Jenny Ruth: A company of delayed promise

Wellington Drive Technologies shareholders have had to endure a series of disappointments over the last couple of years, not least their shares falling from 86c in early 2004 to as low as 32c earlier this week.

The reasons for the share price fall aren't hard to find.

This time last year, the company was expecting a small net profit for the year ended June.

Then, at the annual shareholders meeting in late November, chairman Shawn Beck was saying he expected the company to become profitable in the six months ended June, which would mean "a substantially reduced loss" for the full year ended June.

When, in February, it reported a $2.54 million net loss for the first half, up from a $1.25 million net loss in the previous first half, the company had become more circumspect about the full-year outlook, saying "the range of outcomes is wide".

Last week, the company reported a $4.89 million net loss for the year, up from last year's $2.94 million loss - a result that was also worse than expected.

Another aspect of the result to cause concern is that rather than accelerating in the second half, sales actually fell to $784,000 from $1.05 million in the first half. Full-year sales of $1.83 million were still well ahead of the $871,000 the previous year.

The company, which was founded in 1986, has chalked up $23.4 million in losses to June 30.

But is its situation as dismal as the numbers suggest?

A key word in all the management commentary over the last couple of years has been "delay".

The company experienced teething problems in ramping up its production capacity, incurring unexpected costs, and several deals with customers were delayed.

Managing director Ross Green said a key reason for the failure to report a profit was that one of its major customers, Aweco in Germany, decided to make changes to its dishwasher components based on Wellington's motors, putting production back another 12 months. Wellington had been expecting production to start in early 2005 which would have contributed nearly six months' worth of royalties to the latest results.

"That's not a disaster, it's just been delayed," Green says.

An idea of the significance of the lost royalties can be gleaned from the increase in royalties received in the latest year to $60,000 from $7000 last year, which goes straight to the company's bottom line.

Most of those royalties are from Australian manufacturer Seeley, which uses a Wellington motor in an evaporative-cooling air conditioner that has been selling since December 2003.

Seeley promotes the product as the world's most energy efficient.

Arcelik, the leading global appliances manufacturer based in Turkey, is about to start producing refrigerators using a Wellington compressor motor.

The company says another European licensee is working through the last details of production engineering and regulatory approvals for "a confidential new product" that should be introduced this financial year after several previous delays.

Another delay of several months occurred in the company's building up production capacity in Asia. It has enough capacity in New Zealand to manufacture between 50,000 and 100,000 of its smaller, less noisy and more energy-efficient motors a year.

Its Asian arrangements will allow it to supply millions of units a year and that capacity can be expanded as sales increase.

The delays came about because the Asian manufacturers took longer to get the hang of how to make Wellington's components, which Green describes as "pretty novel". But that Asian production capacity is now in place.

A crucial factor at this stage of the company's development, as it moves from simply supplying small quantities of trial units to fulfilling substantial orders, is that it must be able to demonstrate to its customers that it can deliver.

"When you've been out there marketing and you've got customers wanting your product, you can't go along to them and say, 'Sorry, one of our partners has had a few delays'." Customers aren't interested in such problems and just want their deliveries on time.

Another customer in the United States, A O Smith, had been expected to put in production capacity to produce Wellington's motors in Europe that the New Zealand company is supplying. That production capacity was delayed after significant senior management changes at A O Smith.

"Our relationship with them is still good, but they didn't get their act together," Green says.

These factors meant Wellington had to hire additional staff to produce units in New Zealand and also had added freight costs. The company also faces freight delays because, although it is now shipping by the container load, it still isn't shipping in sufficient quantities to command first-class service from freight forwarders.

While a year ago the company said it had delivered about 15,000 units to European customers, Green doesn't want to put a number on the quantity sold in the latest year because he doesn't want to alert competitors to Wellington's unit pricing.

One aspect of the company's difficulties in ramping up production capacity is that it has had to turn some orders away.

"You can say no, up to a point. It's quite strong to say, 'Look, I can't take on any new customers right now because it's important to me to continue to support the early customers who showed faith in us'," Green says.

"It's like a dam bursting. For a good period of time, the more you say no, the more interest you get."

That's particularly so in a market that's keen to access more efficient motors to meet new energy-saving regulations.

But, ultimately, Wellington is aiming to meet the increasing demand.

A key competitive advantage the company has is that producing its motors doesn't require specialist equipment. They can be made on equipment which is used for other purposes, making it relatively easy to increase productive capacity.

One thing that should give shareholders considerable comfort is the names of Wellington's customers. As well as the substantial companies already mentioned, they include J E StorkAir in the Netherlands, P Lemmens Air Movement in Belgium and Vent Axia in Britain.

Green says the company is actively working with between eight and 10 manufacturers now and about another 20 are in the early stages of evaluating its motors.

"The number of companies in Europe alone that could benefit from using our products is around 800," he says.

But, in the meantime, Wellington is still eating through cash and Green can't promise it won't need more. "It's not certain. That's something the board's looking at at the moment."

In the 2005 financial year, the company raised $7.4 million, mostly through placements, after raising just over $6 million the previous year. By June 30, it had $3.24 million in cash.

"New Zealand doesn't have a stellar record of investing in things like us. I think the capital markets have been pretty generous with us," Green says. But in other parts of the world, the amount of cash Wellington had chewed through to reach this stage would be regarded as minuscule, he said.

Wellington Drive Technologies headquarters: 13 William Pickering Drive, North Harbour, Auckland.

Profile: It makes electric motors for household appliances that use about the same amount of energy as light bulbs and which can be made smaller and are less noisy than conventional motors.

Market capitalisation: $51.3 million.

Latest results: The company reported a $4.89 million net loss for the year ended June, up from a $2.94 million loss the previous year.

Management: Managing director Ross Green, sales vice-president Ray Cox, delivery vice-president Bruce Farquharson, accountant/secretary Ron Jackson.

Major shareholders: Axa with 14.7 per cent, Westpac and the Hunter Hall Australian Trust with about 10 per cent each and Greenstone Fund with 9.5 per cent. Green owns just over 2 per cent.