the SSM following this meeting. In preparing their report, Grant
Samuel was given access to all our files and forecasts on the subject and in
their summary they said;
"In Grant Samuel's opinion, the Proposed Transaction is in the best interests
of Rakon shareholders. The rationale for Rakon's entry into the SWD component
manufacturing market in 2010 was based on the view that the SWD market was
going to expand rapidly and that Rakon was well positioned with its advanced
technology to achieve attractive market share. The projected strong growth in
the market did eventuate, but for Rakon the twin effects of severe price
competition fuelled by a devaluation of the yen relative to the USD, has
rendered the RCC business uneconomic for the time being. Rakon could not have
foreseen such change in the competitive landscape when it made the decision
to proceed."
If you haven't read the Grant Samuel report in detail, I recommend it to you
as very good analysis of Rakon and a very useful way to understand our
business.
Without being too flippant about the subject of RCC and China "We had a go,
it hasn't worked as we would have liked and now we have arranged a strategic
alliance with a strong Chinese partner where we can profit with low capital
risk from the SWD market".
Importantly the Board has moved swiftly to ensure that the business is in a
position where it can recover and grow within market segments it knows and
currently generates profits from.
Within those three other dynamic market segments, Rakon is recognised by its
customers as a leader in product quality, research & development and for
innovation. Again quoting from the Grant Samuel report:
(SLIDE OF INDEPENDENT GRANT SAMUEL POINTS)
o Rakon has a high quality reputation and established vendor status at all
major Tier 1 OEMs in the telecommunications infrastructure sector, with
market share growth fuelled by new designs and leading technology.
o Rakon is now established as a world leader in the Space and High
Reliability markets and is the largest non-US based producer and the
strategic supplier to the European Space Agency for space grade oscillators.
o Rakon's market leadership position ensures its technology is designed into
many of the new consumer devices, high margin precision GNSS instruments and
next generation solutions in new markets such as agriculture, construction
and GIS mapping.
Our intention is, that despite significant write-offs, Rakon will have an
almost debt free balance sheet and the resources to expand within the areas
of business we know well and currently do well in, where there is opportunity
for good profit growth with much less risk and capital demands than the SWD
component manufacturing space.
The Board is unanimously determined to ensure that Rakon's future is about
solid profit growth, little or no debt and as soon as possible to start to
pay a dividend to shareholders from the business's cash flows.
Before getting to that point, there is not just the major adjustment of the
RCC/ECEC transaction required but the realigning of all our business units
globally. One action we will need to take to achieve this realignment is to
reduce the size of our team in France. We are currently in negotiations for a
major reduction, the cost of which may well exceed 2m EUR but the annual
benefit, from the following fiscal year will be a similar amount.
With this global realignment the Board has asked management to ensure that
our balance sheet values properly represent what our future activities are
about and to make certain that any write-downs are made in this year of major
change and don't need to be revisited for some time to come. With this in
mind, management's review, which was announced to the share market earlier
today, indicates that our full year net loss for FY14 could be in the order
of $53.8 of which $37.2m is from balance sheet write-downs and $16.6m is from
trading. The trading result will be carrying $6.9m in one-off costs for
operational readjustments.
Importantly our debt is forecast to be below $10m, considerably lower than
the $37 million with which we finished the 2013 year.
This anticipated result, coupled with this past year's unacceptable loss of
$32.8m, would mean the total for the 2 years FY 13 and FY14 will have lost
$86.6m after tax. Believe me this is not a result we enjoy as a Board,
especially as we collectively own ~30% of the company, however we strongly
believe that these tough decisions and adjustments need to be made to
position the company for a more profitable and stable future than has been
the case for the past few years. In fact your Board is so confident of that,
that some of us have been buying shares in Rakon and will continue to do,
when trading windows allow us to do so.
Our share price performance over the past few years has been terrible, we
acknowledge that. We are determined to have this situation reversed and we
realise that only a track record of soundly based cash profits will build
investor confidence. The changes we are making are extensive and focussed on
ensuring that our company is consistently profitable and able to return a
dividend to you, our long suffering shareholders, as soon as possible. I can
tell you that the directors today at their Board meeting resolved that from
the completion of the year ending March 31 2015 to begin paying a dividend of
up to 50% of Rakon's after tax profit, if considered fiscally appropriate.
(SLIDE OF CHAIRMAN'S FOLLOWING STATEMENTS)
As we discussed last year, we have one extra director on our Board, Mr Herb
Hunt, whose election we are voting on today. I also mentioned last year that
this extra director would necessitate an increase in the overall directors
fees paid. This increase, under the NZSX Listing Rules, does not require
shareholder approval unless there is an increase in the underlying individual
fees paid. There is no such increase and I would like to reinforce our
commitment made last year that there will be no request for an increase in
fees until the company achieves an EBITDA of $25m, and even then we may not
request an adjustment. As well as the non-executive directors, both the
Managing Director and the Sales & Marketing Director have agreed to the same
freezing of their annual salaries.
Today we are also voting on the re-election of Mr Darren Robinson. I realise
there are still a number of shareholders who feel there are too many
Robinsons on the Board and that Darren should be voted off the Board. I would
like to remind you of the points I made on this subject last year which are
supported by the Board. The Robinson family are the cornerstone shareholders
of Rakon, Darren gets no extra money for being a director, just extra risk.
The Board believes that having Darren at the Board table enhances the Board's
knowledge of market place dynamics and his 23 years of experience in this
complex business of quartz science and technology is important to the Board's
evaluation of key decisions. It is often the case for Tech companies to have
executive directors and to counter concerns about separation of Governance
and Management we are able to have non- executive director only sessions.
(SLIDE OF TCXO PRICE & SHARE PRICE RELATIONSHIP)
In summary, I have showing behind me a 10 year graphical summary of the
selling price of our key products, TCXO's in USD and NZD. This graph
highlights the pressure the firm has been under since listing. Interestingly
enough when we overlay Rakon's share price it is unerringly close to the NZD
value of the TCXO's we sell. I'm not certain if this actually means anything
but it does show a very interesting relationship. This continual TCXO
devaluation in both market price and NZD terms highlights the constant need
for our team to be enhancing manufacturing efficiencies so that we can stay a
step or two ahead of the market and price deterioration. This requires more
than day-to-day manufacturing techniques and new ways of doing things, but
every so often a significant realignment of all our activities, something we
are doing now. So it's certainly a time of massive change for Rakon and
whilst we have had to write off $37.2m from our balance sheet, following our
completion of the ECEC transaction and other key operational adjustments, our
company will be much stronger. It will have a balance sheet with little or no
debt, a net asset value per share of some 56 cents, and no requirement for
any additional capital.
We have made the tough decisions, had to announce and deal with losses that
none of us find palatable but as a result the future is brighter and more
sustainable than previously- and on that note I would now like to hand over
to our Managing Director Brent Robinson, to outline to you how he sees the
path ahead and the profit opportunities along the way.
End
End CA:00240841 For:RAK Type:ADDRESS Time:2013-09-06 16:57:26
