Media Release
30 August 2006
Wellington Drive Technologies Ltd 2006 Full Year Result
Overview
The year has seen a substantial increase in deliveries of electronic motors and associated components to European
customers, and the first substantial deliveries to customers in Asia. Total operating revenues, excluding interest, at
$6.88 million were more than 3 times the previous year’s figure of $1.84 million. This is in large part due to the
increase in sales of motors and controllers. Products supplied by Wellington are now found in a growing range of
appliances, including vending equipment in Europe and Australasia, heat recovery and house central ventilation units in
Europe and commercial refrigeration equipment in Europe, Turkey and Australasia.
Our business that supplies customised, “Total Integration”, motor solutions for licensees has progressed well, with the
development of several new projects. Revenue from Total Integration design services was $0.54 million compared with
$0.21 million in 2005. The seven Total Integration development programmes we have with major appliance suppliers in a
wide range of applications, including refrigeration compressors, central heating, dishwashers and ceiling fans, have
progressed well, with customers reporting good levels of satisfaction.
Final assembly of all our motor types is now carried out in Asia. Transfer of motor final assembly operations was
completed late in the financial year. Positive effects from the transfer are beginning to show through in our production
costs, although the full benefits are yet to be realised. Quality levels are excellent. Facilities for finishing
motorized fan assemblies, the format in which most of our motors are sold, are currently being commissioned in Asia.
With the supply chain stabilizing, considerable effort was devoted to increasing sales, particularly in the second
half-year. Wellington’s sales activity is now managed from Singapore, to increase overlap time with, and to improve the
proximity to, regional sales people, major customers and their supply infrastructure. New sales appointments were made
in Europe in the second half year and people to represent us have been appointed in Korea, Thailand and Norway. Coupled
with our increased sales activity, requests for samples have been running at a sustained high level (almost 300 samples
were delivered to 47 new companies during the year) and we anticipate that over time many of these sample deliveries
will result in substantial orders. Small orders have already been received from some of these new companies.
The international focus on energy costs evident last year has intensified, helping to further raise interest levels in
our products. In commercial refrigeration products, for example, the electricity savings enabled by electronic motors
are believed to pay back the additional costs of the electronic motor (compared to a conventional, low efficiency,
induction motor) in less than six months in major Northern Hemisphere markets. Increasingly, this fact is being
recognized in the marketplace as a whole.
Commodity prices for copper reached record levels of over $US8 per kilogram during the year. The copper price has more
than doubled over the past 18 months, and has more than tripled over the past three years. Copper is a major component
of the cost of conventional motors and has caused further price rises for these products that Wellington’s electronic
motors compete with. The price rises make the economics of electronic motors, and Wellington’s in particular, more
attractive.
Delays are still affecting our financial results. Conversion of sample programmes to production orders is taking longer
than hoped, although these delays appear to be reducing. Customer approvals for the production engineering stages of
some Total Integration programmes have also occurred. These delays happen for a number of reasons. The main causes are
field test programmes taking longer than expected and alterations by customers to product detailed specifications, once
customer sales and marketing people begin to contribute to specifications following initial engineering analysis and
test work. Consequently, our improvement in revenues, although welcome, is below the level that we had hoped to record.
Financial Review
The consolidated loss before tax and before unusual items was $4.53 million, improved from the loss of $4.89 million in
the year ended 30 June 2005. Revenues from product sales at $5.89 million were substantially ahead of the previous
year’s figure of $1.55 million. Revenue from engineering projects of $0.54 million also increased, from $0.21 million in
2005, as more engineering team time was devoted to customer-funded activities.
We have continued to invest in product development, in-market sales and marketing, distribution, production and stock.
Costs were higher than last year reflecting these actions. Overseas representation costs and commissions were up
$273,000 and overseas marketing and travel costs were up by $102,000. Warranty provisions were up by $78,000 due to the
higher level of product sales. Patent costs declined by $78,000 reflecting the completion of the grant process on
several international patents. Salaries were slightly lower than last year at $1.85 million (2005: $1.91 million), given
the emphasis during the year on the sales of products already completed. Recruitment costs also declined by $46,000, as
the New Zealand team stabilized and vacant posts were filled by suitable candidates already known or approaching the
company directly.
Stock on hand at year end was $2.69 million (2005: $1.62 million). Stock levels remain high at present during the
relocation of some fan manufacturing activities from the United Kingdom to China. Fixed assets at $1.53 million were
similar to the previous year’s figure. Capitalized development costs rose to $2.06 million (2005: $1.67 million). The
increases were associated mainly with starting production of motor and controller variants and the development, and
completion of development, of new products.
Debtors and receivables rose to $2.34 million at 30 June 2006 (2005: $0.52 million), due to the higher volumes of
products being shipped. We expect the relative levels of receivables to decline during the current financial year,
particularly as improved terms of trade for AirMoVent products are negotiated.
We delivered increased numbers of products last year. During the second half year, most product final assembly was
carried out in Asia. Our margins on product sales improved during the year, although we are yet to see the full effect
of the Asian production transfer appear in our results. Further improvements in margin are confidently expected during
the current financial year.
