WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
CORPORATE PARTICIPANTS
Disclaimer
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Mr. Wilson Watzko – Controller Officer
Mr. Paulo Polezi – Finance Officer
The statements that may eventually be made
during this conference call relating to WEG’s
business perspectives, projections and
operating and financial goals and to WEG’s
potential future growth are management
beliefs and expectations, as well as
information that are currently available.
These statements involve risks, uncertainties
and the use of assumptions, as they relate to
future events and, as such, depend on
circumstances that may or may not be
present.
Investors should understand that the general
economic conditions, conditions of the
industry and other operating factors may
affect WEG’s future performance and lead to
results that may differ materially from those
expressed in such future considerations.
Mr. Luís Fernando Oliveira – Investor Relations
Manager
3Q14 Conference Call
PRESENTATION
Operator: Good morning and welcome to WEG's
conference call on the earnings 3Q14.
Conference Call
3Q14
Page 3
October 30, 2014
Before going on we would like to let you know that
any statements made in this conference call relative
to the company’s business outlook, operating and
financial goals as well as its future growth potential
are based on the company's management
assumptions and beliefs and rely on information
currently available. Forward-looking statements
involve risks, uncertainties and assumptions as they
refer to future events and therefore depend on facts
that may or may not occur.
Investors should understand that general economic
conditions, industry conditions and other operating
factors may affect WEG's future performance and
lead to results that materially differ from those in
such forward-looking statements.
October 30, 2014
We would like to remind you that this conference call
is being held in Portuguese with simultaneous
translation into English.
We would like to inform you that this conference call
is being recorded and right all participants are
connected in listen-only mode. Later on we are
going to start the Q&A session when we will provide
further instructions. Should you need any help during
the conference call please reach the operator by
pressing star zero.
Today with us in Jaraguá do Sul are Mr. Sérgio
Schwartz, Executive Vice-President and Investor
Relations Officer; Mr. Wilson Watzko, Controller
Officer; Mr. Paulo Polezi, Financial Officer and Mr.
Luís Fernando Oliveira, Investor Relations Manager.
To attain the presentation on the quarterly results or
the release we are going to ask you to go to the
investor relations webpage at www.weg.net/ri.
_________________________________________
Please go ahead Mr. Schwartz.
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Good morning everyone. It is a pleasure to have you
to give you details on the earnings of WEG in 3Q 14.
In this presentation Paulo will talk about the
performance of our revenues and growth and then
Wilson is going to talk about costs, EBITDA, working
capital and investments. After this presentation we
are going to be available for your questions. Please
Paulo could you start the presentation.
Page 1
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
Highlights
Quarterly Figures
Net Operating Revenue
Domestic Market
External Markets
Q3 2014
Q2 2014
2.055.972
994.061
1.061.912
1.821.547
900.348
921.198
12,9%
10,4%
15,3%
1.758.381
872.363
886.018
16,9%
14,0%
19,9%
466.737
638.533
31,1%
258.569
12,6%
350.699
17,1%
0,32056
413.147
577.325
31,7%
227.985
12,5%
311.500
17,1%
0,28265
13,0%
10,6%
387.197
599.213
34,1%
228.761
13,0%
326.934
18,6%
0,28362
20,5%
6,6%
External Markets in US$
Gross Operating Profit
Gross Margin
Net Income
Net Margin
EBITDA
EBITDA Margin
EPS (adjusted for splits)
%
Q3 2013
13,4%
12,6%
13,4%
%
13,0%
almost 20% in Brazilian reals. This time the effect of
the exchange variation was small and we saw two
very positive effects: first the consolidation of our
acquisitions especially WEG Yatong in China; and
second the results of our competitive positioning that
was a bit more aggressive and the continuous
expansion of our portfolio of products and
applications.
7,3%
Business Area
Revenue breakdown
13,0%
Figures in R$ Thousand
Page 5
3Q14 Conference Call
October 30, 2014
5%
5%
7%
7%
6%
11%
10%
9%
10%
11%
22%
23%
24%
23%
24%
62%
61%
60%
60%
58%
3Q10
3Q11
_________________________________________
Mr. Paulo Polezi – Finance Officer
Thanks Sérgio and good morning everyone. We will
start on page 3 with a table that summarizes the
main numbers in the quarter. We would like to draw
your attention to two points: first the growth in our
net revenues of 16.9% over 3Q 13, a growth that
was seen both in the domestic and in the foreign
market in dollars and in Brazilian reals. The reasons
for the performance in both cases are different but
we consider that the results were good.
