WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English
Mr. Sérgio Schwartz – Executive Vice
President
Disclamer
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.
Mr. Laurence Beltrão Gomes – Finance and
Investor Relations Officer
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.
Operator: Good morning and welcome to WEG’s conference call about the results of 2012 and
4Q12.
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.
4Q12 Conference Call Page 2 February 28, 2013
Before we go on we would like to clarify that any forward-looking statements made during this conference call relative to WEG's business outlook, projections and operating and financial goals and as well as WEG’s potential future growth are based on management's beliefs and expectations and rely on information currently available. Forward-looking statements involve risks, uncertainties because they refer to future events and therefore depend on circumstances that may or may not happen.
Conference Call
2012 and 4Q12
February 28 th , 2013
Investors should understand that general economic conditions, industry conditions and other operating factors may affect WEG's future performance and lead to results that may materially differ from those expressed in such future considerations.
We would like to inform you that this conference is being recorded and at this time all participants are in listen-only mode. Later on we are going to start the Q&A session went further instructions will be provided. Should you need any assistance during the conference call please reach the operator by pressing star zero.
We would also like to remind you that the conference call will be conducted in Portuguese with simultaneous translation into English.
Today with us in Jaraguá do Sul are Mr. Sérgio
Schwartz, Executive VP; Laurence Beltrão
Gomes, Finance and Investor Relations Officer;
Wilson Watzko, Controller Officer and Luís
Fernando Oliveira, IR Manager.
To obtain the quarterly results press release or the presentation that we will be using during this conference call please go to WEG's investor relations page at www.weg.net/ir .
Please Mr. Schwartz you may go on.
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English
Agenda
„
„
„
„
Sérgio Schwartz – Executive Vice President
„
„
Highlights
Revenues growth and performance
Laurence Beltrão Gomes – Finance and Investor Relations Officer.
„
„
„
Costs, Expenses, EBITDA
Cash Flow
Capex
Sérgio Schwartz – Executive Vice President
„ Outlook and final remarks
Questions and answers have this very well-planned in our strategic plan
WEG 2020, and 2012 was a year when we took an important step and the concrete step towards that.
The second aspect is our Ebitda growth rate that was slightly above revenue. That confirms WEG's discipline to improve competitiveness and results both in Brazil and also in foreign markets. The Ebitda margin for 2012 is very close to 2011; but again the curve of recovery we had along the year makes us very proud.
4Q12 Conference Call Page 3 February 28, 2013
Mr. Sérgio Schwartz – Executive Vice
President
Good morning everyone. It is a great pleasure to have you joining us in the conference call of our earnings of 4Q12 and year 2012. Our agenda today use quite objective: I am going to talk about the highlights of 2012, a difficult year but very positive to WEG in our evaluation; also I am going to talk about our growth and development of revenue; then Laurence Beltrão Gomes, our
Financial and IR Officer is going to talk about costs, expenses and Ebitda and later on we are going to open for your questions.
I also would like to mention that the company continues to seek capital efficiency aiming to have a better return on capital investment.
Laurence is going to talk about that in more detail, but basically we are being able to increase revenue without increasing Capex or working capital.
Net Operating Revenue
Annual Evolution
In US$ million
External Market
Domestic Market
4,502
1,842
-6%
4,211
1,684
4%
4,392
18%
1,722
5,189
19%
2,286
6,174
3,157
Highlights
Yearly Figures
2,660 2,526 2,670
2,903 3,017
Net Operating Revenue
Domestic Market
External Markets
External Markets in US$
Gross Operating Profit
Gross Margin
Quarterly Net Income
Net Margin
EBITDA
EBITDA Margin
EPS
2012
6,173,878
3,016,662
3,157,216
1,609,721
1,880,856
30.5%
655,979
10.6%
1,053,545
17.1%
1.0573
2011 % 2010 %
5,189,409 19.0% 4,391,973 18.2%
2,902,958 3.9% 2,670,443 8.7%
2,286,451 38.1% 1,721,530 32.8%
1,361,689 18.2% 982,835 38.5%
1,556,051 20.9% 1,386,952 12.2%
30.0%
586,936 11.8%
11.3%
31.6%
519,782 12.9%
11.8%
882,340 19.4%
17.0%
0.9461
11.8%
789,110 11.8%
18.0%
0.8371
13.0%
Figures in R$ Thousands
2008
4Q12 Conference Call
2009 2010
Page 5
2011 2012
February 28, 2013
On slide 5 we have the comparison of our net operating revenue in the past five years divided into domestic and foreign markets. Once again our growth was attained in complex, challenging economic scenarios with the continuity of the crisis in Europe and low economic activity both in Brazil and also in developed countries.