Operational Review
Sales and Products
Sales growth was good during the year. Enquiry levels and requests for samples ran at a high level during the second
half year and are remaining at a high level currently. We are hoping to see the rate of conversion from enquiry to
business accelerate, and the company’s supply chain is now well prepared to deliver to a significantly increased level
of orders. Given the new sales appointments made in the second half year, and our plans to make further sales and
sales-related appointments over the coming months, we confidently expect sales growth to continue.
In total, Wellington delivered over 200,000 motors of all types (including AirMoVent induction motors) in the year for
the first time and reliability of our products in service remains excellent.
Almost 300 samples were delivered to 47 new companies during the year, with most of these being delivered in the second
half year. We expect to obtain business from many of these companies and some have already placed small orders.
During the second half year our lead customer in the clean room industry successfully completed trials of, and approved,
our new motor and electronics/software system (the DF102 motor and CH350 controller combination). These products are
designed for the air handling requirements in clean rooms in semiconductor manufacturing facilities, hospitals and other
areas needing filtered air supplies. Power ratings are substantially larger (at 350W) than other Wellington products
offered to date. We have received forecast requirements for deliveries of substantial numbers, and we expect good sales
growth in the product lines during this financial year. The first production deliveries were not, however, made in June
2006 as originally hoped, due to changes in the customer’s detailed requirements for initial shipments. An initial
production order for 500 units was received subsequent to the financial year end.
In addition to our lead customer (who is a major supplier of clean room equipment) several other companies have these
new motors and controllers under evaluation for general purpose air moving use.
The first samples of a new Wellington motor (the ECR81) for commercial refrigeration systems were delivered to customers
in May. This unit has smaller size than comparable products, including other Wellington commercial refrigeration fan
motors that are already part of our product range. The new motor also has externally-mounted electronic controls, which
are preferred by some customers. Because of its size and mounting arrangements, it is particularly suitable for retrofit
applications, where it can be used to replace low efficiency induction motors in service in refrigeration equipment and
vending machines, saving electricity. It can be used to directly replace standard (low efficiency) motors without any
other changes being required and is the only product known to be fully suitable for such “upfits”. The first deliveries
of production units were made (to Norway) in July.
All our medium-size external rotor motors, which are used mainly in heat recovery ventilation and central ventilation
products in Europe, were upgraded to conform to the European RoHS (Reduction of Hazardous Substances) regulations during
the year.
Full approval from Underwriters’ Laboratories (USA) for our commercial refrigeration product range was obtained during
the year, which is a significant milestone. The range is already CE approved for sales in Europe.
Our customers are manufacturers of commercial refrigeration equipment, and a good level of orders for the commercial
refrigeration product range as a whole was received during the year, notably from Sanyo Corporation as announced in
November. Many small orders have been received (for several hundred to a few thousand pieces) and we confidently expect
that these small orders will lead on to larger levels of business in due course.
We have been advised by our customers that several major, international, supermarket chains have begun to specify
high-efficiency motors for some of their new refrigeration equipment. All our customers are projecting significant
growth of demand for high efficiency motors in this important segment. Although growth of confirmed demand has been
lower up to date than all parties expected, this appears to be changing and we are well placed to satisfy new
requirements.
Our AirMoVent range of conventional induction motors, sourced from Asian partners, has been selling well, particularly
in Turkey where much of the commercial refrigeration equipment for Europe is now built. AirMoVent motors are offered so
that customers can continue to purchase from one source as they make the transition to using our high efficiency
products.
We are currently supplying most of the major Turkish commercial refrigeration manufacturers with AirMoVent motors,
having received a steady flow of orders. All of our AirMoVent customers have also been evaluating Wellington high
efficiency commercial refrigeration motors and several have placed orders, some for several thousand units. We
anticipate further growth of sales in the Turkish market in the current financial year.
Production and Logistics
Relative stock levels remain higher than we expect to require in the medium term. We are currently holding stocks in the
United Kingdom, in transit from China and as work in progress in China as we complete the transfer of our main motorized
fan assembly operations from the United Kingdom to China. Transfer should be completed in September 2006. One major
advantage of the Asian location for production and final assembly activities is reduced transit time to major markets
(compared to New Zealand), reducing necessary stock levels and logistics costs.
We have begun to see some benefits from our relocation of operations in this respect, but the major proportion of the
expected benefits is yet to appear in our results. We are also carrying significant stocks of commercial refrigeration
motor components and partly finished commercial refrigeration motor assemblies to maintain capability to service the
short-notice customer orders that are typical in the commercial refrigeration business.
Margins on our manufacturing business are improving. Our Asian production is performing well and, with the transfer of
motor final assembly operations now complete, little engineering and production management resource is now being
absorbed by these activities. Considerable attention is being devoted to product cost reduction, now that a good period
of stable production is behind us. A review of all components, processes and suppliers began late in the year and has
already begun to yield significant results. We anticipate achieving good improvements in manufacturing margins over the
coming months.
