International Conference Call
WEG S.A.
1st Quarter 2010 Results
April 29, 2010
Operator: Good morning ladies and gentlemen and welcome to the audio
conference call of WEG S.A. 2010 1st Quarter Results.
Thank you for standing by. As a reminder, this conference is being recorded and at
this time all participants are in a listen-only mode. Later we will conduct a question
and answer session and instructions to participate will be given at that time. If you
should require assistance during the call, please press the star key followed by
zero (*0).
To obtain 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 .
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Before proceeding, we would like to clarify that 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
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.
With us today in Jaraguá do Sul we have Mr. Alidor Lueders, Investor Relations
Officer; Mr. Laurence Beltrão Gomes, Financial Officer and Mr. Luís Fernando
Oliveira, Investor Relations Manager. Please go ahead sir.
Mr. Alidor Lueders: Here is Alidor speaking, good morning. It is a pleasure to
have you for WEG’s 1Q10 results conference call. I would like to start on slide
number 3 saying that the results confirm our expectations regarding the recovery
after the 2008 and 2009 crisis.
This is going to be a gradual recovery with different segments responding at
different paces. It is clear that the most dynamic economic agent is the consumer,
more specifically the Brazilian consumer, and from there economic dynamism
spreads to other agents.
So in our case the different segments are evolving according to the following
trends: first consumer goods, especially the white goods continue strong despite
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the end of the stimulus from the government, with the end of the tax reduction last
January. This segment continues to respond to easy credit conditions and
improving disposable income.
Second, in industrial equipments we are doing better the closer and more
connected our client is to the Brazilian consumer. The longer-cycle products are
still in the early stages of recovery. The dynamism is also spreading from the
emerging countries, where the recovery is much more clear than in the more
mature markets. Nevertheless, we are resuming our investment plans whenever
we judge that demand is strong enough to justify doing so.
We highlight that the India high-tension electric motor plant should start production
by 2H of this year and second, the plant in Linhares, in the Brazilian Northeast,
where we should start producing commercial electric motors by the end of 2010.
I would like to call Mr. Luís Fernando Oliveira to present the details of the quarter.
Please Luís Fernando, go ahead.
Mr. Luís Fernando Oliveira: Hello, good morning everybody and let us jump
straight to slide number 4 where we have the main, the key figures for this 1Q10.
We are going to go into the details on those figures, but I would just like to point out
and put those numbers into a little bit of perspective by highlighting the figures that
we have for the Brazilian industrial production as they are calculated by the
Brazilian IBGE.
It is pretty clear from the numbers - both from the expansion of the general industry
as it is from the expansion in capital goods specifically - that we are now under a
very strong, very robust recovery. In both cases, in the first two months of this year
(which is the data that have so far) we are seeing expansions close to 20%.
Also clear, especially when you look at the last 12 months comparisons, that the
adjustment that we had in 2009 was very deep and is not completely over yet. I
mean, we are not out of the adjustment that we had last year. The production of
capital goods, for example, in the last 12-month comparison still shows (up to
February) still shows a drop of almost 13%.
So given those numbers for … let us go straight to the next slide, slide number 5,
where we have the composition of the 11% drop on both gross revenues and net
revenues. We can see that in the domestic market, the Brazilian market, we are
pretty much stable. We did not have any drop compared to 1Q last year. The drop
on revenues was basically a result of the external market. In dollars terms we
dropped 11% as well in the external market.
We had highlighted before, but once again the deceleration has happened at
different paces in different markets; we entered into the recession in different
speeds for the different segments and the same goes going out of this recession.
The speed of the recovery is very different depending on the segments you are
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talking about. Right now we are clearly seeing the mix becoming more and more
concentrated in the short-cycle kind of products.
And another effect that is pretty clear as well, which is something we know from
past experiences, is the fact that the 27% difference in the Brazilian real (the
Brazilian currency has appreciated 27% against the US dollar over the past year,
on 1Q10 compared to 1Q09) and that has a negative impact in the comparison
when you do those comparisons in reais terms as we do.
