WEG S.A.
1st Quarter 2011 Earnings Results Conference Call
April 28, 2011
Transcript of the simultaneous translation from Portuguese into English Motors | Energy | Transmission & Distribuition | Automation | Coatings
1Q11 Results Conference Call
April 28, 2011
Q1 2011 Results Conference Call
April 28, 2011
Operator:
Good morning and welcome to the audio conference of WEG about the results of 1Q11. We would like to
inform you that this conference call is being recorded and at this moment, all participants are connected in
a listen-only mode. Later on, we are going to start the Q&A session when further instructions are going to
be provided to you all.
Should you need any assistance during the call please ask the help of an operator by pressing start zero
(*0). To obtain the quarterly results press release or the presentation that will be used during this
conference, please go to WEG's investor relations page at 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.
Q1 2011 Results Conference Call
Página 2
April 28, 2011
Before we proceed, we 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 the potential future
Page 1 WEG S.A.
1st Quarter 2011 Earnings Results Conference Call
April 28, 2011
Transcript of the simultaneous translation from Portuguese into English growth of the company are management's beliefs and assumptions and rely on information that is currently
available.
These statements involve risks, uncertainties and assumptions as they relate to future events and therefore
depend on circumstances that may or may not happen. Investors should understand that the general
economic conditions in the industry and other operating sectors might affect WEG's future performance
and lead to results that may differ materially from those expressed in such forward-looking statements.
With us today in Jaraguá do Sul we have Mr. Laurence Beltrão Gomes, Financial and Investor Relations
Officer, Mr. Wilson Watzco, Controller and Mr. Luís Fernando Oliveira, Investor Relations Manager. Please
Mr. Gomes you may go on.
Q1 2011 Highlights
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
Q1 2011
1,343,137
862,863
480,274
288,211
1,126,117
310,662
Q1 2010 Growth % Q4 2010 Growth %
1,131,546 18.7% 1,504,610 -10.7%
801,299
7.7%
964,471 -10.5%
330,247 45.4%
540,200 -11.1%
181,170 59.1%
315,278 -8.6%
931,907 20.8% 1,258,429 -10.5%
308,613
391,300 -20.6%
0.7%
27.6%
33.1%
121,564
119,645
10.8%
12.8%
164,808
181,750
14.6%
19.5%
31.1%
1.6%
141,508 -14.1%
-9.3%
224,149 -26.5%
11.2%
17.8%
Figures in R$ Thousands
Q1 2011 Results Conference Call
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April 28, 2011
Mr. Laurence Beltrão Gomes:
Good morning, everyone. It is always a pleasure to have you in this conference call. We are going to have
a brief presentation with general comments, some additional comments later on and then the Q&A
session.
We are going to start with slide number 3 where we would like to highlight some points: the first is a
growth of 21% in the net revenues of 1Q, which shows that WEG can operate and grow in a very
competitive environment. 1Q11 shows robust growth especially in the external market.
The second point is that this growth results from a general increase in our business volume with the
pickup of the industrial activity in mature markets, our entrance into new markets and the consolidation of
revenues of the businesses that were acquired last year.
Another point is that, at the same time, we faced during this quarter some difficulties that altogether
decreased our operating margins. We are going to explore these aspects in further details, but we would
like to mention as the main point first an increasing price of raw materials, especially steel and copper, that
pressured the production costs; a lower dilution of fixed costs as well; and also a fast appreciation of the
Brazilian currency. These would be the main factors that pressured our operating margins this quarter.
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1st Quarter 2011 Earnings Results Conference Call
April 28, 2011
Transcript of the simultaneous translation from Portuguese into English We would like to remind you that pass through relative to our sales prices and the increase of inputs are
being negotiated and implemented and should have an impact on margins along the next quarters.
Likewise, we will probably see in the next quarters the positive impacts of those recent investments in new
manufacturing units that are still in a pre-operating phase or just starting up operations.
The market in which WEG operates is rapidly changing with some clear trends as the smart grid. Also,
there are the growing importance of energy efficiency and of alternative energy sources. WEG is getting
ready for these new markets.
