WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Operator: Good morning ladies and gentlemen, welcome to WEG's conference call to announce the
results of 2Q11. As a reminder this conference is being recorded and all participants will be connected in
listen-only mode. Later we will conduct a question and answer session when further instructions will be
given. Should you need assistance during the call please press star zero.
Motors | Energy | Transmission & Distribution | Automation | Caotings
2Q11 Results Conference Call
July 22, 2011
2Q11 Results Conference Call
July 22, 2011
To obtain the quarterly results press release of the presentation that we will be using in this conference
please go to the investor relations page of WEG at the page www.weg.net/ir.
Disclaimer
The statements that may 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.
2Q11 Results Conference Call
Page 2
July 22, 2011
Before proceeding we would like to clarify that any possible statements made during this conference call
pertaining to WEG's business prospects, projections and operating and financial goals and potential future
growth are forward-looking statements based on information 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 happen.
Investors should understand that 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.
Today with us in Jaraguá do Sul we have Mr. Laurence Beltrão Gomes, Finance and Investor Relations
Officer; Mr. Vilson Vatzko, Controller and Mr. Luís Fernando Oliveira, Investor Relations Manager. Please
Mr. Laurence, you may proceed.
Page 1 WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Mr. Laurence Beltrão Gomes: Good morning everyone. It is a pleasure to hold this conference call to
announce the results of 2Q11 of WEG. We will try to make a fast and objective presentation and then we
will open for Q&A.
Highlights
Second Quarter, 2011
Gross Operating Revenue
Domestic Market
External Markets
External Markets in US$
Net Operating Revenue
Gross Operating Profit
Q2 2011
1,510,276
936,061
574,215
360,639
1,277,258
381,437
Gross Margin
Quarterly Net Income
29.9%
27.6%
154,557
121,564
12.1%
10.8%
215,579
164,808
16.9%
14.6%
Net Margin
EBITDA
Q1 2010 Growth % Q2 2010 Growth %
1,343,137 12.4% 1,227,421 23.0%
862,863
8.5%
831,210 12.6%
480,274 19.6%
396,211 44.9%
288,211 25.1%
221,100 63.1%
1,126,117 13.4% 1,013,015 26.1%
310,662 22.8%
309,812 23.1%
EBITDA Margin
30.6%
116,522
27.1%
32.6%
11.5%
174,015
30.8%
23.9%
17.2%
Figures in R$ Thousands
2Q11 Results Conference Call
July 22, 2011
Page 3
So you may go to slide number 3 where we would like to highlight a few points. First of all the strong
growth of 26 in net revenue in 2Q which confirms the growth trend which is quite clear. Since 3Q10 we
have been showing a two-digit growth in net revenue, that is we have found the path towards consistent
growth.
Second this growth is a result of a general growth in business volume; the resumption of demand in many
markets; entry into new markets and consolidation of revenues of the businesses we acquired. Once
again there has been robust growth in Brazil and especially in the foreign market.
Number 3, after a combination of many different negative effects in 1Q we worked intensely to minimize
those effects, compensate them with other actions such as additional reductions in costs and expenses
and this led to a 24% growth in Ebitda and a 32.6 growth in net income. And it is already possible to note
a considerable recovery of margins (both Ebitda margin, 17%; and also the net margin which was 12%).
Highlights
First semester of 2011
Gross Operating Revenue
Domestic Market
External Markets
External Markets in US$
Net Operating Revenue
Gross Operating Profit
Gross Margin
Quarterly Net Income
Net Margin
EBITDA
EBITDA Margin
06M11
2,853,413
1,798,924
1,054,489
648,850
2,403,375
692,099
Growth %
06M10
21.0%
2,358,967
1,632,509
10.2%
45.2%
726,458
402,270 61.3%
23.6%
1,944,922
11.9%
618,425
28.8%
31.8%
276,121
236,167
11.5%
12.1%
380,387
355,765
15.8%
18.3%
16.9%
6.9%
Figures in R$ Thousands
2Q11 Results Conference Call
Page 4
July 22, 2011
Now please on slide number 4 we are presenting the comparison of the semesters where we can see that
there has been a 23.6% growth in net income and sales performances in Brazil and overseas have shown
to be very consistent along the year.
On the other hand the recovery of profitability will be gradual because of the appreciation in the exchange
rate, product mix and competitive environment. This is a challenging environment considering a scenario
Page 2 WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English of fierce competition as we highlighted in other opportunities. The mix of products sold has been
recovering, but this recovery is still slow in the businesses of power generation.