4Q12 Conference Call Page 4 February 28, 2013
So on page 4, on slide 4 we have the key numbers of the year of 2012 compared to 2011 and 2010. On this slide I would like to draw your attention to three numbers: the first is the growth in revenue, a growth of 19% that shows that the company has been able to implement its expansion project in a very consistent manner. As you know we want to grow and we
In Brazil the investments in expanding our industrial capacity are low and our strategy to expand the product portfolio adding new components and providing integrated systems has been crucial for our development. We have been able to attain more space in the segments in which we did not have a very good share some years ago, as oil and gas and naval
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English   construction, as well as in more traditional segments as mining for example, where our portfolio of solutions is more and more thorough and integrated.
Now going to page 7 we have the comparison of the net operating revenue quarter on quarter in
2011 and 2012. What is important to highlight here is that our performance in the external market has remained strong as a result of
In the foreign markets the result of this expansion strategy in our portfolio has been structural factors that really set us apart in the market as agility, closeness to the client, very positive. We have been attaining more market share, we are going into new segments investments in brands, commercial structures and also application engineering and and we are capturing important clients. What we highlight here is the performance in North customization of products and solutions with research, development and innovation.
America, although our performance was satisfactory in almost all the regions in the All this combination of a strong commercial, globe. industrial structure allied to agility in seizing opportunities is responsible for the consistency
Highlights
Quarterly Figures of WEG's growth in the external market in recent years.
Net Operating Revenue
Domestic Market
External Markets
External Markets in US$
Gross Operating Profit
Gross Margin
Net Income
Net Margin
EBITDA
EBITDA Margin
EPS
Q4 2012
1,662,258
774,533
887,725
431,141
528,641
31.8%
183,157
11.0%
300,603
18.1%
0.2952
Q3 2012 %
1,613,067 3.0%
798,626 -3.0%
814,441 9.0%
401,460 7.4%
Q4 2011 %
1,468,551 13.2%
781,938 -0.9%
686,613 29.3%
380,772 13.2%
498,587 6.0%
30.9%
184,756 -0.9%
11.5%
445,686 18.6%
30.3%
156,248 17.2%
10.6%
284,276 5.7%
17.6%
258,210 16.4%
17.6%
0.2978
-0.9% 0.2518
17.2%
Figures in R$ Thousand
Business Areas
Revenue breakdown
In R$ million
7%
13%
6%
11%
6%
11%
24%
23% 25%
6%
10%
24%
7%
9%
23%
6%
9%
22%
8%
10%
25%
7%
10%
27%
57%
60% 58%
60% 61%
63%
57%
Net Operating Revenue
Quarterly Evolution
In US$ million
External Market
Domestic Market
1,469
1,277 1,317
1,126
47%
43% 44%
41%
1,529
1,613
55%
4Q12 Conference Call Page 6 February 28, 2013
On page 6 we have a comparison of the main numbers in 4Q12 and here we would like to draw your attention of the gradual recovery that we had in our Ebitda margin, a positive curve of growth from our point of view that shows that along the year we had a gradual improvement of this margin.
1,370
48%
52%
50%
1,662
53%
1Q11 2Q11
Industrial Equipment
4Q12 Conference Call
3Q11 4Q11
GTD
Page 8
1Q12
Domestic Use
2Q12 3Q12 4Q12
Paints & Varnishes
February 28, 2013
Now going to slide number 8 we have our breakdown of revenue by business areas. We have been highlighting that our business model is based on operating flexibility, which enables us to very fast adjust our production efforts, distribution, offers as well, to respond to the market and concentrate efforts and resources in those activities that are more appealing at a certain point in time. Because of this flexibility we have been able to respond fast to the changes in demand as you can see in the changes in percentages in the different business areas.
59% 57% 56% 53% 52% 48% 50% 47%
Q4 Q1
I am going now to turn it over to Laurence to continue the presentation.