Going out slide number 6 we all can observe the distribution of those sales
throughout the various regional markets, regional markets that we have. The
domestic market continues to increase its importance in the overall pie, both
because of the better performance in relative terms, as well from the fact that we
are selling in Brazil, we are selling in a strong currency (the Brazilian real) as we
mentioned before.
As we are only looking at one quarter, we have some wide variations in terms of
the quarter to quarter comparisons of the importance of the different regions;
nevertheless, it is very clear the trend of faster growth in emerging countries (South
America, Asia and Africa for sure) than in the more mature countries.
North America is also slowly recovering, it is in a better position; Europe is still
bringing up the rear, I mean, Europe is in very early stages - if it is so, if we can say
so - of this recovery.
Going to slide number 7 we see the distribution of the sales between the different
areas. As we mentioned, the recovery has been one that is being led by the short
cycle products. It is very clear from the fact that the motors for domestic use, as we
call them, continue to show strong performance representing now 17%, during this
quarter representing 17% of our revenues.
The industrial equipment continues to suffer because it is the area where we have
the largest portion of the external market and the strong real makes those
comparisons a little bit worse.
And GTD we can see clearly the lower speed of order intakes we had in 2009 and
now start to show in revenues.
Moving to slide number 8 we see the Cogs, the cost of goods sold graphs. It is
pretty clear from the results, the good results that we have been having on cost
containment and operating measures. Even in those results we have shown, even
though we have not had much help from the top line - those results would be much
more apparent we would have a growing revenue, which is not the case yet.
So what happens is that we are having those results even though the capacity is
still below what would be the ideal levels. We are getting close to that, but it is still
a little bit below that and that has an impact on the cost of manufacturing.
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In terms of cost of the raw materials that we use they have been pretty much stable
up to now. There is a bit of speculation in regards to the future, but so far we have
not seen much pressure; much the contrary, they have been pretty stable.
In terms of … one thing that jumps out when you compare 1Q this year with 1Q
last year is the impact, the high importance that the fixed costs have in the overall
distribution of costs of goods sold and that is the direct result of the fact that we are
not growing, so the dilution of those fixed costs becomes so much more difficult.
Going to slide number 9, we have a little bit of analysis of profitability. We can see
here that gross margin has been recovering, despite the fact that we still do not
have top line growth, which is very clear when you take a longer period of analysis
compared with 2008, 2007, that we still have space for further recovery and we
should see that as the top line recovery becomes more and more attractive, as top
line starts to grow, we should see a little bit of an expansion, further expansion of
gross margins here.
And the Ebitda margin also shows a bit of improvement, not so much because we
did not have the same success we had in the cost containment as we had in terms
of the expense containment, especially the general and administrative expenses
we were not so successful as we have been in the past in containing those
expenses. We expect that to be correct in the future, but not in this quarter and
nevertheless that makes the comparisons a little bit worse in that sense.
Nevertheless we highlight that we are … there is a very clear trend of the Ebitda
margins trending back to the historical intervals that we have in the floor of 21%,
22% Ebitda margins and that is the trend that we are observing right now.
In terms of the net margin it is a direct result of everything I have said so far plus
the fact that during this quarter, I mean if you look at the FX rate during 1Q this
year it was pretty stable and that is always beneficial because the largest impact
that we have is the impact of the FX rate on financial results, even though
sometimes that might not be a cash impact, but nevertheless the volatility of the FX
rate always has an impact on the net margin, which is not the case during this
quarter, so we saw a little bit of improvement as well compared to 1Q09.
In slide number 10 we have the debt and the cash position. We continue to have a
very strong balance sheet, very strong capital structure, both from the point of view
of the absolute numbers - I mean, we still have a net cash position - and from the
fact that the type of financial instruments that we continue to use.
