WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English CORPORATE PARTICIPANTS
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Mr. Luís Fernando Oliveira – Investor Relations
Manager
PRESENTATION
Operator: Good morning and welcome to the
conference call of WEG about the earnings of 2Q13.
We would like to inform you that this conference is
being recorded and that at this point all participants
are in listen-only mode. Later on we are going to
start the Q&A session when further instructions will
be provided.
Should you need any help during the conference call
please reach the operator by pressing star zero. To
attain the quarterly results press release or the
presentation that we will be using during this
conference please go to WEG's investor relations
page at www.weg.net/ir.
Before we go on you would like to clarify that any
statements made during this conference call relative
to WEG's business outlook, projections and
operating and financial goals as well as to WEG's
potential future growth are management's beliefs
and assumptions and rely on information currently
available. These forward-looking statements involve
risks, uncertainties and assumptions as they relate to
future events and therefore depend on
circumstances that may or may not occur.
Investors should understand that general economic
conditions, industry conditions and other operating
factors may affect WEG's performance in the future
and lead to results that may differ materially 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 Laurence Beltrão Gomes, Finance and
Investor Relations Officer; Wilson Watzko, Controller
Officer and Luís Fernando Oliveira, Investor Relations
Manager.
Please Mr. Laurence Gomes may start the call.
Page 1 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English _________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Good morning everyone. It is a pleasure to have you
to talk about the results of 2Q13. I am briefly going
to mention the main points about this quarter
including some details on growth and the
performance of revenues and then Luís Fernando is
going to talk about costs, Ebitda, working capital and
investments and then we are going to open for the
Q&A session.
So we are going to start on slide number 3 and I
would like just to draw your attention to two points:
the first is the growth of revenue of 11.2%, a slight
acceleration compared to the rate we had in 1Q13
but still below our usual numbers. Our expectation is
for us to see, continue to see this gradual
acceleration in the second half of 2013.
The second point is the continuous recovery in
profitability and margins. We can see in terms of
absolute numbers and in our margins, gross margin,
Ebitda and net margin. The recovery of margins is a
gradual process but it seems to be very consistent.
On page 4 we show the evolution of our net
operating revenue along the quarters. Even adjusted
to nonrecurring events growth was about 9%. The
good performance in the domestic market, organic
growth of 15.9%, can be explained by the higher
competitiveness in markets with short-term cycle,
serial products that gained competition against
imported goods.
The devaluation of the exchange rate has an impact
that is positive in the revenues measured in reals;
but we have to remember that the US dollar also
valuated compared to several currencies in the world
and that somewhat explains the decrease of our
revenues in the external market measured in dollar
that had a drop of 1.9%.
So we think of challenges for growth of 2013 but
that does not jeopardize our commitment of reaching
revenues of R$ 20 billion by the year of 2020. We
are completely confident about the opportunities that
we identified in the process when we designed the
2020 WEG project and we are continuing to work to
seize the opportunities at the most.
Page 2 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English On slide number 5 we have a distribution of our
revenues according to the different business areas.
So the revenue breakdown here: serial products,
short-cycle products really stood out; these are
those machinery for machine and equipment
industries and also domestic use. We had a positive
effect of the exchange devaluation for the domestic
market.
However we do not see major changes in the
engineering long-cycle products more related to the
process industry and in these cases the investments
in expansion of production capacity are still slow
Brazil and overseas.
In GTD we have positive signs in the prices of
transmission and distribution products and probably
the energy auctions that we are going to have in the
second half of this year will increase demand,
although the current pace is still very slow.
On page 7 we have our Ebitda and we again think of
the growth of our Ebitda margin. We have been
talking about that, it is a very consistent growth.
Now I am going to turn it over to Luís Fernando to
continue the presentation. Please Luís Fernando.
And on page 8 we have the evolution of working
capital with a percentage of net revenue along the
years. We have been drawing your attention to a
trend of drop in working capital. In this quarter
specifically it is slightly higher; but still we believe that
the trend is for it to go down.
