WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English CORPORATE PARTICIPANTS
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Disclamer
Vice
Mr. Wilson Watzko – Controller Officer
Mr. Luís Fernando Oliveira – Investor Relations
Manager
PRESENTATION
Operator: Good morning ladies and gentlemen.
Welcome to WEG's conference call to announce the
results of the year of 2013 and 4Q13.
Conference Call
2013 and 4Q13
February 27th, 2014
This conference call is being recorded and right now
all participants are connected in listen-only mode.
Later we are going to conduct a Q&A session when
instructions will be provided. Should you need
assistance during this conference call please
request the help of an operator by pressing star
zero.
To have access about the press release or the
presentation that we are going to use during this
conference call please go to WEG's investor
relations page at www.weg.net/ir.
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.
4Q13 Conference Call
Page 3
February 27, 2014
Before proceeding we would like to clarify that
statements that may be made during this conference
call pertaining to WEG's business prospects,
financial and operational projections and goals and
WEG's potential for future growth are mere
assumptions of the company's management and
they are based on information currently available.
Such forward-looking statements involve risks,
uncertainties and assumptions because they refer to
future events and therefore they depend on
circumstances that may or may not happen.
Investors should understand that general economic
conditions, industry conditions and other operating
factors may affect WEG's future performance and
may lead to results that are materially different from
those
expressed
in
such
forward-looking
statements.
We would like to remind you that this conference call
will be made in Portuguese with simultaneous
translation into English. Today with us in Jaraguá do
Sul are Mr. Sérgio Schwartz, Executive Vice
President and Investor Relations Officer; Mr. Wilson
Watzko, Controller Officer and Mr. Luís Fernando
Oliveira, Investor Relations Manager.
Please Mr. Sérgio you may start.
Page 1 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English Highlights
Quarterly Figures
Net Operating Revenue
Quarterly Evolution
Q4 2013
1.893.299
913.388
979.911
Q3 2013
1.758.381
872.363
886.018
7,7%
4,7%
10,6%
Q4 2012
%
1.662.258 13,9%
774.533 17,9%
887.725 10,4%
428.229
387.197
10,6%
431.141 -0,7%
615.847
599.253
2,8%
528.641 16,5%
32,5%
34,1%
Net Income
237.439
228.761
Net Margin
12,5%
13,0%
Net Operating Revenue
Domestic Market
External Markets
External Markets in US$
Gross Operating Profit
Gross Margin
EBITDA
341.653
326.934
EBITDA Margin
18,0%
18,6%
EPS
0,3827
0,3687
%
31,8%
3,8%
In R$ million
External Market
1.893
Domestic Market
1.529
1.662
1.613
1.700
1.758
49%
50%
52%
1.478
1.370
52%
50%
53%
48%
52%
48%
50%
47%
52%
51%
50%
48%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
48%
183.157 29,6%
11,0%
4,5%
289.786 17,9%
3,8%
0,2952 29,6%
17,4%
Figures in R$ Thousand
2012
4Q13 Conference Call
Page 5
February 27, 2014
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Good morning everyone. It is a great pleasure to
have you here to share with you the results of the
year of 2013 and 4Q of the same year. First we are
going to highlight a few points about growth and the
performance of the revenue; then Wilson will be
talking about costs, Ebitda, working capital and
investments. We are going to do that briefly and then
we will answer your questions.
So starting on page 3 of our presentation I would like
to draw your attention to two points: the first is the
growth of revenues amounting to 14% in 4Q 13 as
compared to the previous year. 2013 was a year of
growth that was slightly below our historical levels for
reasons that we are going to detail further ahead; but
it is important to highlight that we ended the year
with an acceleration in performance. This has been
or this was the highest growth rate in a quarter in
2013.
2013
4Q13 Conference Call
In terms of the net operating revenues for the year it
reached 1.893 billion in 4Q 13, 14% greater than the
previous year and almost 8% greater than the
previous quarter. The domestic market continues to
respond favorably to the new exchange rate with the
growth of 18% over the same period in the previous
year. We still observed a recovery of the market of
short-cycle products, serial of local manufacturing
which after the devaluation of the exchange rate
have become more competitive facing imported
products.
The revenues in the domestic market continued to
grow in Reais with a positive impact that is more
relevant of the devaluation in this quarter. The growth
of the revenue measured in Reais was 10.4%;
however we remind you that the valuation of the
American dollar in face of many other currencies
partly explains the reduction in revenues from the
foreign market as measured in dollars.