Second this recovery of growth was attained aiming
at maintaining margins similar to those of the first half
of the year.
Net Operating Revenue
Quarterly Evolution
In R$ million
1.478
48%
52%
Q1 13
1.784
1.822
50%
52%
50%
51%
52%
50%
48%
50%
49%
48%
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
1.758
49%
51%
Q2 13
Brazilian Market
3Q14 Conference Call
2.056
1.893
1.700
Page 7
External Market
October 30, 2014
On page 4 we can see the evolution of our net
operating income in our quarter along 13 and 14.
Growth in the domestic market was 14% over the
same period of last year and there are some positive
effects here: first we were able to rebuild our
inventory after the World Cup especially in shortcycle products and also our very good performance
in GTD.
In the foreign market for the first time we exceeded
R$ 1 billion in revenues and growth was stronger
3Q12
Industrial Equipment
3Q14 Conference Call
GTD
Page 9
3Q13
Domestic Use
3Q14
Paints & Varnishes
October 30, 2014
Slide 5 brings the distribution of revenues in our
main business areas. In this chart we can see the
impacts of a lesser industrial activity in Brazil
decreasing the relative importance in the areas of
equipment for industrial use and paint and varnishes.
We see that projects in process and infrastructure in
the Brazilian market are under a wait period.
On the other hand it is apparent that there was an
improvement in the conditions for GTD with impacts
that are positive on the price of products and
business profitability. We continue to see a growing
demand in wind generation, an increase in the
visibility of sources like small power plants, biomass
and even solar energy.
The area of motors for domestic use shows a
favorable impact of seasonality with manufacturers
and distributors preparing for a stronger demand in
the end of the year. The consolidation of WEG
Yatong acquired in 1Q also brought a favorable
impact.
With that I am going to get back to Wilson to
continue the presentation.
Page 2
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
growth in operating expenses comparing to the
growth of net revenues especially because of better
control and dilution of sales expenses.
Costs of Goods Sold
Materials
64%
Materials
65%
3Q13
3Q14
Other Costs
9%
Labor
22%
Depreciation
4%
Labor
22%
Page 11
3Q14 Conference Call
Others Costs
10%
Depreciation
4%
The domestic market shows a retraction in the
industrial activity. We have adopted additional
measures to control costs and expenses that should
protect our margins from any deterioration. The
expansion of margins additionally depends, we
believe, in gradually improving the basic grounds of
the markets in which we operate both in terms of the
mix of products demanded and the conditions to
price them.
October 30, 2014
_________________________________________
Working Capital
In % of Net Revenue
Mr. Wilson Watzko – Controller Officer
50,0%
Well thanks Paulo good morning everyone. We are
going to go to page 6 with a breakdown of our costs
for 3Q 14. The main point to highlight is that market
conditions are not favorable for us to rebuild our
margins; thus in 3Q 14 gross margin was 31.1%, 3
p.p. below 3Q 13 and 0.6 p.p. below the previous
quarter.
The reasons for the decrease were first the difficulty
to realign sales prices at the necessary speed
especially because of the unfavorable conditions in
the domestic market; the change in the mix of
products sold. The loss of gross margin was partially
offset with gains in productivity with constant
innovation in our products and production
processes.
Main impacts on EBITDA
40,0%
Working Capital
30,0%
Clients
Inventories
20,0%
10,0%
Advances
Suppliers
0,0%
3Q06
3Q07
3Q08
3Q09
Page 15
3Q14 Conference Call
3Q10
3Q11
3Q12
3Q13
3Q14
October 30, 2014
On page 8 we have the evolution of working capital
as a percentage of our net revenues along the
years. When we measure working capital this way
we can see that there was an increase compared to
the previous quarter. There was an increase in the
accounts of clients and inventories and these
increases were partially neutralized for the growth of
accounts payment to vendors and advanced
payments, a reflex of a good performance in sales in
GTD.