The joint venture with M. Torres, that was recently announced, will enable us to enter the market of wind
energy in a direct manner, and this is a market that is coming up as a new and important renewable
source of energy in Brazil.
Gross Operating Revenues
Domestic Market
R$ million
5%
8%
0%
22%
623
1T07
Q1 2011 Results Conference Call
761
802
801
863
1T08
1T09
1T10
1T11
Página 4
April 28, 2011
In slide number four, we can see then the recovery of our domestic market with an 8% growth in our sales
compared to the previous year. The Brazilian industrial production has been growing at a very robust pace
and several aspects have favored this expansion, the expansion of the BNDES program to support
funding being one of them.
We believe that Brazil is starting a consistent cycle of investments in industrial capacity with the highlight in
the oil and gas industries with investments for exploration of the pre-salt oil.
In the GTD business area we see two different dynamics: in transmission and distribution we are having a
good performance with the diversification of customers and markets, and sub energy stations for industrial
clients as well as concessionaires and generators of electric energy are still heated.
In this 1Q11 we had to the 100th manufacturing unit of our unit in Mexico, which is continuously
expanding its production and increasing its penetration in the American market.
In the segment of energy generation, our focus is the distributed generation of renewable energies in the
Brazilian market. The outlook is very positive for the energy auction of renewable energy that is initially
scheduled for July 2011, both for wind energy businesses that will probably dominate the offer in the
auction, as well as more traditional renewable energy sources (biomass and small hydropower plants).
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1st Quarter 2011 Earnings Results Conference Call
April 28, 2011
Transcript of the simultaneous translation from Portuguese into English Gross Operating Revenues
External Markets
US$ million
2,1066
External Market in US$
2,3117
1,7354
Quarterly Average FX
1,8229
1,6664
59%
-11%
4%
18%
288
165
195
203
181
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011 Results Conference Call
Q1 2011
April 28, 2011
Página 5
On slide 5, we show also positive results both in more mature economies as well as in emerging
economies in the growth of our sales. In developed markets such as the US, for example, we have been
growing and obtaining market share and incorporating new products and services to our portfolio.
The businesses acquired last year gained momentum by being incorporated to our group. We created
access to businesses and clients that none of the parties had before as separate units. We are still open
to new opportunities in the acquisition of businesses both in Brazil and abroad that can add new
technologies or can enable us to have fast access to target markets.
Business Areas
Gross Revenues Breakdown
1.343
971
6%
14%
21%
1.271
5%
9%
1.100
6%
15%
33%
25%
1.132
8%
17%
24%
30%
7%
59%
7%
13%
57%
52%
54%
46%
1Q 2007
1Q 2008
Industrial Equipment
1Q 2009
GTD
1Q 2010
Domestic Use
1Q 2011
Paints & Varnishes
R$ million
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April 28, 2011
Going to slide 6, we can see here the mix of products that we sold. Consumer goods continue with very
good performance, good conditions of credit, employment and income in Brazil really fostering the use of
products such as white line products. Remember that until 2010, we had incentives for white goods
products and this has been really increasing the volume of sales.
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1st Quarter 2011 Earnings Results Conference Call
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Transcript of the simultaneous translation from Portuguese into English As for industrial equipment we benefited from investments in the expansion of industrial capacity in Brazil
and also of our operations overseas as it was mentioned, also benefiting from a recovery of the industrial
activity and gains in market share.
In GTD as I previously mentioned we have two different dynamics: transmission, distribution with a clear
recovery of businesses; and generation of energy waiting for the auction to pick up momentum. We are
prepared to be part of the auction as a provider of complete solutions in a very competitive manner.
Now I would like to turn it over to Luís Fernando Oliveira to talk about the quarter numbers. Please Luís
Fernando you may go on.
Cost of Goods Sold
Depreciation
5%
Other Costs
33%
Steel &
Coper
44%
Other Costs
31%
1Q11
Depreciation
6%
Other
Materials
20%
Q1 2011 Results Conference Call
Other
Materials
19%
Página 7
1Q10
Steel &
Coper
42%
April 28, 2011
Mr. Luís Fernando Oliveira:
Good morning everyone. Let us go very briefly to slide number 7. Here we have the breakdown of costs
for 1Q. We are going to explain some important effects that affected our margins this quarter.