Highlights
Yearly Figures
2013
Secondly it is important to highlight the continuity of
a trend that we have been seeing along the year of
recovering profitability and margins with expansion in
gross margins, Ebitda and net margin as well as with
a growth that was in absolute terms in the net and
the gross income; in the Ebitda and in the net
income.
February 27, 2014
Page 7
Net Operating Revenue
Domestic Market
External Markets
2012
%
2011
%
6.828.896
3.432.040
3.396.856
6.173.878 10,6%
3.016.662 13,8%
3.157.216 7,6%
5.189.409 19,0%
2.902.958 3,9%
2.286.451 38,1%
External Markets in US$ 1.569.891
1.610.330 -2,5%
1.361.689 18,3%
1.880.856 18,9%
1.556.051 20,9%
Gross Operating Profit
Gross Margin
Quarterly Net Income
Net Margin
EBITDA
2.236.766
32,8%
30,5%
843.467
30,0%
655.979 28,6%
12,4%
10,6%
1.230.032
586.936 11,8%
11,3%
1.016.748 21,0%
851.155 19,5%
EBITDA Margin
18,0%
16,5%
16,4%
EPS
1,3595
1,0573 28,6%
0,9461 11,8%
Figures in R$ Thousands
4Q13 Conference Call
Page 9
February 27, 2014
Now going to page 5 where you can see the main
numbers for the year. Again we highlight the
recovery of the gross margin, Ebitda margin and net
Page 2 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English margin as well as the absolute growth of gross profit,
Ebitda and net income. This recovery is based on
quite consistent foundations in our target markets
and was helped along 2013 both by the devaluation
of the real in face of the North American dollar as
well as some additional incentive measures and
furthermore: a continuous effort of the company in
the pursuit of higher efficiency, productivity, with
actions in research, development and innovation.
Additionally the valuation of the US dollar against
almost all currencies in emerging markets partly
explains the reduction in revenues from the foreign
markets as measured in dollars.
Business Areas
Revenue breakdown
6%
12%
5%
9%
6%
6%
9%
11%
28%
23%
57%
60%
22%
25%
The growth in revenue of 10.6% vis-à-vis 2012 was
below our usual standards and what we had
included in our strategic plan WEG 2020. It is
important to consider that the growth in 2013 was
essentially organic because we could not complete
no relevant M&As; but we are still confident in our
aspiration to reach revenues amounting 20
billion/year in 2020 established in our strategic plan
WEG 2020. This aspiration is based on very detailed
works to identify market opportunities including nonorganic growth. We continue to work and invest in
our efforts to make the most of these opportunities
and to convert them into effective transactions.
Net Operating Revenue
Yearly Evolution
In R$ million
Domestic Market
11%
External Market
19%
5.189
3.397
18%
4.211
4%
4.392
6.829
6.174
3.157
2.286
1.684
1.722
2.670
2.903
3.017
3.432
2.526
2009
2010
2011
2012
2013
4Q13 Conference Call
Page 11
February 27, 2014
Now on page 6 you can see the evolution of the
annual net operating revenue along the past five
years showing a growth of almost 11% in 2013 as
compared to the previous year. As we said the
performance trend both in the domestic and foreign
markets were quite consistent during the year.
In the domestic market we noted a good
performance as a response to the new level of the
exchange rate and its effects on WEG's
competitiveness and our local customers. In the
external market 2013 was a year of consolidation of
positions that the conquered over the past years.
57%
4Q10
Industrial Equipment
4Q13 Conference Call
64%
4Q11
4Q12
GTD
Domestic Use
Page 13
4Q13
Paints & Varnishes
February 27, 2014
On slide number 7 you can see the distribution of
revenue through the main business areas. As we
have been mentioning along the year, the highlight
still is the performance of short-cycle products in the
domestic market, both those meant for the
machinery and equipment industry as well as
domestic-use
engines.
In
both
cases
competitiveness provided by the new exchange rate
makes it possible for these products to have better
conditions to complete with imported products in our
market. The effects of the exchange rate in the
competitiveness, however, are not yet clear in the
revenues from engineered products of long cycle
related to process industry and infrastructure
projects.
In terms of GTD we have witnessed a modest
performance with global prices of distribution and
transmission in a slight recovery and demand
conditions stable during the year. The prospects,
however, are of gradual improvement especially in
the generation businesses especially with new
competitive conditions and new regulations in power
auctions leading to more sustainable conditions and
greater diversity of sources.