_________________________________________
Mr. Luís Fernando Oliveira – Investor Relations
Manager
Well hello good morning everyone. We are going to
page 6. Here we have the breakdown of our
production costs in comparison to 2Q12. Again we
had an increase of gross margin of 2.6 p.p.
compared to 2 in 2Q last year reaching 32.8%. The
reason for the good performance was the exchange
devaluation; better costs; the reduction in taxes in
the payroll and the sale of a non-operating property
in Hortolândia, São Paulo.
The growth of working capital is expected in 2Q, it is
traditionally happens and in addition we have the
effect of the devaluation over the assets received in
foreign currency. But we are still seeing an
expansion in the return on capital invested.
Page 3 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English We want to grow in competitiveness at any time and
the results show that we are on the right pathway.
With that I close our presentation and we can open
for Q&A. Please operator you may go on.
_________________________________________
Q&A Session
Operator
Finally on slide number 9 we have our Capex
program in organic investment. Our expectation is to
invest approximately R$ 265 million in 2013 in
expansion and increase of production capacity.
I am going to close presentation and now Laurence
is going to make the final remarks.
Thank you. Ladies and gentlemen we will now start
the Q&A session. Once again we would like to
remind you that this conference call is being
conducted in Portuguese with simultaneous
translation into English. If you want to ask a question
please press star one and to withdraw your question
from the list press star two.
Our first question comes from Alexandre Falcão,
HSBC.
_________________________________________
Mr. Alexandre Falcão – HSBC
Good morning Laurence, Luís Fernando. My
question has to do with the dollar effect that you
already felt. First I would like just to know how long
your cycle is, so when we are going to start to see
the impacts of a lower... I am sorry, a higher dollar
amount.
_________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Well, before we open for Q&A I would just like to
reinforce some points: first we continue confident in
the market opportunities that are available for a
company such as WEG and that is why we believe
that the aspirations of the WEG 2020 plan are
completely accomplishable. Our opportunities are in
organic growth and also by means of acquisitions
and projections that can bring to us new products,
markets and technologies to our business. We work
always continuously in the two fronts.
And secondly if you see any benefit in the decrease
of tariff barriers for steel in your next quarter and if
that has had an impact for more competitive prices
already. Thank you.
_________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Well thanks Falcão for your question. I think it is
important to mention that the average exchange rate
was 2.06; if we continue at this level of 2.25 we do
believe that we are going to have a second half of
the year that is going to be better for WEG
compared to the first half of 2013, a direct impact
and also an indirect positive impact because we are
going to have more competitive products in our
domestic OEMs and also a higher competitive
Page 4 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English position for WEG in both the external and the
domestic market.
Also it is important to highlight that part of our
production costs are also tagged to the dollar (a
small part of that) and so the effect is not completely
direct; but I think the message is that we believe that
the second half of the year is going to be better for
WEG if we compare to the first half of the year.
auctions and the business might pick up, and
perhaps along the next quarters we may see a
recovery in the demand of this industry.
_________________________________________
Mr. Alexandre Falcão – HSBC
Ok thank you very much.
_________________________________________
As for steel prices these negotiations are
negotiations of quarterly contracts or contracts every
four months. It is a very competitive environment,
you know, and of course we try to use our
bargaining power to try to come strong into
negotiations; but negotiations are also strong.
And also another point to highlight is that the whole
of the industry passes on these increases, any
potential increases are passed on to prices in a very
clear and fluid manner and we know that the world
industry does the same.
_________________________________________
Mr. Alexandre Falcão – HSBC
Ok thank you very much. Just a follow-up
specifically for GTD, for transmission and distribution
products: I should assume that because you did not
have any major investments announced in
cogeneration or new alcohol and sugar mills so GTD
continues to lose share in your pie, and so I would
like to know what do you think is the level it should
stop decreasing share?
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Operator
Just as a reminder, if you want to ask a question just
press star one.
Our next question comes from Ricardo Schweitzer
from Votorantim Corretora.