In R$ million
303,7
(6,1)
Capex Program
(250,6)
FX Impact on
Revenues
(20,5)
326,9
Volumes,
Prices &
Product Mix
Changes
COGS (ex
depreciation)
Selling
In R$ million
(10,5)
(5,2)
13,0
General and
Administrative
Expenses
Profit Sharing
Program
Other
Expenses
Page 13
132,3
Outside Brazil
Brazil
EBITDA Q3 14
EBITDA Q3 13
3Q14 Conference Call
350,7
October 30, 2014
On page 7 we see the main variation in the accounts
that compose our EBITDA. In the quarter EBITDA
had growth of 7.3% compared to the previous year
and EBITDA margin reached 17.1%, 1.5 p.p. below
3Q 13 and the same level of 2Q 14. In addition to
the already mentioned effects when we analyze the
gross margin EBITDA margin benefited from a lower
94,0
60,5
63,9
15,6
61,1
13,1
64,3
8,4
23,5
56,8
6,0
61,3
11,8
50,7
49,5
48,3
48,0
55,9
70,6
71,8
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
3Q14 Conference Call
Page 17
October 30, 2014
Finally slide 9 shows our organic investments to
expand capacity that added up to R$ 132.3 million
in this quarter and R$ 290.6 million in the first nine
months of 2014. We believe that investments in the
end of the year are going to be between 450 and
Page 3
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
500 million, below our initial forecast which was
around 590 million.
We have been managing investments cautiously
avoiding the accumulation of idle production
capacity and adding investments to businesses that
are most hurt by the lower industrial activity. On the
other hand important projects such as the expansion
of electric motors in China and Mexico continue to
be executed at full speed.
With that we close our brief presentation and again I
turn the floor to Sérgio.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Well thank you. Before starting the Q&A I would like
to reinforce some important points: 2014 has been a
challenging year. The demand for industrial
commercial products in the Brazilian market is
stagnated and investment decisions continue to be
delayed.
In the energy segment however we have been
finding good opportunities, which has enabled us to
reach satisfactory performance.
Outside Brazil conditions are a bit more stable and
we have a greater diversity of opportunities. We
continue however confident in opportunities for
growth for WEG and we continue to perform the
necessary actions to seize opportunities. For
example this month we announced a smaller
acquisition of FTC in Colombia expanding our share
in the market and reinforcing our position in the oil
and gas segment.
Well with that we close or presentation and now we
can start our Q&A session. Please operator you may
go on.
Investor Relations Contacts
Sérgio Schwartz
CFO
+55 (47) 3276-4533
schwartz@weg.net
3Q14 Conference Call
Paulo Polezi
Finance Officer
+55 (47) 3276-6354
ppolezi@weg.net
October 30, 2014
Luis Fernando
Oliveira
Investor Relations
+55 (47) 3276-6367
luisfernando@weg.net
_________________________________________
Q&A Session
Operator
Ladies and gentlemen we will now start the Q&A
session. We would like to remind you that this
conference call is being held in Portuguese with
simultaneous translation into English. If you have a
question please press star one. If you want to
withdraw your question just press star two.
Our first question comes from Cássio Lucin from
J.P. Morgan.
_________________________________________
Mr. Cássio Lucin – JP Morgan
Good morning everyone thanks for the call. I have
two questions, the first with regard to 2015. What do
you expect for the year? Do you think that the
Brazilian real is going to be further weakened in the
year and if possible what would be the practical
effects of that on your revenues? I know that you are
going to improve profitability but I would like to hear
your thoughts on that. That would be my first
question.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Good morning Cássio and thanks for the question. It
is true indeed. We have more competitiveness if the
Brazilian real has a lower exchange rate both in the
domestic and in the foreign market; however it is
important for us to note that exchange rate variations
do not impact the revenues of the margin directly.
Basically what happens is that the company is
repositioned in the several markets in which it
operates and therefore you expand market share,
you improve margins and sometimes you even are
able to defend positions.