Now I would like to turn it over to Wilson for him to
continue.
Page 3 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English Costs of Goods Sold
Materials
65%
Materials
64%
2012
2013
Working Capital
Other Costs
10%
Depreciation
4%
our foundations in our target markets, both from the
standpoint of the product mix on demand as well as
from the standpoint of global price trends. This
structural trend is also helped by the favorable
scenario in Brazil with a more competitive exchange
rate and the measures of tax relief.
Labor
21%
Labor
22%
Other Costs
10%
In % of Net Revenue
50,0%
Depreciation
4%
40,0%
4Q13 Conference Call
February 27, 2014
Page 15
Working Capital
_________________________________________
30,0%
Mr. Wilson Watzko – Controller Officer
20,0%
Clients
Good morning everyone. Going to page 8 that
provides a breakdown of costs compared to the last
quarter of 2012. Along the year we managed to
expand consistently the gross margin, which in this
quarter was 0.7 percentage points above 4Q 12
reaching 32.5 because of the relative stability in the
cost of raw materials in Reais the positive effect of
the devaluation of the exchange rate over the
revenues, the best dilution of transformation costs
and the introduction of innovations both in products
and in manufacturing processes which provided
productivity gains.
Main impacts on EBITDA
Q4 2013
Q3 2013
1.893,3
1.758,4
7,7%
1.662,3
13,9%
Consolidated Net Income for the Period
237,3
230,2
3,1%
184,8
28,4%
Net Margin
12,5%
13,1%
(+) Income taxes & Contributions
(+/-) Financial income (expenses)
(+) Depreciation & Amortization
EBITDA
72,0
(24,4)
56,8
341,7
67,5
(26,5)
55,8
326,9
EBITDA Margin
18,0%
18,6%
Net Operating Revenues
%
Q4 2012
53,7
(2,7)
54,0
289,8
10,0%
Advances from Clients
Suppliers
0,0%
4Q06
4Q07
4Q08
4Q09
4Q10
4Q13 Conference Call
4Q11
4Q12
4Q13
February 27, 2014
Page 19
Now on the next slide we are going to see the
evolution of working capital over the past few years.
We continue the gradual trend of reduction which
we have highlighted for some time. We insist that
investment in working capital is a capital investment
like any other and this should be made with the
same discipline and the same objectives of
maximizing return that we have, for example, in the
investments on fixed assets with different features of
risk and maturity time. In this manner we continue to
see the recovery of return over invested capital along
2013.
%
11,1%
6,7%
-8,1%
1,8%
4,5%
Inventories
34,2%
n.a.
5,2%
17,9%
Capex Program
In R$ million
10,2%
Capex
% of Net Revenues
9,3%
8,1%
17,4%
Figures in R$ Million
5,8%
5,4%
457
5,3%
3,6% 3,9%
3,7%
3,6%
305
4Q13 Conference Call
Page 17
February 27, 2014
On page 9 you can see the comparison of Ebitda
and it is possible to see that the effects that we
discussed continue to enable the expansion both in
absolute Ebitda, which grew 18% year on year, as
well as the margin percentage which reached 18%
with an expansion of 0.6 percentage points. We
have said that this is a consistent expansion
because it is based on the gradual improvement of
226
206
2004
233
238
244
2012
2013
188
146
2005
4Q13 Conference Call
111
2006
2007
2008
2009
Page 21
2010
2011
February 27, 2014
Lastly on slide 11 you can see the organic
investments in the expansion of capacity as a
percentage of net revenue. We reached 244 million
in organic investments in 2013 in addition to 15
million in assets acquired. We are close to our initial
Page 4 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English expectation of R$ 265 million with some additional
disbursements in 2014.
For 2014 we are estimating a more robust
investment program in the expansion and
modernization of our production capacity which will
reach 592 million approximately. This amount
already includes the first disbursements of
investments amounting to US$ 345 million along the
five years in the manufacturing units of electrical
engines in Mexico and China.
In this matter we close this brief presentation and I
send the conference back to Sergio.
and we have the basis to continue growing
sustainably in the foreign market.These opportunities
are of organic growth because the market for electric
equipment has been growing steadily all over the
world.
There are also opportunities for nonorganic growth
with new products, new markets and new
technologies that may be added to our business.