The increase in the cost of materials, especially steel and copper. These two raw materials had an
increase of about 35% compared to the average prices of the previous year. Not only costs went up, but
also the speed of the high price was faster and that made it difficult for us to transfer prices. Whenever
prices increase very fast, it is more difficult for us to transfer these prices to the final price.
In addition, an increase in the currency of the Brazilian real compared to the dollar also impacted our
business, and again in a very fast manner. The mix of products sold - we are insisting on this point – we
are not completely recovered and likewise when we had in the last quarter that had an impact in our gross
margin.
Although the occupancy of the industrial capacity has improved we are still not at the ideal point of fixed
costs, which causes an impact in the cost of transformation and an increase in the participation of other
costs. This is very important in this quarter because we had some recent units, such as for example the
unit in India that just started its operations; the operation of Linhares, which is still in a preoperational
phase, and that all certainly has an impact in our bottom line.
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1st Quarter 2011 Earnings Results Conference Call
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Transcript of the simultaneous translation from Portuguese into English And finally, a larger share of operations outside Brazil in our total revenues and in these operations outside
Brazil we still do not have such a strong competitive position as we have in Brazil, and that also shows a
negative impact in this quarter.
Main impacts on EBITDA
45,1
256,7
17,4
189,6
FX Impact on
Gross
Revenues
Deduction
on Gross
Revenues
22,1
181,8
0,7
Volumes,
Prices &
Product Mix
Changes
COGS
Selling
Expenses
164,8
1,2
General and
Administrative
Expenses
EBITDA Q1 10
EBITDA Q1 11
R$ million
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April 28, 2011
Página 8
Going to slide number 8, we have all the variations of EBITDA and we are analyzing these variations. You
can see the main impacts here: positive variations in gross revenues; an increase of price; volume of
sales; product mix changes - that is all having a very important positive impact of R$ 257 million and then
we have the currency exchange and our bottom line here.
I would say that the most negative impact of 190 million is of the cost of raw materials, also a still poor mix
of products and our participation in overseas operations. But I think that overall we are having very good
results controlling such negative impacts. The total impact was a negative 9% in our Ebitda and a
decrease in our EBITDA margin to 14.6% this quarter.
Cash Flow
2.553,0
189,2
34,6
Operating
Investing
Cash 4Q10
2.487,1
220,5
Financing
Cash 1Q11
R$ million
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April 28, 2011
On slide 9, we have a graphic representation of our cash flow. We can see that our cash generation is
strong, with a good management of our working capital, despite the growth of revenues. Generally when
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Transcript of the simultaneous translation from Portuguese into English we have a growth of revenues, we have a higher consumption of working capital, but we have been able
to be more efficient in managing our working capital.
Cash flow in our investment activities is decelerating because of the investment in capacity we already
talked about this year - this year is going to be a year of concentrating the beginning of operations of new
units.
And finally, the reduction of our indebtedness and the payout of dividends in the second half of 2010 that
were paid in March had an impact in the financing line. This is traditional, this always happens in every
quarter... every first quarter, sorry, of every year.
Capex Program
Outside Brazil
Brazil
61,4
34,2
73,8
53,7
43,7
27,2
30,1
Q1
Q2
44,1
13,0
2,0
40,7
42,1
Q3
Q4
2010
33,8
8,2
25,6
Q1
2011
R$ million
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April 28, 2011
Going to slide 10, we can see our investment program in the quarter. Especially in 1Q11 we had a relative
deceleration of investments in capacity. In the beginning of 2011 we are going to work to maximize
production in these recently finalized units: the units for high-voltage engines and generators that we just
opened in February and the plant in Linhares that is in pre operation and is probably going to start
operations very soon.
Remember that we have flexibility in the speed of operations and this is a very important characteristic of
our investment program. If it is the case, we can respond very fast to any increase in demand.