Q1
4Q12 Conference Call
Q2
2011
Q3
Page 7
Q2
2012
Q3 Q4
February 28, 2013
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English
Costs of Goods Sold Main impacts on EBITDA in R$ million
454.3
638.3
Materials
66% Materials
65%
2012 2011
882.3
530.2
Volumes,
Prices &
Product Mix
Changes
FX Impact on
Revenues 109.5
COGS
(ex depreciation) Selling
Expenses
50.4
General and
Administrative
Expenses
15.1
Profit Sharing
Program
1,053.5
Others Costs
10%
Depreciation
4%
Labor
21%
Other Costs
9%
Depreciation
4%
Labor
21%
4Q12 Conference Call Page 9
February 28, 2013
EBITDA 2011
4Q12 Conference Call Page 10 prices and changes in the product mix and the exchange devaluation gave us an additional positive impact of R$ 454 million.
EBITDA 2012
February 28, 2013
On page 10 we have the analysis of the variation of each of the components of our Ebitda. You see that in 2012 we had an expansion of R$ 530 million because of an increase in volumes,
Well good morning everyone. We are going to go to page 9 that brings the breakdown on the cost of products sold in 2012 in our comparison to
2011. Again no significant changes in this breakdown. In 2012 there was an increase of 50 basis points in gross margin compared to the previous year going to 30.5%.
The main factor that increased our gross margin was the relative stability in the prices of materials and transformation costs; the effects of the average valuation of 14% in export revenues and with regard to the cost of materials there was a negative impact of the exchange variation in copper and steel prices offset by the positive effect of the more devaluated real in the external market.
The cost of products sold excluding depreciation increased by 638 million and here we include prices, volumes and the exchange variation per se that also affects our costs. For admin expenses we had a quite stable growth growing less than the growth in revenues because of the gains in productivity. Higher expenses in sales also reflected a higher growth in the external market. The net effect was an increase in 19.4% of Ebitda with an absolute variation of R$ 171 million to reach 1.053 billion with an Ebitda margin of 17.1%.
Working Capital
For WEG also a relief on taxes in the payroll represented a very important saving in the year.
The units Linhares, Espírito Santo and Hosur in
India had a low contribution in the dilution of fixed costs at first, but they will continue to evolve with the gradual occupation of the production capacity in such places.
In % of Net Revenue
50,0%
40,0%
30,0%
20,0%
Working Capital
Clients
Inventories
10,0% Advances from
Clients
Suppliers
0,0%
4Q05
4Q12 Conference Call
4Q06 4Q07 4Q08 4Q09
Page 11
4Q10 4Q11 4Q12
February 28, 2013
On page 11 we see the evolution of our working capital as a percentage of net revenue in recent years. This chart shows the increase of
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English   efficiency in capital that was mentioned before.
You can see that after a period of expansion the working capital showed clear decreasing trend along 2012 even with the strong expansion of revenue. You see that this increase could be even faster if market conditions were a bit more favorable in the long-cycle products, in which absences in payment are more common from clients.
Strategic Planning WEG 2020
Aspirations and strategic direction
18%
19%
Capex Program
In R$ million
9.3%
10.2%
Capex
% Net Revenue
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
4Q12 Conference Call Page 13 February 28, 2013
8.1%
7.4%
5.8%
457
5.4% 5.3%
Mr. Sérgio Schwartz – Executive Vice
President
3.7%
3.6%
3.9%
305
126
206
146
111
226 233
188
238
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
4Q12 Conference Call Page 12 February 28, 2013
On slide 12 we have another aspect of this effort on capital efficiency. We have been able to expand revenues with relatively lower investments in recent years. This is possible because we have operations and facilities that can still improve capacity without major additional investment and just better projects.
Also you can see that there was a lower intensity of Capex in recent years. When we have more efficiency in the use of capital we can have a better recovery of return on investments, even better than margins.
Well very well then. Before opening for Q&A I would like to draw your attention to the chart on page 13. A year ago we had our strategic plans for WEG 2020 and said that we wanted to have a 17% number here in these years and we are already taking the full measures to be able to reach the plan, which increases our confidence that we are going to reach the plan in the future.
We know there is still much to be done. There are concrete opportunities and we have consistent competitive advantages but we have to keep our discipline in the execution of projects. We have to keep competitive, we have to maintain our leadership position and move on continuing our project to expand in the foreign market.
Now I am going back to Sérgio for the final part of the presentation.
Finally I would like to talk a bit about 2013, first with regards to investments in the expansion of production capacity and plants modernization.
We expect in 2013 to invest approximately R$
265 million on that and the expansion of working capital should be approximately R$ 87 million. We understand that we can have the domestic market responding to stimuli that are being given from the government in recent months being a bit more dynamic, better exchange rates and the tax effect should start yielding results that will really meet the expectation of the company of having moderate growth but robust in the domestic and foreign
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English   markets. As a whole we are very confident that
2013 can be a year for us to continue our expansion project and improve our results.