This ends our presentation and we may now start
our question and answer session. Now operator you
may proceed please.
Contacts
Strategic Planning WEG 2020
Aspirations and strategic direction
ƒSérgio Luiz Silva Schwartz
Investor Relations Officer
ƒ Luís Fernando M. Oliveira
Investor Relations Manager
+55 (47) 3276-6973
luisfernando@weg.net
twitter.com/weg_ir
6.829
20.000
11%
6.174
19%
5.189
4.392
18%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
4Q13 Conference Call
Page 23
February 27, 2014
4Q13 Conference Call
Q&A Session
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Operator
Before we start our Q&A session I would like to draw
your attention to the chart on page 12. Two years
ago we presented in a conference call such as this
our aspiration of reaching the revenue of 20 billion in
2020, which was our way of announcing the
strategic plan WEG 2020 to our stakeholders and
we want to reaffirm that the actions to use or to
make the most of the opportunities we identify are
being executed and the interim objectives of WEG
2020 are in line with our expectations.
We need to keep our discipline for execution
keeping our competitiveness in the markets where
we already have consolidated positions and
continuing our expansion into other markets. We see
interesting opportunities in the domestic market both
because of the dynamic movement created by the
more competitive exchange rates in specific areas
February 27, 2014
_________________________________________
_________________________________________
Vice
Page 25
Thank you very much. Ladies and gentlemen we are
now going to start our Q&A session. As a reminder
once again this conference call is being held in
Portuguese with simultaneous translation into
English.
If you want to ask a question please press star one
and if you want to take your question from the list
please press star two.
Our first question comes from Mr. Bernardo Carneiro
from Deutsche Bank.
_________________________________________
Mr. Bernardo Carneiro – Deutsche Bank
Good morning everyone. I have two questions, the
first one is I would like to understand the reasons for
the continuing drop, even though small, for the
Page 5 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English revenue in the foreign market both in terms of
exports and the revenues coming from overseas
even when we measure it in dollars. It dropped in
2013 and also in 4Q.
The second question do you expect an increase in
the cost of raw materials because of the new
exchange rate? The Real depreciated considerably
vis-à-vis the dollar and you received the benefit
because of that especially because of metal alloys,
the prices of metal alloys have not gone up yet.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Good morning Bernardo. I am going to answer your
question. The first one regarding the performance of
our sales in the foreign market as we have said
before we talked about the devaluation of some
specific currencies in markets where we have
significant operations and it ended up translating into
fewer US dollars in our financial statements.
If we consider the size of the operation and WEG's
share in those markets we also see that WEG has
not reduced its market share, we are not reducing
market share for example in South Africa, where
WEG has a significant market share, Latin America
and even in Australia too. We have been having an
impact in our consolidated financials but this does
not mean that we are losing market in the front-end;
it is much more a result of the devaluation of the
other currencies than market conditions.
But still keeping on that, because market share is
more related to volume, to physical production, what
about prices? Have you managed to increase prices
in dollar or the global demand does not yet make it
possible to increase dollar prices?
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Well Bernardo we need to separate serial products,
short-cycle products that suffer a smaller variation of
prices as compared to demand and as we renew
our portfolio and we introduce new products (that we
call the customized ones) those variations in our
lines to meet specific demands of our customers, for
these we can make small movements in prices to
transfer cost increases. But along 2013 we had a
certain stability in this market and so we did not see
any changes in prices.
However, for long-cycle products it follows up
supply and demand and here prices are more
volatile, so we see a margin that is slightly higher
than we initially expected to increase prices
especially in GTD where we expected to increase at
slightly higher speed and we could have some price
changes, but that practically did not happen or if it
did it was very specific but it was not significant.
_________________________________________
Mr. Bernardo Carneiro – Deutsche Bank
Thank you very much.
_________________________________________
But also additionally there is also a loss of strength in
some markets where WEG has important
businesses such as mining and then there are more
markets than the ones I have mentioned (Africa,
Australia and Chile, Canada). We have investments
in general. We have not been seeing, and we
carefully monitor this, we have not had any
significant loss in market share in our target markets.
Maybe we have not been growing as fast as we
expect; but this is much more because of the lack of
movement in the market than because of our
strategies.
_________________________________________
Mr. Bernardo Carneiro – Deutsche Bank
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
You also asked a question about costs. Well, we are
not expecting any significant changes in costs in
2014. Because of longer-term contracts our volatility
is slightly lower when we are dealing with
commodities such as copper, aluminum and steel.
