WEG Day Harry Schmelzer Junior, CEO August 2012 WEGE3 / WEGZY
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WEG Day Harry Schmelzer Junior, CEO August 2012 WEGE3 / WEGZY Overview Impressive growth track record 5,189 4,392 3,74 49 3,009 3 2,515 5 2,204 1,6 694 1,282 1,066 800 628 6 527 5 466 4 372 3 353 3 CAGR 18.3% 4,211 4 4,502 Business model allows to find and explore growth opportunities even under unfavorable macroeconomic conditions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 WEG Day 2 Resilient business model We are back on track on top line growth, growth despite challenging macro conditions 18% 44.392 4% 2007 WEG Day 2008 2009 2010 2011 2.8899 21% 2.403 4.2211 3.7499 20% 44.502 -6% 6% 5.1889 Net Revenues (RS$ million) 2012 3 Robust and diversified business model We adapt and thrive under almost any condition Domestic & External markets 41% External Market 50% 59% Domestic Market 50% 2007 WEG Day 6M12 4 Broad and synergistic product portfolio Business areas revenue mix 6% 5% 6% 7% 14% 12% 12% 15% 23% 27% 57% 55% 2007 2008 Paints & Varnishes WEG Day 34% 26% 48% 54% 2009 2010 Domestic Use GTD 6% 11% 6% 9% 24% 22% 59% 62% 2011 06M12 Industrial Equipment 5 EBITDA and margins EBITDA (RS$ million) and EBITDA Margin 25% 23% 20% 18% 17% 16,2% , 15,8% -18% 18% 2007 WEG Day 2008 2009 2010 2011 4669 23% 380 7899 8882 12% -6% 8337 1.026 9923 11% 2012 6 How to improve margins / increase competitiveness? Strong focus to improve competitiveness Internal productivity and continuous improvement Improve global manufacturing footprint Innovation and higher technological content Recovery of overall economic conditions WEG Day 7 Industry y structure and WEG’s business model Our industry is undergoing major change Megatrends cause changes in demand and create opportunities Energy and industrial efficiency Renewable energy Electric motors represent around 25% Global need to diversify energy of world electricity consumption Industrial productivity increases and ISO 50.001 (energy management) di drives investments i t t sources and lower GHG emissions Scale and technological development increases viability Smart grid Electrical mobility Electricity distribution network has to Increasing urbanization adds to become ”smarter” More sensors, more automation, more efficient generation and use of electricity WEG Day congestions and need of new solutions Electric vehicles, hybrids or alternative fuels will become more common 9 Electric equipment industry structure A perceived As i db by WEG Generation (into electric energy) Thermall Biomass Th Bi Thermal Natural Gas Small Hydroelectric Plants Wind Solar WEG Day Components and integration AAutomation t ti (l(low & hi highh voltage switchgear, drives, controls) Critical power Conversion (from electric energy) Electric motors Transformers Gearboxes 10 “The final destination” Strategic integration of equipment into complete solutions Components and integration G Generation ti C Conversion i Typical Applications Valu ue Adde ed Ventilation Compressors Generation plants Substations Segments Oil & Gas WEG Day Pumps Mining Sugar & Ethanol Ship building Steel Pulp & Paper Cement General Industry 11 Motors Strategic Positioning Appliance Industrial Hi h V lt High Voltage Energy Generators Biomass Systems Small Hydro Small Hydro Wind T&D Power Dry Distribution Automation Substations Drives Controls Panels N New Business Gearboxes Gensets Hydro Turbines Steam Turbines Steam Turbines Gas Turbines WEG Day 12 Differentiated business model Our capabilities and characteristics are quite unique and enable us to make the best of market opportunities WEG Day 13 Clear competitive advantages Unique business model creates important and stable advantages Competitive Advantages WEG Business Model Large and synergistic portfolio Worldwide presence One-stop One stop shop concept Mass customization Production in low cost emerging g g markets Low financial leverage Focus on M&A enabling continuous future growth WEG Day 14 Strategic Planning WEG Strategic Plan 2020 Corporate aspiration of R$ 20 billion by 2020 20,00 0 73 0,73 2,60 2,40 3,60 5,48 17 0% a a 17.0% a.a. 5,19 WEG 2011 WMO 15.3% 15 3% 15.5% WEN 21.3% 21 3% 11.2% WTD 15.2% 15 2% 17.4% WAU WTI 19.5% 19 5% 83.9% 16.0% 16 0% 58.9% WEG 2020 CAGR 2011‐2020* WEG Day 16 Growth drivers “More More and Better” Better International Expansion p New Businesses WEG Day 17 Growth comes from diverse base Disciplined approach to organic and non-organic non organic expansion 20,00 0 73 0,73 2,60 1/3 Non Organic 2,40 3,60 5,48 17 0% a a 17.0% a.a. 2/3 Organic O i 5,19 WEG 2011 WMO 15.3% 15 3% 15.5% WEN 21.3% 21 3% 11.2% WTD 15.2% 15 2% 17.4% WAU WTI 19.5% 19 5% 83.9% 16.0% 16 0% 58.9% WEG 2020 CAGR 2011‐2020* WEG Day 18 Portfolio Strategy Clear vision of attractiveness of opportunities November 2011 May 2010 Market Acc cess October 2011 November 2011 May 2010 May 2011 June 2012 June 2010 March 2011 December 2010 Technology WEG Day 19 WEG Day Sérgio Schwartz, Vice President August 2012 WEGE3 / WEGZY Business overview WEG Motors Industrial motors business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Large and fast growing