Operating cash flow continues to be - which was a strong highlight of 2009 continues to show a very positive trend, even though during this quarter we had the
impact, which is seasonal, we described a seasonal impact payment of the
dividends during this 1Q, which is usually when we do those kinds of things. So we
also see a small reduction on short-term debt still.
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One thing that we should highlight, yesterday we had the start of the 30-day period
of disclosure for this new instrument that we are applying to with the IFC. We
should have this disclosure period for 30 days and after that, if everything goes
according to the plan we should be able to sign for a small loan from the IFC that
we are going to be using towards the India project that we are developing. Which is
important here is not so much the value of the financial instrument per se, but it is
the first time we access, we are trying to access the IFC. So that is very important
as a new source of funding for us.
Finally, going to slide number 11 we have the evolution of the Capex program. We
are recovering some of the speed of the Capex program. We are speeding up
some projects. We highlight two main projects: the plant in India for a high-tension
engine, high-tension motors and generators that we expect to start producing in the
2H this year; and the plant in Linhares, in the Brazilian Northeast, where we should
start producing commercial electric motors towards the end of this year - at least in
the first phase.
I always highlight that - it is a very important characteristic of the Capex program
that we have - we have this flexibility of speeding up or slowing down the Capex
program according to the demand conditions that we have and that allows us to
maximize return on invested capital and that is the main metrics we are paying
attention all the time.
That pretty much wraps up the presentation. We are now ready to entertain any
questions you might have and I would ask the operator to conduct the Q&A
session. Thank you.
Q&A Session
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Operator: Excuse me. Ladies and gentlemen we will now begin the Question and
Answer Session. If you have a question please press the star key followed by the
one key (*1) on your touchtone phone now. If at any time you would like to remove
yourself from the questioning queue, press star two (*2).
Excuse me. Our first question comes from Mr. Nicolai Sebrell from Morgan
Stanley.
Mr. Nicolai Sebrell: Hi, thanks for taking my question. I was wondering if you
would talk a little bit about the international market in more detail, in other words
where do you think demand might recover soonest and if you could talk about
product lines, in other words which product lines you think might recover soonest
abroad?
And then talking about domestic market, if you could just flash out a little bit more
what you think the next year or two years - in whatever kind of detail you can speak
about - but there are obviously a lot of initiatives going on (Petrobrás infrastructure,
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etc.) how much, as we see infrastructure spending accelerate in Brazil, how much
of that benefits you guys? I am just trying to understand, because there is an
indirect connection and I am trying to understand if that affects you guys at all.
Thank you.
Mr. Oliveira: Ok Nick, thank you for your question – very, very broad question - let
me try to make it as concise as possible without losing much context. Well, in
terms of the international market some things … we are not seeing anything new in
that sense. I mean, the recovery … we had the recession last year, it affected more
a few places that other and even coming out of this recession some places are
doing much better than others. So in general terms emerging markets are doing
much, much better than the mature economies.
And even within the mature economies some places like North America, which are
more dynamic or by the adjustments that you have to make can be made quicker,
are doing better than other places, for example Europe. Europe is still legging, still
bringing up the rear, which is something … we have this perception and we have
been hearing that from some clients: for example, we have connection with large
OEM companies that do business throughout the world and they are basically
telling us the same thing.
So we are moving, we are trying to make the most of it trying to move resources as
much as we can, which is not a new thing for us. Our bets were already placed on
Asia. Our presence in Asia we think is a growing frontier for us, we have been
saying that for a while and now is the time to make this bet pay off.
So we have been investing heavily in the plant of India, for example, because we
see definitely there is growth there and plus there is a specific opportunity for us in
India related to infrastructure and energy spending.
So in general terms emerging margin markets and then on those emerging
markets we have a few specific areas, a few specific pockets where we can
leverage the experience that we have in other parts of the world and make the
most of it, and make it happen quicker: casing point, high-tension motors in India
for example, that is a very good example.