Now I am going to ask the operator to open for the Q&A session
And second I would like to understand a bit more about your margins. You had an increase in margin expansion year-on-year and is there any risk of this margin to decrease or you think you had an inflection point and you are having an ascending trend from now on?
Contacts
ƒ
Laurence Beltrão Gomes www.weg.net/ ir
Finance and Investor Relations Officer laurence@weg.net
ƒ
Luís Fernando M. Oliveira
Investor Relations Manager
+55 (47) 3276-6973 luisfernando@weg.net
twitter.com/weg_ir
4Q12 Conference Call Page 14
Mr. Sérgio Schwartz – Executive Vice
President
February 28, 2013
Well thank you very much Daniel for your question. As for the first question we do have expectations in the domestic market and we believe that we are going to have higher levels of growth that we had in 2012. We believe that the quality of our backlog for long-cycle products in the beginning of the year are better than what we had in the previous years and therefore we hope we can have better numbers.
But I would say that it is very hard to talk about
Q&A Session double digits in the domestic market at this point and especially if you think of short-cycle
Operator
Well thank you very much. Ladies and gentlemen 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. products, because we do not have very high visibility this year. But again, there is an expectation of larger growth in the domestic market and this, we believe, has to do with the government measures that are being taken in terms of reducing taxes in our payroll, simplifying some tax credits and all that we
If you want to ask a question please press star one and to remove your question from the list press star two. We would like to remind you that if you want to ask a question just press star one. believe will bring us benefits in the future and perhaps will make the market a bit more dynamic in Brazil.
Having already been through very aggressive
The first question comes from Daniel Gewehr from Santander.
Mr. Daniel Gewehr – Santander expansion rates in the foreign market in recent years, we believe that we are going to continue to grow; now the relation between foreign and domestic market in terms of growth can be a bit more balanced in 2013.
Good morning everyone, congratulations on the results of 4Q. I have two questions, first I would like to understand a bit, you talked about moderate growth in the foreign market but recovery of Brazilian clients. Do you see that you are having more orders? Do you think you are going to have a double-digit growth in 2013 in the domestic market?
As for margins well, WEG has been working very, very hard to reduce costs, rationalize its expenses, developing new products, new applications, expanding its product portfolio to capture better margins. So we have lots of initiatives that are going on that may lead to better results and this is, again, what we expect for this year: we want to consider the current
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English   numbers as an inflection point and from now on that we are going to have better numbers.
But we also have to consider the Capex investments that we had in the past that were quite substantial especially in the years of 2007,
2008, can bring better results now to us as we are going to have a growing maturity in the most recent units of the company and better use of our production capacities. So we are very hopeful that the results are going to just get better.
Mr. Daniel Gewehr – Santander
Ok thank you very much.
Well Lucas thank you very much for your questions. If you allow me I am going to start by answering your second question and then Luís
Fernando can answer your first question. Well, our expectation of growth in our scenario of
WEG 2020 is to capture approximately two thirds of growth organically and one third by means of M&A. In fact we in WEG have been continuously analyzing opportunities for acquisitions.
I cannot tell you right now that there is something to be released in the short term; but in each one of our business units there are analyses going on and we remain with the guideline of seeking expansion of our product portfolio having a better positioning in the market, having new technologies and also considering the alternative of acquisitions.
So that remains in our plans and acquisitions may happen regardless of the geography.
Operator
Our next question comes from Lucas Brendler from Geração Futuro. Mr. Luís Fernando Oliveira – Investor
Relations Manager
Mr. Lucas Bendler – Geração Futuro
Hello, good morning everyone. Also I would like to congratulate you on the earnings release of
4Q and year of 2012. These were quite positive results compared to the market.
But I have two questions, one that is related to the number you released about investments. My question is: the investment of 260 million approximately is it including 80 million of working capital or you are talking about two different numbers and so you would have total investment considering the two accounts of R$
350 million? So this is my first question.
And Lucas just to add on to this question well... the first question I am sorry, you asked about the different numbers, they are two different numbers: we have a budget for the modernization and investments in fixed assets and you have investments of our working capital, which are an additional 87 million and then we have a small portion for investments in software - but it is a small number about R$ 3.8 million. But they are different numbers.