markets Fundamental F d t l changes h in i consumer preferences f and regulations Mass customization and global distribution Technical assistance, technological know-how Cost competitiveness Customized to fit each market Organic (Africa, Middle East, North America) Inorganic (China and India) Maintain competitiveness in Brazilian market Significant additional revenues impact from acquisitions More competition from Asian players Difficulties to operate commoditized products 2 Worldwide Minimum Energy Performance Standards IE2 NEMA PREMIUM HIGH EFFICIENCY NEMA PREMIUM NEMA PREMIUM HIGH EFFICIENCY EFF1 IE2 HIGH EFFICIENCY IE2 WEG Day 3 Decentralized manufacturing footprint Increased flexibility flexibility, reduced costs and lower exposure WEG Day 4 WEG Motors Large and fast growing markets North America ~US$7,4 $ bi by 2020 - 5% p.y. China and Índia ~US$13,4 bi by 2020 - 12% p.y. Africa and Middle East ~US$2,5 US$2 5 bi bby 2020 - 5% p.y. WEG Day WEG Motors Power transmission business case Business Attractiveness Synergies Market is mature and growth rates are stable Complete C l t power transmission t i i solutions l ti andd increasing complexity are strong trends Engineering services and product development Technical sales force, able to provide complete power transmission solutions Expansion Model New markets (organic and inorganic) Portfolio expansion p Economic C id ti Considerations Maximize synergies Execution E ti off growth th strategy t t Risks Reaction from gearbox manufacturers WEG Day 6 WEG Power Transmission Synergy Complete package of new opportunities Gearbox WEG Day + Motor + Drives + Controls 7 WEG Motors Comercial / appliance motors business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Large, mature, high volume (scale) markets Competition C titi is i price i based, b d but b t logistics, l i ti engineering services and R&D are also important Well positioned in Brazil Condition to expand abroad, under certain conditions Several options to explore,: From maintaining Brazilian market focus To pursuing global expansion (inorganic) Maintain competitiveness and defend Brazilian market Execution of geographic expansion strategy Lower growth of the Brazilian market (organic or loss of market share) 8 WEG Automation Drives and Controls business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Fast growing market (8 to 11% per year) Energy efficiency and new applications tend to increase demand Internally developed technology Cross sales synergies, specially with industrial motors Growth options (increase Brazilian share, expand internationally, enter new applications) Some S geographies hi offer ff better b tt opportunities t iti Maintain Brazilian position Execution of growth strategy (new geographies, geographies new applications) Commoditization of smaller products Fierce competition from Asian players 9 WEG Automation Smart Grid business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Globally developing market Brazilian market still in the first stages, pending regulatory definitions Already supplying infrastructure components, components smart applications are incremental business Leverage g leadershipp positions p Develop strategic alliances R&D investments Explore inorganic alternatives Intensify R&D actions Accelerate expansion of portfolio of products and services Earlyy stages g of market development p ((regulation, g viability, i bilit ttechnological h l i l standards) t d d ) Competition from international players 10 WEG Automation Building automation business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Large, fast growing market (U$ 70 billion/year) Energy management, security and general control tend to grow faster Technology is dominated and products are already commercially available Some distribution channel synergies Leverage current product line Develop client relationships Complement portfolio Brand new market for WEG Significant additional revenue stream Large diversity of products demands more intensive R&D effort 11 WEG Automation Critical Power business case Business Attractiveness Synergies Expansion Model Fast ggrowingg emerging g g markets like China,, India andd Middle Middl East, E based b d on energy stability bili Mature markets should have moderate growth Alternator (genset component) and UPS are already part of product portfolio Component p synergies y g with other applications pp Expand into genset business, leveraging product portfolio Increase I UPS capacity it Economic C id ti Considerations Lower margins in equipment Significant opportunity in services (MRO) Risks Diesel engine manufacturer client loyalty GHG emission regulations may restrict market WEG Day 12 WEG Automation Complete solutions / Systems business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Increasing investment for industrial and infrastructure applications in Brazil Additional revenues from products and services Scale of production, production specific capabilities and cross sales opportunities in Brazil New competencies needed outside of Brazil Leverage existing relationships and markets Capture cross synergies Sector specific