Final Remarks
„
„
„
„
„
Growth is robust and increasingly diversified :
„ Products
„ Segments
„ Geographies
Unfavorable scenario has a short term impact, but it can be
minimized over the next quarters
2010 acquisitions underwent profound changes when
incorporated into WEG
We are working to maximize returns on recent investments on
new capacity
Medium and long term opportunities continue to be very
attractive
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April 28, 2011
Page 7 WEG S.A.
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Transcript of the simultaneous translation from Portuguese into English Well, finally before opening to Q&A we would like to reinforce some very important points this quarter: first
that our growth is robust and it is more diversified in terms of the products we are selling, the segments
we are operating and geographies where we are based and that can provide products and segments
throughout the world.
We have a particularly unfavorable scenario that has a short-term impact in terms of volatility of costs,
exchange depreciation, everything that we mentioned before; but we believe that this scenario is going to
be minimized in the next quarter due to several actions that we have been taking, like the transfer of prices
and etc.
All the acquisitions of 2010 are already using a very positive impact. They changed the level when
incorporated into WEG. By being with WEG it really changed the level of the size of its operations and now
we are working to maximize returns on greenfield operations - basically in India and Linhares as I
mentioned, but as a whole medium and long-term opportunities continue to be very, very attractive and
we are very confident about these opportunities for the future.
We are now giving the call back to the operator and we are going to open for the Q&A session. Thank you
very much.
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 (*1). If you want to remove your question from the list just press star
two (*2).
Excuse me. Our first question comes from Renato Mimica from Bank of America Merrill Lynch.
Mr. Renato Mimica: Good morning everyone. I have two questions, the first, if possible I would like you to
elaborate a bit more about the negotiation of prices for you to include that to your final prices. I want to
know if you are being able to implement this pass-through and how much this is going to mean in terms of
margins. Do you think you are going to reproduce the same profitability in the end of the year as you had
last year, especially with the ramp up of the new activities?
And also about mix in the second question. Looking in the short-term this dynamics of higher growth in
external sales and a larger share - is this going to continue? I would like to know at what point the auctions
that are going to open are going to be translated in revenues.
Mr. Gomes: Ok Renato, thank you for the question. Well, the dynamics of the negotiation of passing on
prices this is a natural movement of the market. All major players, our competitors are passing on an
increase of costs, an increase of input in the main raw materials, because it affects all the players in the
market where we operate and it is these players that are the first to start increasing their prices. They
basically start ahead of this market.
But of course, even for these players there is a delay, there is a lag behind that that does impact the whole
of the market. What I mean is the following: that the increases on prices are being negotiated with the
different product lines, with the different units. They will have an impact in the next quarters, this is a natural
moment, there is room for that to happen. But these are readjustments that have to be negotiated in the
market.
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Transcript of the simultaneous translation from Portuguese into English And so this is being implemented. We have room to do that and everyone will naturally pass on the
increases and WEG is always behind these major players. So we even benefit from being a bit behind
these players to gain market share and to gain more sales.
And the second point yes, we expect margins of 2011 in the total of the year to be better than the margins
of 2010. I think this is an important message. We expect the positive impact of adjustment; the dilution of
the cost expenses that we had with three operations - these are impacting on our bottom line now; but as
we start to use the capacity and increase our sales these margins are going to improve as well.
As for GTD we have a portfolio, we have requests in terms of distribution, transmission. The market is very
heated as we mentioned and we mentioned that in the previous call of the previous quarter. In this quarter
specifically, 1Q11, there was a delay in deliveries and consequently a delay in the invoicing of sales,
because we had a problem with one of our major suppliers and so we did have a delay and that had an
impact in the invoicing of transmission and distribution, so we had to postpone sales to the following
month and in a way this is going to offset this lack of invoicing or this lack of amount in 3Q.
So not only in distribution and transmission, but we also are receiving some orders still below the expected
levels in terms of the generation of energy; but we hope in the second half of 2011 especially distribution,
transmission and recovery of generation, and then GTD is going to appear in a more relevant manner
contributing for better margins.