Our contracts are slightly longer term and so these
variations in market prices we can dilute them over a
slightly longer period.
But what will happen in 2014 with those contracts is
that there will be a reduction in dollar prices but
because of the devaluation of our currency there will
Page 6 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English be a compensation and some stability of costs in
Reais.
_________________________________________
Operator
Our next question comes from Cássio Lucin from
J.P. Morgan.
_________________________________________
Mr. Cássio Lucin – JP Morgan
Well I am sorry, this is Cassio in JP. So my question
to Bernardo is the following: some companies are
focusing in longer-cycle products and they are
saying this is not so strong. Do you think this is due
to a lack of confidence in the cycle because of
market conditions or is it any other factors? Or you
are not seeing this?
Second question if we were to consider the growth
in the domestic market - and I know this is a kind of
difficult - how much was it due to mix, price or the
exchange rate that weakened the sales in the
domestic market? These are my two questions.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Good morning Cassio. With regards to this issue of
a weakening in our book of orders for longer-cycle
products we need to consider WEG's position in
face of the companies that you have mentioned. We
are not exactly fighting for the same markets. The
products that WEG has been focusing on, also
because there is a more modest share in the foreign
markets because of market share, this makes it
possible for us to focus on businesses where we
see the best possibilities to compete and to capture
more value.
So as they are small abroad we can afford to
choose which are the business that we are going to
focus on, and because of this small market share as
we expand our portfolio and we go into new
geographies we manage to keep a pace of
businesses that is not so closely related to the
overall market as those competitors, whose markets
are more subject to short-term market changes.
If we look at North America, where in T&D we have
about 3% market share, the recent movements of
market have made it possible for us to capture a
volume of orders, a good volume of orders
regardless of the economic scenario in that market.
Regarding the domestic market and WEG's
evolution - we have been talking a lot about
competitiveness related to the exchange rate and
everything else - we might not be paying the
appropriate attention to all the actions that we
continuously implement in our company in terms of
competitive positioning, which is research,
development and innovation.
So we also had… in addition to the exchange rate
we launched products in some important segments
here in the domestic market which made it possible
for us to directly or indirectly recover market share
and to displace or to take share from some
important products. I would not be able to specify
which segments specifically so that the competition
will not focus on that; but in 2013 - and these are
projects we have been working on for a while - we
cannot say that at some point the exchange rate will
devalue for us to reposition.
We are continuously developing new products to
recover advantages that we had in the past. So we
want products with higher efficiency than imported
products to set off or to compensate the price. So it
is also product mix but it is very much related to the
release of new lines too.
_________________________________________
Mr. Cássio Lucin – JP Morgan
Thank you very much. If you allow me just a follow
up: in the European market what can we see in
terms of trend in industries and markets WEG is
going to focus on?
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
So the most significant markets for WEG in Europe
are the markets of pumps, ventilators and
compressors which are typically engines. In these
markets we have make quite significant investments
Page 7 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English in the development of new products and we have
been able to capture important opportunities
especially in OEMs, and customers that export
machines and equipment to other parts of the world.
We have been seeing this: so a significant share of
our sales in Europe the final destination of the
equipment is not in Europe; many things that are
going to go to Asia, which I would say is our number
one market.
_________________________________________
Mr. Cássio Lucin – JP Morgan
Okay thank you very much.
_________________________________________
Operator
Our next question comes from Thomas from J.P.
Morgan.
_________________________________________
Mr. Thomas Mcelwee – JP Morgan
I would like… This is a fast question: this increase in
demand for products related to power or the
rationing of energy in Brazil…
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Thomas thank you for your question. This is an issue
that is very much on the agenda today and we need
to be very careful in terms of defining what we are
talking about.
There are two very different things: one thing is it
would be a blackout, a failure in the system, and
outage due to some problems, something that
happens, and events and so the power goes down
for some time. This is difficult to predict and it is
difficult to know when it is going to happen and
usually impacts are very localized. It is the type of
situation that usually is solved with more investments
in industry - which is good for WEG - and we have
been seeing that many of the changes that we are
talking about the regulation (in the auctions and
everything) they are already going towards that
direction in terms of increasing the speed with which
investments are implemented in this industry.
Something different is rationing. That is a problem of
insufficient generation. So sometimes the generation
is not enough due to climate problems: for example
Brazil is clearly a hydroelectric country and if we have
shortage of rain, if there is a dry season there is
nothing to solve.