We prepared our plan for 2015 on the assumption
that we are going to have an average dollar of 2.4
and we believe that our competitiveness with this
exchange rate is quite reasonable. Now any change
in terms of valuation or devaluation of the Brazilian
real will require adjustments and that has to happen
permanently, that is the company has to be a bit
Page 4
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
more aggressive to gain market or be a bit more
conservative to maintain its positioning.
So the exchange rate is something important for
WEG but we also have to consider that 50% of our
revenues are based on Brazilian reals with the
Brazilian market; the other 50 is part of exports and
part from production activities abroad. On the other
hand we have a very large volume of imports of raw
materials and even when they are not imported
prices are tagged in dollar or will follow the
international market and so the diversification of
supply sources, production units, destination of
sales brings us a reasonable balance in this way we
are not much vulnerable to exchange variations.
_________________________________________
Well I think so and quite fast. The companies that
you mentioned generally work with a level of
inventory that is very low. They basically transfer
orders directly to their supply chain. In the previous
quarter we had already heard of this movement but
we had not felt the impacts in our orders; but now a
bit more, not that significant to tell you the truth.
In fact the second half of the year is stronger in
terms of seasonality and so it is a bit hard to identify
if it is because the improve of demand comes from
seasonality or if there is an effective change in the
market. But our expectation is that 4Q is going to be
very much in line with 3Q.
_________________________________________
Mr. Cássio Lucin – JP Morgan
Mr. Cássio Lucin – JP Morgan
Okay so you still do not have a practical effect?
Okay I just have a follow-up question: when you said
a bit more aggressive are you talking about prices or
are you talking about payment terms? What would
be more aggressive?
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
_________________________________________
No not really.
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
_________________________________________
Mr. Cássio Lucin – JP Morgan
The commercial terms as a whole. Naturally price in
some markets, especially those in which we still do
not have a very established position is a determinant
factor for us ready to enter the market and in the end
of the day it is what matters the most to customers
to be more competitive in price. So aggressiveness
in prices I think will be the point we will be focusing
the most.
Okay thank you very much have a good day.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
You too.
_________________________________________
_________________________________________
Mr. Cássio Lucin – JP Morgan
Operator
Okay. Let me ask you another question: some of
your competitors are reporting an increase in their
backlog. Do you think that WEG is going to benefit
from this atmosphere as well?
Our next question comes from Mr. Ricardo
Schweitzer from Votorantim Corretora.
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Good morning everyone thanks for the opportunity. I
would like you to elaborate a bit further on the
evolution of your backlog and also price requests.
Vice
_________________________________________
Page 5
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
You said that short-cycle products continue to stand
out because these large investments continued to
be postponed; but in 2Q you were talking about a
variation of being compacted more from customers
and I would like to know if there was an evolution in
this regard. Thank you very much.
And I am going to ask the second question as well:
in the release I read that you are having a certain
difficulty in aligning prices with the gains of
productivity. I would like to know what it is like to
pass on prices in the domestic market. Thank you
very much.
_________________________________________
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Well basically when we talk about long-cycle
products you have to separate GTD from industrial
infrastructure investments and even capacity
expansion. With GTD we have a very good backlog:
in generation more particularly because of the
energy auctions that were held from August through
December last year, and we had there some small
power plants events, WEG was able to be very
successful with that increase of orders in result of
those actions. So for the next 24 months we have a
very good backlog in the area. As for transmission
and distribution we are already starting 2015 with a
very good backlog.
On the other hand when we talk about investments
in infrastructure, expansion of capacity, therefore
industrial equipment then we do not see a major
change, not in our backlog or in more customers
coming to talk to us. What we see is that projects
are being postponed and the market is not giving
signs that this is going to be resilient in the short
term.
_________________________________________
Operator
Our next question comes Lucas Marquiori from
Banco Safra.
_________________________________________
Mr. Lucas Marquiori – Banco Safra
Hello good morning thanks for the call. I have two
items to further discuss with you: in the domestic
market short-cycle products, an increase in
production there this quarter, you said that basically
part is because industry itself is rebuilding inventory,
so in this movement 4Q would be weaker; is that
correct? Is that what you are seeing, a certain
deceleration because inventories no longer have to
be rebuilt in the industry and so should expect the
domestic market especially in the short cycle a bit
weaker in the market? This is a first question.