Another good example: transformers in the US, another pocket – not emergingmarket per se - but it is a pocket where we can make our best experience work. So
we are trying to work both with the macro environment that we have - I mean, we
can do very little about the macro environment; what we can do is try to leverage
what we have to make the most of this microenvironment and it is going to be a
gradual recovery - do not make any mistakes about that - and that is pretty clear
for us, ok?
In terms of the domestic market you are right. We have several things happening in
terms of the overall infrastructure spending and more so, a few extra pockets, I will
describe them: for example Petrobrás. The Capex program Petrobrás has related
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to the Pré-Sal oil and everything is going to have a very important impact, a direct
impact for us.
Petrobrás is already one of the largest clients that we have already and we are
working very, very hard to try to make this connection even more intense. We are
trying to figure out how can we sell more of our products to Petrobrás directly, how
can we discover the indirect connections that we might have to try to have a larger
share of the Petrobrás business.
Plus we do have other things that are a little bit more indirect, for example:
shipbuilding. There is a strong movement towards increasing the production of
everything that applies not directly to oil production, but oil services, for example,
that directly benefit us. So we are trying to wrap up all those opportunities.
In terms of general infrastructure spending it has not changed all that much. We
see it … it is a more … how can I say … underground for us. It is not something
that came to the floor really in terms of “no, there is a large stimulus package
geared towards the energy segment”. No, that has not happened in Brazil yet. So it
is a much more general feeling that things are starting to improve at the margin
and that should continue going forward, ok?
Mr. Sebrell: What percentage of your revenue is Petrobrás?
Mr. Oliveira: Petrobrás per se represents less than 2% directly; but you have to
take into account all the indirect … for example, we might sell a large motor for a
pump manufacturer in, I do not know, Switzerland; it is going to be selling that
pump to Singapore that is going to be used in an oil platform that is going to end up
at Petrobrás.
Mr. Sebrell: That is indirect.
Mr. Oliveira: Track those things.
Mr. Sebrell: And sticking of those kinds of connections, when you talk about India
and you say that you have relationships there; are those clients that you have, that
you have dealt with elsewhere – in other words, global-type players - or is India
mostly selling into and creating a factory for a market that is mostly domestic
players that are new relationships for you?
Mr. Oliveira: India is basically more geared towards the infrastructure, so it is
basically a domestic market for us. That is more the case in China. In China we are
trying to leverage those relationships. It is more clear the leverage of those
relationships in China than it is in India. Up to now in India it has been … we have
created ourselves, because it is much more geared towards infrastructure, for
example irrigation projects, that kind of thing.
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Mr. Sebrell: And these … so you have a partner or something that you are using in
order to break into these relations? Because it is difficult - I would imagine - as
knocking on somebody's door and saying: “hi, we are the new guys in the block …”
Mr. Oliveira: Yes, but we are not necessarily new guys. We have been doing
business in India for quite a while. What is new in India is the fact that we have a
plant in there, but we have had a commercial operation, a very successful
commercial operation there for the past five years or so. So we do have the
connections. We have locals running this operation, the commercial part of the
operation. So we do have the connections, ok?
Mr. Sebrell: Ok all right, thank you very much.
Mr. Oliveira: Thank you.
Operator: Excuse me. Our next question comes from Mr. Augusto Ensiki from
Morgan Stanley.
Mr. Augusto Ensiki: Hi good morning again gentlemen. Just talking more about
India, do you have any estimate as to how much that will affect your revenue in
2H?
Mr. Oliveira: No. That is something I should mention, we always say that kind of
thing: the way that we build up those plants - we do not like to refer them as plants
actually: we refer to them as in the Portuguese is parques fabris, it is a more
complex thing, it is a modular approach.
So we should start up the production towards the end of 3Q, beginning of 4Q10,
but then we have the ramp up and it is going to start from a small basis. We should
start to see some impact of that in 2011, 2012 - it is going to be more apparent for
us and, as I said, we take a modular approach. We built up small and then we build
up as we have demand.