At the same time structural prospects are still very attractive or appealing. The growing importance of
power efficiency. With the recent publication of ISO 50001 standards about power efficiency and its
management, energy renewable sources are becoming increasingly more competitive and attractive and
we have broad room for growth in many different markets expanding our physical presence and leveraging
our brand and expanding our product line.
Gross Operating Revenues
Domestic Market
in R$million
-13%
925
701
2T07
13%
3%
32%
2T08
2Q11 Results Conference Call
808
831
2T09
2T10
936
2T11
July 22, 2011
Page 5
On slide number 5 you can see the comparison of the gross operating revenue in the domestic market in
2Q along the past few years. This quarter we had a 13% growth over last year. We exceeded the revenue
of 2Q08, the highest point so far.
The Brazilian industrial activity is still at a high level, even though the expansion is now occurring not so fast
compared to the beginning of the year. We believe that Brazil is now starting a cycle of long-term
investment in industrial capacity.
If revenues have already exceeded 2008 the expansion takes place in different paces in different
businesses. This is particularly clear in the area of power generation, which is on await until the A-3
auctions for reserve energy which will take place in August. 582 ventures have registered with a capacity
of 20,000 MW with a highlight to wind generation and thermal gas generation.
Gross Operating Revenues
External Market
In US$ million
External Market in US$
1,9807
2,0705
1,6529
Quarterly Average FX
1,7920
1,5922
63%
-13%
17%
4%
361
211
Q2 2007
2Q11 Results Conference Call
246
213
221
Q2 2008
Q2 2009
Q2 2010
Page 6
Q2 2011
July 22, 2011
On slide number 6 you can see the growth in the foreign market, where there has been expressive growth
in the foreign market. The gross operating revenue in 2Q has been the greatest of any quarter in WEG's
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2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English history as measured in dollars. These are very strong, positive signs. We are growing in spite of the
difficulties caused of the overvalued real and the macroeconomic difficulties in many different markets.
In mature economies we have been growing, winning market share, incorporating new products and
services, leveraging our brand and using competitive advantages of productive flexibility and in terms of
customer service. The operations acquired over the past quarters are becoming more dynamic as they are
incorporated. This is very clear in the case of Zest in South Africa where we have been executing our
business plan successfully. We have gained access to businesses that neither of the parts (WEG and
Zest) used to have before independently.
Business Areas
Gross Revenues Breakdown
in R$ million
1.510
1.119
5%
12%
24%
7%
58%
2Q 2007
1.331
5%
12%
1.227
7%
17%
35%
25%
48%
51%
2Q 2009
2Q 2010
26%
57%
2Q 2008
Industrial Equipment
2Q11 Results Conference Call
1.250
6%
11%
6%
11%
23%
60%
GTD
Domestic Use
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2Q 2011
Paints & Varnishes
July 22, 2011
On slide number 7 you can see the mix of products sold. Consumer goods are going through a moment
of seasonal slowdown and some accommodation. The good foundations are still present; but the
extension of credit, income and unemployment in Brazil, which encourages or fosters consumption of
durable goods, are more moderate. We believe that this market is operating at a new level which is higher
than before and its organic growth has been above the Brazilian economy.
In terms of industrial electro-electronic goods we benefit from the investments in the expansion of the
industrial capacity in Brazil especially with our operations overseas, as we said before, with the benefit
from the combination of demand recovery and market share gains.
The generation businesses are still waiting the power auction to become more dynamic. We are getting
ready to take part as a supplier of equipment at very competitive conditions in this business.
The demand conditions in transmission and distribution are much more dynamic and we have been
seeing good orders coming in.
Now I would like to turn it over to Luís Fernando to talk about the details of the numbers of our quarter.
Mr. Luís Fernando Oliveira: Well good morning everyone. Now briefly on slide number 8 you can see the
breakdown of the costs this quarter. There are important impacts explaining the changes in margin and
they are: there has been a transfer of the increase in the cost of raw materials (especially copper and steel)
that are being implemented in Brazil and abroad. These increases have already had a partial impact this
quarter.
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2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Cost of Goods Sold
2nd quarter of 2011
Other Costs
34%
Steel &
Coper
43%
Other Costs
31%
2Q11
Depreciation
5%
2Q10
Depreciation
6%
Other
Materials
21%
Other
Materials
17%
2Q11 Results Conference Call
Steel &
Coper
43%
July 22, 2011
Page 8
The second point is the growth of occupation of capacity production in the new units (especially Linhares
and in India) which are close to breakeven or to operational balance. We have not yet reached the ideal
dilution of fixed costs, but we are in that path. The mix of products sold, as discussed before, are also
gradually recovering and lastly a reduction in volatility of prices of raw materials and exchange rate this
quarter has also contributed to the recovery of margin. The smaller volatility improves operational
conditions and makes it possible for production strategies to work better.