So once again WEG, the company expects for 2011 to have better margins than the ones that we had in
2010 with a very similar growth (two digit growth) as we had in 1Q11.
Mr. Mimica: Ok very clear, thank you very much, good morning.
Operator: Excuse me. Our next question comes from Verena Wachnitz from T Rowe Price.
Ms. Verena Wachnitz: Thank you, good morning. I would like to ask a question about the decrease in
margin. Before the crisis we had a similar trend in terms of exchange appreciation, a fast increase of raw
materials; but your margin did not low down as much.
So I would like to know the difference in this moment: what is different this quarter that was from previous
quarters where you had similar movements? Is it because of the competitive environment that is more
difficult and so it takes more time for you to recover your margin? What changed in this quarter differently
from other quarters? This is my first question.
And the second question is about the generation auction. When do you think this will translate into
revenues? Because as you mentioned the order book is going to improve in the next half of 2011. When
are you going to really have an impact in your numbers?
Mr. Oliveira: Well Verena thank you for your questions. Well, the basic difference is a difference of the
environment that we had. In a rough comparison the increase of costs that we had in this quarter, the
speed of the increase of cost, could be comparable to a scenario that we had in 2006, 2007 when we
had a similar situation.
That was a very different situation in terms of market, product mix that we had at the time. The market was
clearly at a different moment of the economic cycle. The concrete fact is that at that time we had better
conditions and it was easier for us really to pass on prices and that helped us.
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Transcript of the simultaneous translation from Portuguese into English And naturally we had something that we have to consider: at that time our margin (Ebitda margin) was 24,
25, and it went down some percentage points - but not to the level that it went down now.
In terms of proportion perhaps it is not that different; but now we are starting with an Ebitda margin that
was affected by the two last years of the crisis, and so these aspects have to be considered.
Basically to answer your question is that we are having a different market situation. Our capacity to
implement price readjustments right now is being impacted by market that is still under recovery and it is a
lot more competitive as we have been reinforcing - so it is a different market moment. 2006, 2007
although it is comparable in terms of prices we were at the top of the cycle, it was a different moment.
As for the second question you do have some... you are correct on that. The generation orders are
something that takes time but we are prepared for that. It is not something that we are going to be caught
unprepared. We think that very fast we can start producing and we can deliver very fast.
Of course the bulk of orders is going to happen in 2012 especially in wind energy, and so the higher
impact is going to be for 2011... 2012, sorry. But in T&D we are going to see the results as of 2011.
Ms. Wachnitz: So in terms of competition are you talking more about the market in Brazil that causes a
lower demand for you?
Mr. Oliveira: Well, I think this is something that we have been continuously talking about. We do have an
indirect impact of this market. Our industrial client has this competition, a direct competition of imported
products, and of course this is not an ideal situation for WEG. We have some manners of in a way
counterbalance this direct competition - and producing outside Brazil is a way to do that, we are an
international company - but it is not ideal.
As for direct competition - and this is what we are talking about, our capacity of passing on prices - as we
are a price taker in Brazil, in Brazil we are a bit behind that. So in a situation like that with the appreciation
of the exchange and everything we have to be a bit more careful to avoid these difficulties, to avoid an
excessive increase of our direct competition.
Mr. Gomes: And just to complement, in Brazil our distribution network and technical assistance is a barrier
for the coming of new entrants, and this is very important to say: we cover the whole of Brazil; we built this
distribution network and technical assistance network along our history.
And another important point is that we complete with high-quality products, customized products in which
energy efficiency and quality are drivers of demand rather than price, and this is an important relevant point
when we talk about our competition.
Ms. Wachnitz: Well thank you very much.
Operator: Ok. Next question Cassio Lucin from Banco Safra.
Mr. Cassio Lucin: going back to the first question about prices I would like to understand the following:
what is the speed you are passing on these prices? So you have your costs; how long does it take you to
pass on this cost to your prices? Can you... by the next month are you going to pass on 30%, 40%, 50%?
How much? This is my first question.
And the second question is your backlog, how much grew compared to last year. So these are my two
questions, thank you very much.