The way we say it … sometimes people ask: what is going to be the capacity of
those … of such plant, of X plant, when you are done? The fact is that we are
never done and that is because we take this modular approach.
For example Jaraguá do Sul is never done - it is not done yet. We are completing
50 years next year and Jaraguá do Sul is still not done, we are still building up
here.
Mr. Ensiki: Ok that was helpful, thank you very much.
Mr. Oliveira: Thank you.
Operator: Excuse me. If you would like to pose a question please press star one
(*1).
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Our next question comes from Mr. Larry Demaria from Stern Agee.
Mr. Larry Demaria: Hi, thanks, good morning Luís. Two questions: can you give
us an idea of, say, roughly where you guys are in capacity utilization in the plants
right now? Number one.
And then number two could you just give us some color on capital allocation obviously the net cash position and do you continue to evaluate acquisitions? Give
us an idea of what you guys are thinking? Is it more medium regions? Any
information would be helpful. Thanks.
Mr. Oliveira: Ok Larry. First, I would say that in terms of capacity utilization it is
even … it is always difficult, because we are talking about capital goods built to
orders, so those comparisons are always tough. You are not producing the same
products across time, so we have some estimates in terms of man/hour, that kind
of thing; but nevertheless we do have a large diversity, for example the short-cycle
products we are operating at capacity or even a little bit above capacity right now,
whereas in the long cycle we are in a lower position.
I would say that on average we are approaching the average of 90% or should be
reaching that level in the next few months or so, or few weeks or so, but it is going
to be very diverse. You have a lot of variability across the different plants that we
have. Even in Jaraguá do Sul, or even outside of Jaraguá, I mean you have a lot of
diversity there.
In terms of … we continue to study all the different opportunities we have. We have
been presented with several opportunities. We have been looking then very closely
and I should say - I always say that, it is definitely true - we do not have any
particular preference in terms of size. We do have some preferences in terms of
markets. For example, it would make more sense a few things in emerging
markets; but even in mature markets it might be something to complement the
market, for example the product line. We might find something like that.
I would say that the most important metrics, the metrics that is most important for
all - more than anything else, more than size, more than market - is return on
invested capital. If we get the return on invested capital we have no problem there,
with a large acquisition for example or an acquisition in a mature market. If the
price is right and we can get the return on invested capital we do not have a
problem.
Mr. Demaria: Ok.
Mr. Oliveira: Ok?
Mr. Demaria: That is helpful, thanks. Can you roughly quantify what you would
consider large or medium? R$ 1 billion …
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Mr. Oliveira: It is a moving target, because what is large today would be very, very
large five years ago. So we are talking about … you know, 500 million is pretty
large in terms of revenues for us because you have to consider … one thing that
we take into account when you do the calculation of return on invested capital is
how well we can integrate those things and that is something that people might
oversee sometimes. So we take into account a very large acquisition makes so
much harder the integration part. So for example R$ 500 million … US$ 500 million
in revenues would be fairly large – to give you an idea.
Mr. Demaria: Ok, that is very helpful. Thanks Luís.
Operator: Excuse me. Again, if you would like to pose a question please press
star one (*1).
This concludes today’s question and answer session. I would like to invite Mr.
Lueders to proceed with his closing statements. Please go ahead, sir.
Mr. Lueders: Thank you, thank you for you to be with us in this conference call
and we are optimistic for the future, for the future of our business and we are also
building all the time, seeing new segments of market, looking and we are very
flexible in our operations and all the time we are discussing the best we can do,
with conservative ways to maintain the profits and so on and I hope that we can
have better numbers in the coming quarters.
We are optimistic because we are optimistic in the economy of Brazil and we are
optimistic in some recovery of the economy in the United States, maybe also in the
future in Europe and new countries and so on. Thank you, thank you again for
coming to this conference call. Bye-bye.
Operator: That does conclude the WEG audio conference for today. Thank you
very much for your participation, have a good day and thank you for using Chorus
Call.
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