Main impacts on EBITDA
in R$ million
326,1
43,3
18,6
FX Impact
on Gross
Revenues
190,3
Deduction
on Gross
Revenues
21,7
1,4
COGS
Selling
Expenses
174,0
Volumes,
Prices &
Product Mix
Changes
EBITDA Q2 10
2Q11 Results Conference Call
General and
Administrative
Expenses
9,3
215,6
Profit Sharing
Program
EBITDA Q2 11
Page 9
July 22, 2011
On slide number 9 you can see Ebitda variation. The positive variations in growth with increase in
products, sales volume, product mix and incorporation of acquisitions of R$ 326 million being set off by
the appreciation of the exchange rate, which had a negative effect of R$ 43 million; a negative effect of
Cogs of R$ 190 million (excluding depreciation). We have been working intensely to reduce costs and
increase natural protection with more imports of raw materials and production abroad.
The efforts in controlling operational expenses have been successful and the net effect was the growth of
24% in Ebitda with an absolute variation of 41.6 million reaching 215.6 million with an Ebitda margin of
17%.
Page 5 WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Cash Flows
In R$ million
356,6
2.553,0
Operating
325,3
90,3
Investing
Financing
2.674,6
Cash 4Q10
Cash 2Q11
(*) R$ 226,1 million in long term securities that are considered at the cash flow from
investing activities
2Q11 Results Conference Call
July 22, 2011
Page 10
On slide number 10 we can see the chart representation of cash flow and you can see the cash
generation in operational activities still strong in spite of a higher need for investment in working capital as a
result of the growth in revenue. The cash flow of investment activity (includes long-term financial
investments) was R$ 226 million. Discounted this effect it is likely that in 2011 we will have a year of
slowdown of investments in expansion capacity.
New captures of short and long-term debt have set off the payment of dividends in 2H10. The cash
variation in 1H11 considering long-term financial investment was positive by R$ 347.7 million.
Capacity Expansion Program
in R$ million
Outside Brazil
Brazil
61,4
34,2
73,8
43,7
27,2
30,1
Q1
Q2
53,7
44,1
13,0
2,0
40,7
42,1
Q3
Q4
2010
2Q11 Results Conference Call
41,1
33,8
2,4
8,2
38,8
25,6
Q1
Q2
2011
Page 11
July 22, 2011
On slide number 11 you can see the evolution of the investment in fixed assets along the past quarters we have discussed this before. We are expecting a relative slowdown in investment in capacity expansion
in 2011 and we are working to maximize the production in recently-finalized units (our plant in India) in
generators, and high tension motors and also in Linhares (commercial motors) and we believe that these
two units will end 2011 above break-even point.
And we would like to remind you of our flexibility in speed of implementation of our investment program,
which is one of the main features of our investment program and we can respond rapidly to any demand
increase.
This closes our presentation and we may now move to our Q&A session and we turn it back over to the
operator for our Q&A session.
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2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Contacts
www.weg.net/ri
ƒLaurence Beltrão Gomes
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
2Q11 Results Conference Call
Page 12
July 22, 2011
Q&A Session
Operator: Excuse me ladies and gentlemen; we are now going to start our Q&A session. If you want to
ask a question please press star one. If you want to take your question from the queue please press star
two.
Excuse me. Our first question comes from Mr. Nicolai Sebrell from Morgan Stanley.
Mr. Nicolai Sebrell: Good morning. I have a question about inflation: are you still having problems with
inflation for for the example raw material? Any increase in the costs of payment? This is the first question.
Question number two can you tell me about funding? Do you have any challenges in your funding
strategies or loans? Just for me to understand the outlook, because in other manufacturing sectors or
industries (for example trucks) loan policies are likely to change now and I was wondering whether in your
industry you are faced with the same trend.
Mr. Laurence: Hi Nicolai. First of all the inflation in costs in this quarter has been more stable, our prices
have been more stable (especially copper), there has been some reduction in steel. But as we said in our
last call these increases in costs (especially in raw materials) they affect the industry as a whole and they
are gradually transferred to prices and this is a natural movement and it is spread across the whole
industry.
In terms of funding I think that what happened with the two programs (the PSI that has been renewed to
the end of the year) this has created major demand for this type of loan and has attracted companies that
did not usually... our customers did not usually take these types of loans or these credit lines and they
learned how to use those lines for funding.