Licensing Programmes
The second major aspect of our business is design and development of specialized motor, electronics and software
solutions for specific appliances. We call this service “Total Integration ™”. When in production Total Integration
designs are usually produced by the customer under license to us. Notable examples of Total Integration designs are the
“BreezeAir Icon” evaporative air conditioner produced by Seeley International Pty. Ltd. (Australia), in production now
for two years, and the compressor motor for domestic refrigerators which is entering production with Arçelik A.Ş.
(Turkey).
All programmes involve integration of a Wellington motor, electronics and software with the end appliance. Integration
reduces overall product component count, and costs, while improving performance and industrial design flexibility.
Several new projects began during the year. All of these are in high volume areas of the appliance industry, although
for reasons of commercial confidentiality details of the product areas and customers cannot be disclosed.
We currently have five programmes in progress and at various stages of completion for European customers and two in
progress in the United States. Several additional projects are in negotiation. In general, a large volume of Total
Integration work is available to the company and our current workload is principally limited by the capacity of our
engineering team. Workloads on these projects tend to be irregular, however, particularly when the project direction
begins to tighten towards production and major decisions from the customer are needed.
The development of a very low cost electronic controller for use with our motors proceeded according to plan during the
year. This controller, which we term “Monsoon”, does not offer the range of features that are provided by our
full-feature “Storm” controller platform and is not suitable for all applications. For example, Monsoon offers fixed
speeds only. However, its performance is suitable for simple products that demand a high efficiency replacement for an
old-style AC induction motor at the best possible price. The Monsoon system has now reached prototype level in a new
appliance product being developed with Arçelik A.Ş.(Turkey) and has performed to expectations. Terms for the full
commercialization of this product are currently being discussed with Arçelik’s management and it is hoped an agreement
will soon be reached.
A new patent covering the technology for the Monsoon system is being sought and we expect that Monsoon control will be
offered as an option for many Wellington products in the future. New patents are also being sought for two new motor
construction techniques that further reduce manufacturing costs.
The variable capacity refrigeration compressor developed with Arçelik did not enter full production during the year,
although the last details necessary are believed to have been resolved. Some difficulties were encountered late in the
year with the final regulatory approvals of the production units, which delayed the start of a field trial programme
using production-representative systems. Successful completion of the field trial programme is necessary before the unit
enters production. Wellington and Arçelik are discussing ways of accelerating the final details of this project, as a
notable level of enquiry for the unit (which Wellington has rights to sell) has been received.
A European licensee completed its pre-production run of a confidential new product shortly after the financial year end.
Wellington currently supplies electronic controllers and software for this product, and receives royalty payments for
each unit sold. Although the introduction of the product has taken longer than planned, a good level of orders is
expected during the current year.
Seeley International Pty. Ltd (Australia) has been selling increased numbers of an evaporative cooling air conditioner
(the “Breezeair Icon Series, www.seeley.com.au) which uses a Wellington motor built under license. The product is
promoted by Seeley as the world’s most energy efficient evaporative air conditioner.
Outlook
Good growth in sales was achieved during the year. The infrastructure to support continued growth is largely in place.
Recent additions to the company’s own sales team, and to its representative network, have been made. Sales growth is
expected to continue.
Manufacturing costs are continuing to reduce, albeit they are not yet at satisfactory levels. Increased efforts are
being devoted to this aspect of the business as the supply chain is stabilizing. Overheads are likely to rise modestly,
largely a result of lower capitalisation and higher amortisation of capitalised development costs (as the product range
matures) and the full year impact of the additional in-market sales and support staff added during the past financial
year, with some modest additions to this area.
There is no sign that the international focus on energy costs, which has been helping to cause an increased level of
enquiries and requests for quotations, will change in the medium term. The energy saving benefits of Wellington motors
are a major factor in all of our present and prospective business. The high and rising prices for oil are continuing to
focus authorities and consumers on energy efficiency. Market demand for electric motors with good energy efficiency
performance, like Wellington’s, is continuing to grow.
Delays continue to affect our results, although the Company’s performance is improving and its medium term future is
becoming more predictable, more positive and more secure. Directors, management and staff are continuing to work hard to
ensure that Wellington’s long term goal of a significant share of the world electric motor market is secured.
Our internal medium term financial plan anticipates that strong revenue growth will continue over the current financial
year and beyond. Combined with an outlook for continuing reductions in production and logistics costs, this revenue
growth is expected to produce an improving earnings profile in both the short and medium term.
Primarily in order to greatly accelerate Wellington’s sales growth and production and logistics cost reduction,
Directors have reached agreement in principle for a significant investment in new equity in Wellington from a US based
investment group who, if the transaction is successfully completed, will become actively involved in Wellington’s
development. This is the subject of a separate announcement released today.
Directors
Nominations for directors are invited in accordance with Listing Rule 3.3.2. Nominations should be sent to the
Secretary, Wellington Drive Technologies Ltd, PO Box 302 533 North Harbour, no later than 27 October 2006.
For further information visit www.wdtl.com.
ENDS