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Good morning Laurence, Luís Fernando, thanks for
the call. You gave a follow-up about the generation
business more specifically; but we have seen both in
this release and other quarters a change in tone
about the transmission and distribution area. We
were thinking about a surplus of offer in the segment
and it seems that it has changed a lot.
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Ricardo I am sorry, your question is not very clear,
the sound quality was not so good; could you
please try to speak a bit slower?
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Well Falcão, GTD is a cyclic business and it is a
business with long cycles. It may in the short time
continue to lose share. It is not as fast as other
businesses and so it is probably going to decrease
its share a bit more.
But there is not a floor for that; but it is not going to
fall too much beyond that. 20% I think is a very
reasonable level and I do not think it is going to drop
much more than that. The businesses are at a basic
level and we do not have any additional drops we
believe, quite the opposite; there is a possibility that
because of possible better prices in the energy
Can you hear me ok now?
_________________________________________
Mr. Luis Fernando Oliveira – Investor Relations
Manager
Ok.
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Page 5 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English So I had asked about the transmission and
distribution segment. We realized a slight change of
tone from you with regards to the segment, opposite
to what you had been saying in previous quarters.
You were talking about a very depressed market
because of the capacities that we have in Brazil.
And the perception we have - including Laurence's
introduction - is that the tone has changed a little.
Could you elaborate a bit more on the segment?
_________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Well, indeed transmission and distribution, the
transmission and distribution area improved this
quarter, this year altogether there was a slight
improvement in prices and there has not been a
change of tone; but we do expect it to continue to
improve.
Mr. Alexandre Falcão – HSBC
Well, thanks for the opportunity of a follow-on. I
would like you to comment about the rollout of your
wind energy segment, what you see the scenario is
like, production capacity, what you have in terms of
projects in your pipeline and what kind of revenues
we can expect from now on.
_________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Well we continue with the projects for the localization
and development of prototypes. Our negotiations
continue, they are ongoing. This segment is very
promising for WEG. We believe that we are going to
have a share in the near future that is compatible to
the share that we have in the electric machinery
market.
The major potential that we continue to have is in the
external market. We still have a capacity of
production to be occupied in the Mexico unit. This
unit was built and directed to the North American
market and it is a major potential that we have for
transmission and distribution.
But negotiations are still ongoing. There are several
negotiation fronts going on, they have not been
completed yet. There was a change in the segment
last year in terms of regulation and norms. It was a
relevant change in several aspects of this segment.
Our project continues, it is moving on and there is
really nothing new for this area.
The American market has a very obsolete network,
obsolete equipment, very old. It is a great market
and something is about to happen and it has been
so for the past three years. So we do have a positive
expectation in the external market especially due to
the investments in transmission in the United States.
So we are waiting for the energy auctions that are
going to be conducted in the second half of 2013.
This is going to be very important in terms of what
price the auctions are going to reach, what price
wind energy is going to reach. But so far everything
is within expected.
_________________________________________
_________________________________________
Mr. Ricardo Schweitzer – Votorantim Corretora
Mr. Alexandre Falcão – HSBC
Ok thank you very much.
Ok thank you very much.
_________________________________________
_________________________________________
Operator
Operator
Once again, to ask a question just press star one.
Once again, to ask the question press star one.
We would like to remind you that if you wish to ask a
question just press star one.
Our next question comes from Alexandre Falcão,
HSBC.
We are now closing our Q&A session. Now I would
like to invite Mr. Gomes for his final remarks. Please
Mr. Gomes you may go on.
_________________________________________
Page 6 WEG S.A.
2nd Quarter 2013 Earnings Results Conference Call
August 01, 2013 – 11:00 a.m. (Brasilia time)
Transcript of the simultaneous translation from Portuguese into English _________________________________________
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
Well thank you very much for joining us in this call
and have a good day.
_________________________________________
Operator
WEG's conference call is now closed. We thank you
very much for your participation, have a nice day and
thanks for using Chorus Call.
_________________________________________
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