I do not believe that there is any indication or concrete indications so far that loans or credit lines will be
reduced for the funding of machinery and equipment. I think that everything that has been going on and
everything that has been said we are expecting an incentive plan for the manufacturing industry, and all
expectations and speculations so far in terms of reducing taxes for the manufacturing industry in terms of
innovating, of encouraging, fostering technological innovation will be the two pillars for this plan and we do
not think that credit lines will be removed in this case - but this is just speculation.
Mr. Sebrell: Thank you very much.
Operator: Excuse me. Our next question comes from Mr. Cassio Lucin from Safra.
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2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Mr. Cassio Lucin: Good morning. I have two questions, the first one can you tell us your portfolio orders?
Can you share with us the numbers in terms of growth and qualitative, especially in terms of transmission
and distribution?
The second in terms of the price scenario that you are seeing. What is the activity in the market? I do not
know if BB, Siemens... I was wondering this type of thing.
The third question do you have any target in terms of cost reduction for this year? You mentioned cost of
reduction, expenses... any metrics for us to use from now on?
Mr. Oliveira: Let us start from the first one. This is particularly healthy in terms of transmission and
distribution, this is an area of infrastructure. So any investment, even more traditional investments will need
to count on transmission and distribution. This is particularly clear in investments more directly related to
the growth of energy - so all the investment that we have been seeing recently, all these wind farms.
We do not yet have a direct connection in terms of generation;
distribution this has heated up our business and so we are very
infrastructure for substations even in wind farms, where we did not
which will eventually change - but they have had strong indications
revenue in the future months.
but in terms of transmission and
successful in terms of selling this
yet have products for generation and this will have an impact in our
Mr. Lucin: But how much? 15%, 20% year on year?
Mr. Oliveira: Well, this is always long-term. We prefer to be slightly more careful, we do not yet have a
formal guidance. What we can say and what we have noted is that there has been a strong acceleration in
demand especially in transmission and distribution, which does not apply to generation.
From the standpoint of prices and going back to your previous question in terms of transfer of prices,
obviously it happens because there are cost increases and they are widespread through the industry. It is
impossible to manufacture what we make, generators, without using copper and steel. So this affects any
manufacturer anywhere in the world. So obviously these prices are transferred and we always insist that
we cannot do it as fast as these raw materials (especially commodities that are traded in the stock
exchange) we cannot keep up with them, cannot be as fast.
And we also have an additional care of trying to analyze how the market is behaving. So we were
considering the capacity the market has to absorb those price increases. So obviously price increases are
being implemented. Part of that is already reflected in the results of this quarter and there is still more to
come up. But so if prices of copper and steel go up, even if it seems to be in the short-term it is because
there is a final demand for these products and we can incorporate those price increases without any
problems.
And your third question regards cost reduction. Well, cost reduction... As we always say cost is like hair.
So people who do not really know us in person… maybe nails, you have to trim them every day.
There are many programs. For example, we have a continued improvement program of WEG’s. We have
more Kaisen, so we stop the production line; study processes; see the bottlenecks; study how long raw
materials take to go in and for the final product to come out. So we have had excellent results with this
type of program and we will continue doing them.
Mr. Lucin: But you do not have a target.
Mr. Oliveira: We do not have a number to inform to you and our expectation is for us to continue doing
that so that we attain a recovery in profitability. We cannot take everything out on the other end. We are
not going to recover profitability without any additional effort.
Mr. Lucin: Just a follow up Luís: of the growth you have shown how much of this is organic?
Page 8 WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English Mr. Oliveira: If you take out… the simple exclusion of sales of the operations last year the organic growth
would be 17%. So instead of 23 it would be 17, which is a quite expressive number in our opinion.
Operator: Excuse me. Our next question comes from Mr. Bruno Giardino from Santander.
Mr. Bruno Giardino: Good morning everyone. I have three questions, the first one regards the 17% growth
that you mentioned. How much of this comes from price and volume? If you could share a breakdown
with us.
The second is the price increase that you have used that may have a positive impact on the margins from
now on. How was this increase? Is it as big as in 2Q? Could you give us an estimation of size?
And the third question in terms of domestic engines. So is there any nonrecurring effect or something?
Mr. Oliveira: Starting... going backwards the reduction in engines for domestic use took place last year
and basically 2Q10 was the quarter when we effectively noted the final phase of the incentives in
reduction of manufacturing tax. So there was a concentration of revenue that quarter.
From then on it has been at a relatively high level. In spite of the measures of the government in terms of
trying to moderate growth… but this segment in 2Q in the normal seasonality it would be... it is usually a
weaker quarter usually and there is an accommodation too. So it is a segment that is operating at a higher
level as compared to how it operated before the crisis.