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Transcript of the simultaneous translation from Portuguese into English Mr. Oliveira: Well Cassio, as for passing on prices you are assuming that costs... if they stopped now we
would take a few months to zero the deficit so to speak.
Mr. Lucin: More than three?
Mr. Oliveira: In some markets it would take more, in the Brazilian market less; but as a whole from 3 to 6
months we would have zeroed the deficit. But it is something that is moving. You cannot assume that the
prices are going to stop today and everything is constant, and so this is not something that we can do.
Prices are... we have to live with that because they are always moving.
Mr. Lucin: Yes, but explaining the fact that you are price maker...
Mr. Oliveira: Well, when you are price maker that comes with a responsibility: you have to be very cautious
because, again, prices are comparable among markets. But I would say 3 to 6 months is a reasonable
time for you to really pass on all increase in costs. And the second question what was that again?
Mr. Lucin: Well, I do not know if they are comparable; but the coming of orders in your backlog what was
the increase? If you make a comparison year against year do you have any idea?
Mr. Oliveira: Well, of course we are not going to open; I do not like the concept of backlog, but anyway we
are having more and more orders in T&D and in the area of generation we are still waiting for the auction to
know.
Mr. Lucin: So year on year can we think of two digits?
Mr. Oliveira: Yes, certainly.
We have a question that was asked on our webcast. Marcelo Queiroz, which is an individual investor, is
asking about the positive effect of Ebitda, how much that would represent in terms of prices.
Well, it is very difficult to isolate the effect, because we have a very large diversity of products. That would
only be possible if we had sold the same products in both quarters. Because our line of products is very
customized, it is upon order, we have... it is very hard to have a direct comparability.
And the second question he asks is how much the company understands... how much we still need to
pass on to our costs, and it is basically what we answered in the previous question: if everything stops
now from 3 to 6 months we would be able to pass on what we are missing in terms of lag of prices.
Operator: Excuse me. Our next question comes from Welliam Weng from WEG. Excuse me Mr. Weng,
your line is open stop
Mr. Welliam Weng: Good morning. I would like to ask a question about exchange. Given that one third of
your revenue comes from the foreign market and you still have direct and indirect competition of your
competitors, how would that affect your margins if you would take a lot more time to achieve an Ebitda
margin of 20% and if this is possible if you look up to the future.
Mr. Oliveira: Well, the main impact is the following: remember that we have a strategy to put costs and
revenues together. The speed of exchange appreciation, the main impact of it, is that it makes this
process a bit more difficult.
So, as contracts expire you have to renew them faster and so it is a process that works very well for a
certain speed of exchange variation and when it is too fast it is a bit behind. I think this is the major impact
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Transcript of the simultaneous translation from Portuguese into English there. If you can do this well, as a whole the impact is neutralized along time - the impact of exchange
variability.
As for margins, as Laurence mentioned we do have an expectation to improve our margins in the next
quarters to levels even above last year. If we are going to be able to get to more than 20% or not well, this
is another question.
Mr. Weng: Ok thank you very much.
Operator: Excuse me. We would like to remind you that if you want to ask a question just press star one
(*1). Once again, to ask a question please press star one (*1).
We are now closing the Q&A session. I would like to turn it over to Mr. Laurence Gomes for his final
considerations. Please, you may go on.
Mr. Gomes: Well, once again we thank you for joining us in this conference call and we thank you for your
questions and be sure that really the opportunities of our company are very good, especially because of
the world growth that is being pulled by emerging countries that need infrastructure; harmonization of
energy efficiency; increase in the market of high-use products; new and more intelligent ways to produce,
treat and use energy (known as smart grid) that are even brother than that; and particular events of Brazil
as the World Cup and the Olympic Games.
Our history of growth and profitability is very solid. We have the largest portfolio of electro electronic
products in the world market in the generation, transmission and generation of electric energy and so its
efficient use in the industry.
To close we invite you all to visit us in Jaraguá do Sul to get to know our facilities. This is the best way to
get to know WEG. Have you all a nice day and I wish you all excellent businesses.
Operator: WEG's conference call is now closed. We thank you for your attendance, have a nice day and
thank you.
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