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Well Lucas thanks for your question. The first part of
your question we did see that inventory was being
rebuilt and we believe that the market kind of went
back to normal. And we did say that in 2Q we were
identifying a decompression and this is what
happened: the market went back, we are trying not
to use the word normality, but it went back to regular
tracks and this is what we see for the rest of the
year.
We do not have any question about that, there is no
dramatic change to happen; there was a major
expectation about the events of the past weekend
but nothing is going to change and probably 4Q is
going to be very much aligned with 3Q. We do not
see a substantial change with regards to the
remainder of the year.
We do have an important component that we have
to take into account which is the following: the
second half of the year is traditionally stronger than
the first. The orders that come along the year have a
concentration of deliveries in the second half of the
year and this is not going to be different and that
kind of offsets any fluctuation that you have in the
rebuilding of inventory. So we do not believe in a
different performance. This is our understanding right
now.
As for the recomposition of our prices this is always
a bit more complicated; negotiations are not easy
obviously and again in this scenario that we have a
demand that is not heated it is even more difficult.
You cannot pass on prices as fast as you should.
What is more natural to happen in a heated market
and the market as it is today is a bit harder; but
again in the end of the day there is no other way
around, I mean prices with raw materials are always
there and eventually if they go up we have to pass
Page 6
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
them on. So it is much more of a one-time difficulty
than something that will last for a greater period.
an environment such as the one we are
experiencing now with the difficulty of passing on
prices there is also a major concern with costs.
_________________________________________
Mr. Lucas Marquiori – Banco Safra
Okay thank you very much.
_________________________________________
Operator
Our next question comes from Juan Tavares from
Citigroup.
And then directly related to that it is because of this
that we have a very specific caution about following
our Capex plan. The best way to have cost
efficiency is to avoid at the most to have idle
production capacity, therefore avoid to build idle
production capacity, capacity that is not going to go
into operation immediately. If you think of cutting
costs this is the most efficient way of doing that,
much more than building and then having to cut
anything.
_________________________________________
Mr. Juan Tavares – Citigroup
Hi thank you good morning everyone. Just my first
question is regarding costs. You mentioned about
quantifying the cost initiatives. I am asking if you
would be able to quantify some of these cost
initiatives.
And to understand you mentioned that these
initiatives could help you keep margins flat; where
are you seeing most of the pressure? Are these cost
initiatives going to be offsetting pricing pressure or
mix pressure?
And then my second question is regarding Capex. I
know you mentioned for this year you reduced a little
bit your target to close to 450. Could you give us an
update on may be what we should expect for 2015?
Part of our investments that are being delayed this
year are going to go to 2015, there is no doubt
about that; but we had already said that: that is
2015 tends to be a year of investments slightly
above the traditional curve because we have a
concentration with China and Mexico, two major
units where you have a concentration in the first two
years. These are two projects that are being followed
at the same pace and we are not going to slow
down and then a bit of what was delayed this year is
going to happen next year.
So the trend is to have similar numbers (maybe 450
to 500 more or less). We still do not have the
numbers for 2015 but that is going to be about it.
_________________________________________
Mr. Juan Tavares – Citigroup
_________________________________________
Great thank you.
Mr. Luis Fernando Oliveira – Investor Relations
Manager
_________________________________________
hi Juan. I am going to answer in Portuguese and you
are going to follow the simultaneous translation. I
think that is how we have to do it in the call
structure. But anyhow we have a saying inside the
company for some time now saying that "costs are
like hair: you have to have it cut all the time". There is
not a program for us to cut costs; there is a culture
of having low costs and expenses and that has to
be permanently reminded.
We would like to remind you that if you want to ask a
question just press star one.
We play very close attention to operating expenses
right now, it is a source of concern; and naturally in
Operator
We will now close the Q&A session. I am going to
turn the call over to Sergio Schwartz for his final
considerations.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Page 7
WEG S.A.
3rd Quarter 2014 Earnings Results Conference Call
October 30, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English
Well thank you very much for attending the call and I
wish you a good day.
_________________________________________
Operator
WEG's conference call is now closed. I would like to
thank you all very much for participating, have a nice
day and thank you very much for using Chorus Call
Brasil.
Page 8