So the situation seems to be okay for 2014. This
happened in 2013. We talked about this, it is back
on the agenda this year but this is very hard, we do
not know very much about it.
It seems reasonable to think that a repetition of 2001
is unlikely. The industry is much more prepared
today and evolved a lot. We have many more
thermal power plants.
Well, the impact for WEG: greater importance in
generation investments. This is already happening.
We have been seeing this and it is difficult to quantify
because this affects first the regulation of auctions
and then the performance of the people taking part
on the auctions and we have been seeing this along
the year. This is one of the reasons why we are
focusing more on this industry.
Greater importance on energy efficiency in the
industrial, manufacturing industry, products with
higher value added such as more efficient and
automated engines. But then on the other hand
there may be higher electric power costs and this
has been neutral for WEG. We have been able to
purchase energy, we are covered, well covered with
our contracts and energy has a small share of our
costs (less than 2% of our total costs) and clearly as
the situation becomes more severe then maybe a
lower demand for consumption of engines and
appliances.
In the worst-case scenario if there is an effective
generalized rationing scenario where everyone
needs to lower consumption by 20% for example it
is impossible for us to do anything as this will be
more difficult. In 2001 we had a situation such as
this, but then we were able to work around. But this
year we do not think it would be so easy. But what I
can say: when the electric industry in the need for
investment becomes more evident this is good for
Page 8 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English us up to a limit when it gets to a situation that is
more drastic as the ones we are talking about.
So considering this situation this has been the
reaction have been seen. There are some specific
cases, for example with alternators, emergency
energy. These are more specific cases with more
and anedoptical cases. But on the whole this is
good for us.
_________________________________________
Mr. Thomas Mcelwee – JP Morgan
I understand, thank you very much.
_________________________________________
Operator
Our next question comes from Ricardo from
Votorantim Corretora.
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Good morning Vilson and Fernando, thank you. I
would like to hear more details about the current
status of the market for engineered products
especially for industrial electric engines in Brazil. Is it
the same as in previous quarters?
With regards to electricity what are your revenues
from electric machinery and equipment such as
alternators and generators?
I would like to hear the opinion about
Württembergische Elektromotoren in terms of
product portfolio and how it affects us in terms of
you already having electric engines and what you
had already won in reducers with the acquisitions
that you had made previously.
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Well we are going to start from the end with the
acquisition. I am not going to mention the name of
our German manufacturer of engines. So there are
two main vectors of acquisitions: one vector is
technological and the other vector is for market
access. This is a case where we have the two
components. It complements our product line; they
have additional products than the ones we had
included here with previous acquisitions. It also
complements in terms of our… in the line of engines
especially related to motor reducers.
And this is also an acquisition that provides us a
component because they are a German
manufacturer in Germany, in the heart of Germany's
industrial area. It is one of the most industrialized
regions in Germany and so very clearly it helps us. It
is a small acquisition obviously, it does not have an
immediate impact that is so significant but it has the
two components and that is why we made this
acquisition.
As to engineered products there has not been any
significant change. We have engineered products
here in Brazil, it is focusing on a few sectors. There
are some segments with investments, specific
investments. We do not have an investment cycle
for the entire process industry; it is concentrated in
some specific things here and there: for example the
pulp and paper industry; in some mining projects; oil
and gas. It follows a path which is similar to the
previous one and this is all very similar to what we
have been talking about.
In terms of alternators as a percentage of GTD it is a
small share, it is not really relevant. It was much
more relevant, for example, if we compare in 2001.
In 2001 as a percentage of the revenues alternators
were more significant than today for WEG; but it is
still an important business and we have a market
position which is quite relevant in Brazil and of
course we want to me to the interests of that
segment.
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Thank you.
_________________________________________
Operator
Excuse me ladies and gentlemen. If you have a
question please press star one.
Page 9 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English _________________________________________
Thank you very much.
Mr. Luis Fernando Oliveira – Investor Relations
Manager
_________________________________________
Operator
Just another question. We have a question in
English from Ravi in HSBC and he is asking about
the situation of the electric power market in Brazil,
rationing and everything, so I think it basically… We
have answered his question.
Our next question comes from Alexandre Falcão
from HSBC.
_________________________________________
Mr. Alexandre Falcão – HSBC
_________________________________________
Operator
Our next question comes from Bernardo Carneiro
from Deutsche Bank.