Mr. Lucas Bendler – Geração Futuro
Ok thank you very much and once again congratulations.
And the second question has to do with your long-term plans, WEG 2020. You had mentioned not only organic but also inorganic growth and if you could give us an update about the search for assets, prices in the market and if you have anything in the pipeline to be implemented in
2013.
Mr. Luís Fernando Oliveira – Investor
Relations Manager
Mr. Sérgio Schwartz – Executive Vice
President
We have a question in our webcast, question from Sérgio Martins about what WEG product is the most successful in the foreign market.
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English
Mr. Sérgio Schwartz – Executive Vice
President
Mr. Daniel Gewehr – Santander
Very well. I would say that one of the very positive characteristics of WEG's business is that we have a very large diversification of products.
We do not count on one single product or a few single products to have a significant expansion of our businesses - but of course that we do have our favorites.
Well, if you allow me I just have two follow-ups: you talked about long-term growth, two thirds organic and one third coming from M&A. When you look into 2013 is this rule maintained or you have an installed capacity to grow 19% without the need of M&A? This is my first question.
And the second question is about GTD, Brazil's wind generation. What has changed after the government interfering in contracts? Is it a negative point or it does not change much in the long term for you?
Today WEG has a very strong positioning in electric industrial motors, but even in electric industrial motors we have been able to capture very interesting opportunities with new product lines, for example electric motors W22 Super
Premium, where we were able to explore opportunities that came up as a result of new laws on minimum efficiency of products that are taking place at different times but in different markets and that really motivate customers to use products with higher efficiency in their installed capacity and not only because of the law itself but also because of analyses of return on investment.
Also the ecologic appeal, saving energy, all that motivates clients to seek for more efficient, economical motors with alternatives that today
WEG can offer in a really differentiated manner in the market.
Mr. Sérgio Schwartz – Executive Vice
President
Well Daniel I can tell you that today we do have manufacturing capacity to have robust growth regardless of M&As; but again M&As are part of the Group's strategy to expand its portfolio, to seek for new technologies, everything I told you before. For 2013 we may have any move with this regard, but I cannot tell you for sure that this is going to happen, at least not at this point.
This is a very interesting question and I am going to extend myself a little in this answer and just make a comment on the subject: today WEG has product lines in industrial electric motors with the highest yield in the foreign market, in the world market. This line I mentioned, the Super
Premium line, excels even the requirements of laws in effect of the strictest countries in terms of energy and that has created additional demand and it has been quite successful overseas.
So what I can tell you is that we are in a very comfortable position because we can explore different possibilities of growth and in 2013 it may be that we are going to have something along the year, we may have an acquisition even later in the year, and then it will not reflect in the numbers of the year per se but only for subsequent years. So in 2013 we are not counting on a major weight coming from M&As for the numbers that we want to deliver.
Operator
Our next question comes from Daniel Gewehr from Santander.
As for your second question we still have not felt any change in the market due to the changes that we had in the law to be quite honest; but of course there is high expectation that in the midterm that can impact the capacity of important clients to move on with their investment programs and consequently we might have an impact in the future. But right now we have not really experienced that.
Mr. Daniel Gewehr – Santander
Ok thank you very much.
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WEG S.A.
4th Quarter 2012 Earnings Results Conference Call
February 28, 2013 – 11:00 a.m. (Brasilia time)
Transcript   of   the   simultaneous   translation   from   Portuguese   into   English
Operator
Once again if you want to ask a question just press star zero... forgive me, if you want to ask a question just press star one.
We are now closing the Q&A session. I would like to turn the call over to Mr. Schwartz for his final remarks. Please Mr. Schwartz you may go ahead.
Mr. Sérgio Schwartz – Executive Vice
President
Well I would like to thank you very much once again for joining us this conference call and again just stress some points: the results show that the pathway we have identified in our 2020 plan is the correct pathway for us to meet our objectives. We have opportunities for organic growth but we continue seeking operations that will bring new products, markets and technologies to our business, increasing the pace of growth of our company.
And being competitive is key for WEG. We have to be competitive at any market under any conditions. We have done a lot but we know we still have much to be done to improve our productivity: reducing, rationalizing costs, expenses, innovating, expanding capacity, reinforcing the image of our brand, capturing more value in our operations, and WEG has been pursuing that and will continue to do so with lots of discipline.
Well, thank you very much and have a good day.
Operator
WEG's conference call is now closed. Thank you very much for joining us and have a nice day.
Thank you for using Chorus Call.
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