So we have been doing it for quite a while and we have been producing at a pace that is higher than
before. Our operation in Linhares, which is initially dedicated to this type of product, we are adapting our
capacity very fast there.
In terms of price increases yes, part of that is already apparent. There are two things: how much of the
price increases have already been announced; and the other for customized products this increase takes
place naturally once you price or quote a specific proposal and part of that is already being seen. There is
still more to come, but most of the price adaptation has already taken place, and if we think in terms of the
raw materials it is likely to continue.
And finally the breakdown of the 17.4% it is very difficult to separate because we always go back to the
argument that it is not comparable, volumes change drastically; you are not comparing the same lines of
product mix, the mix changes and the comparison will never be perfect. You do not sell the same engines
on different quarters, so it is very difficult to do the comparison.
What we have noticed is that there is a volume increase and also higher prices. There is clearly an
increase in volume, it is not just price increases.
Mr. Giardino: Ok thank you very much.
Operator: Excuse me. Our next question comes from Ms. Sara Delfim from Merrill Lynch.
Ms. Sara Delfim: Good morning. Luís, looking at the results it is funny because the understanding we
have, because of the appreciation of the currency slows competitiveness of Brazilian products and we
have been seeing that you have been growing considerably in the foreign market that is dollar price.
Could you share with us which regions you are more competitive and the type of product? Because this is
really a positive surprise - your performance in the foreign market.
Mr. Gomes: There has been a growth in the foreign market. There was a mobilization of the sales force in
the foreign market. We have grown especially in developed, mature markets such as Europe and the US
developing new distribution channels, expanding our portfolio of products. Important to note that in Brazil
we have a broader ranging portfolio and abroad, as we advance, as the brand becomes better known, we
are leveraging our brand in foreign markets. In the more mature markets such as Europe and the US the
Page 9 WEG S.A.
2nd Quarter 2011 Earnings Results Conference Call
July 22, 2011
Transcript of the simultaneous translation from Portuguese into English brand WEG is already known and we are winning market share now also combined to the expansion of
our product portfolio.
We are also implementing a network of technical service. It is difficult to replicate the whole network that
we have in Brazil. We have a different level in Brazil, we have a very good quality, top quality technical
assistance. But we have improved our quality overseas worldwide. We have excellent service centers and
our relationship being very close to customers with flexibility. We can deliver any product in a fast way
using our whole manufacturing capacity. Our manufacturing speed has led us to win market over the past
few months.
It is important in the market as we say. This growth will continue with focus on growth through acquisitions
overseas and this is important. Part of the growth of WEG will arise from acquisitions especially abroad
and this process is focusing on the purchase of technology, companies that will bring in new
technologies, new products. The strategy goes through acquisitions to win market share such as we did
in South Africa with Zest.
In emerging markets that have been growing at wider growth rates WEG has this expertise of working in
emerging markets and have been very successful. This is quite positive and we are really expecting to sell
in new segments, new niches, and we have started the commercial in-sourcing of some segments. Now
that we have a consolidated basis we are now selling to new segments in new markets niches.
Mrs. Delfim: And on future quarters, in the second half of the year can we still assume that the export
market will continue growing more than the domestic market or are you going to reverse trends?
Mr. Gomes: No, the comparison basis changes. In 3Q we will have the consolidation of 3Q of last year,
so Zest will be consolidated in last year's numbers. But yes, we are expecting to have two-digit growth in
the foreign market.
Mrs. Delfim: Thank you very much.
Operator: Excuse me. Just to remind you, if you want to ask a question please press the star one. Excuse
me, once again, to ask a question please press star one.
Excuse me. We are now closing our Q&A session. I would like to turn it back over to Mr. Laurence for his
final considerations. Please Mr. Beltrão.
Mr. Gomes: So once again we thank you all for your attendance and questions in our conference call. I
would just like to emphasize a few points: first of all we have resumed our growth that is strong and
increasingly more diversified from the standpoint of products, segments and geography.
We are also overcoming particularly in a favorable scenario in the first half of the year due to improvement
in our business scenario with a reduction of exchange... of volatility in the exchange rate and as there have
been cost increases and gradual improvement in the occupation of our production capacity in greenfields.
Our acquisitions of 2010 have reached a new level with the incorporations and medium and long-term
opportunities are still very attractive.
To close you are all invited to come to Jaraguá do Sul to see our manufacturing complex. This is one of
the best ways for you to know WEG. So we wish you all a very good weekend and thank you very much.
Operator: This concludes WEG's conference call for today. Thank you very much for your participation and
have a good day. Thank you.
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