_________________________________________
Mr. Bernardo Carneiro – Deutsche Bank
I have a follow-up about your comment before you
opened for questions and answers. You announced
a total Capex for 2014. It is a significant amount and
I would like you to give us some more detail about
this amount, which I think encompasses in
verticalization investments both in Mexico and in
China, R$ 600 million, 580?
_________________________________________
Mr. Wilson Watzko – Controller Officer
Hi Bernardo this is Wilson. Our investment plan for
2014 is at a level close to R$ 600 million and there
are investments that are proportional in all our
business units. There is a significant investment in
Mexico and in the US that is going to start over the
next five years, so this is in our manufacturing plants
for upgrading, modernization and at the same time it
will improve capacity for WEG's gradual expansion.
Along with the growth there is investment in working
capital. It is proportional to our growth in revenues
always with the aim of optimizing investments inferior
to the growth of our sales. So we want to optimize
our inventories so that we may optimize the return on
the capital invested.
_________________________________________
Mr. Bernardo Carneiro – Deutsche Bank
Good morning everyone. My question is related to
your 2020 plan. So considering this plan was
designed at a dollar of 1.85 with the current
exchange rate do you have any plans to change or
to adjust it?
And the second question if you consider total growth
would this change its dynamics and where do you
expect to compensate this growth in the future?
Thank you.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Thank you for your question Alexandre. We need to
consider in our 2020 plan the assumptions that we
laid out when we designed the plan. We had the
expectation that growth would come as a proportion
of approximately two-thirds organic and one-third of
M&A initiatives.
So if we analyze our slides and if you see what
happened in 2011/12/13 you can see that we are
very much in line in terms of the compound growth;
but in 2013 we were a kind of short because we did
not make any significant acquisitions. But in all our
business units we have a roll of alternatives that is
quite interesting. In terms of development we are
discussing developments and we expect that within
a slightly longer term we may compensate that:
maybe in one year organic growth slightly higher
than non-organic and any other year it may be the
opposite.
In terms of the exchange rate we project as part of
that plan and a variation of 4.5%, 5% yearly, and
naturally there is a devaluation of the Reais if this will
call forth a slight repositioning, but this should be
Page 10 WEG S.A.
4th Quarter 2013 Earnings Results Conference Call
February 27, 2014 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English done looking in a longer-term future and right now
we do not think it is necessary to make any more
profound changes in those numbers. We are still
confident that 20 billion for 2020 are feasible.
Mr. Ecilio Vieira de Carvalho – Banco do Brasil
Thank you.
_________________________________________
_________________________________________
Mr. Alexandre Falcão – HSBC
And without wanting to play stress; but with the
dollar slightly more stress do you think we can…
This growth even faster or more front-ended than
initially expected?
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
Well, if the current levels of the exchange rate are
sustained without inflation and if we have the
maintenance of our assumptions in terms of GDP
yes, this may happen… May happen faster, sooner.
_________________________________________
Operator
Our next question comes from Mr. Ecilio Vieira de
Carvalho from Banco do Brasil.
_________________________________________
Mr. Ecilio Vieira de Carvalho – Banco do Brasil
Good morning everyone. I would like to hear from
you how much you have attained in terms of tax
incentives and how much it impacted your revenues
in 2013. Thank you.
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Mr. Luis Fernando Oliveira – Investor Relations
Manager
We have a question for Mr. Robert Lampl about our
working capital and I think Wilson has already
answered this question, has already addressed this
matter, and he is asking how the working capital will
behave over the next 12 months and Wilson
addressed this when he talked about our Capex
Investment Program, so we now understand we
have already answered that question, thank you.
_________________________________________
Operator
We are now closing our question-and-answer
session. I would like to turn the conference over to
Mr. Sergio for his final remarks. Please Mr. Schwartz
you may proceed.
_________________________________________
Mr. Sérgio Schwartz – Executive
President and Investor Relations Officer
Vice
I would like to thank you all very much for your
participation and I wish you all a good day.
_________________________________________
Operator
The conference call of WEG has now ended. We
thank you all for your participation and we wish you
all a good day.
_________________________________________
Hi. Well, this is a number we have been publishing:
the impact is about R$ 9 million per month in terms
of tax relief in the payroll. This is the total impact. Of
course not all of this is related to gaining
competitiveness; but part of it we really used to
increase competitiveness. But this is the total impact
of the tax relief in the payroll.
_________________________________________
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