model to maximize returns Build up of installed base that can be further leveraged Specific risks are different from equipment manufacturing (assembly delay, engineering) 13 A World of WEG Day 14 WEG Energy Small Hydro business case Expansion Model Hydro y capacity p y to increase byy 60% over next 8 years, investment i off U$ 75 billi billion / year globally l b ll Around 10% of investment goes to Small Hydro Complete solutions solutions, including electrical and mechanical packages Industrial capabilities to leverage outside Brazil Maintain strong position in Brazil Organic expansion in Latin America Develop larger machines expertise / technology Economic Considerations Strong competition with other energy sources Risks Regulatory/environmental restrictions Incentives for other sources of energy Business Attractiveness Synergies WEG Day 15 A World of WEG Day 16 WEG Energy Biomass business case Business Attractiveness Synergies Brazilian investments in sugar & ethanol should rebound and generation capacity to grow by 7% per year (5% p.y. globally) Electrical El t i l solutions l ti andd partnerships t hi iin tturbines bi Industrial and commercial capabilities to leverage outside Brazil Expansion Model Economic C id ti Considerations Risks WEG Day Strengthen partnerships and expand product and service portfolio Organic expansion in emerging economies Attractive market for complete solutions (synergies with industrial applications) Lower regulatory/environmental risks Economics of ethanol fuel market 17 A World of WEG Day 18 WEG Energy Wind Energy business case Business Attractiveness Synergies Competitive with other alternatives in Brazil Annual investments of around U$ 1.6 billion Technology being dominated (MTOI JV) Synergies with all other business units (parts and Expansion Model components) p ) Primary focus in Brazil Option to expand in Latin America and other i t international ti l markets k t Economic C id ti Considerations Attractive market for complete solutions Attractive marginal expansion Risks Execution risks (new entrant) Economics of the global wind energy market WEG Day 19 WEG Energy Solar Energy business case Business Attractiveness Synergies Expansion Model Fast global growth Government incentives and subsidies should improve attractiveness for generators Inverters are already part of portfolio Synergies with other business units (parts and components) p ) Organic effort to develop specific products / extend product portfolio Explore E l inorganic i i options ti Economic C id ti Considerations Attractive marginal expansion Risks Market risks include regulation and viability Technological standards yet to be defined WEG Day 20 1 WEG T&D Power Trafos business case WEG products represent around 30 to 50% of a substation total cost WEG Day 21 WEG T&D Power Trafos business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Moderate global growth (3% p.y.) Attractive opportunities in specific geographies and portfolio extensions Technological know-how know how in large equipments Distribution channel synergies in international markets Organic and inorganic efforts to complement product portfolio Organic and inorganic geographic expansion Attractive additional revenues opportunities with marginal distribution / product portfolio investment Geopolitical risks in some countries / regions 22 WEG T&D Distribution Trafos business case Business Attractiveness Synergies Expansion Model Economic C id ti Considerations Risks WEG Day Moderate global growth (3% p.y.) Fairly large addressable market (U$ 3 billion / year globally) Industrial footprint in place in Brazil and Mexico Around 15% share of Brazilian market Regulatory changes in Brazil could create interesting opportunities Leverage L i t international ti l presence Commoditization makes marginal expansion comparatively less attractive Further commoditization and pricing pressure 23 WEG Coatings Coatings business case Business Attractiveness Latin American market grows 3% p.y. Addressable market should reach around U$ 2 billion / year. Synergies Unique position as integrated player Diversification allows for consistent growth Expansion Model Mainly organic growth Inorganic o ga c option op o too complement co p e e portfolio po o o Economic C id ti Considerations Focus in Latin America Risks Execution (environmental, (environmental labor) Cost pressures or increased competition WEG Day 24 WEG Day Laurence Beltrão Gomes, Finance and IR August 2012 WEGE3 / WEGZY Financial performance 1 Strong cash flow conversion We can continue to rely on cash generation as primary source of growth financing Cash Flow from Operations vs. EBITDA 85% 4.805,7 4.016,6 5.688,0 4.815,0 4.515,2 3.900,6 3.119,2 2.459,5 2 749 9 2.749,9 2.093,1 1.365,2 670,3 1.169,9 503,7 2005 2006 2007 2008 Accumulated Cash Flow from Operations WEG Day 2009 2010 2011 Accumulated EBITDA 2 Working capital needs (% of Net Revenues) 50,0% , 40,0% Working W ki Capital Needs 30 0% 30,0% Inventories Clients 20 0% 20,0% 10 0% 10,0% Suppliers Advances from Clients 0,0% 4T05 WEG Day 3T06 2T07 1T08 4T08 3T09 2T10 1T11 4T11 3 Organic Capex (R$ million) 10,2% 9,3% 8,0% 9,3% 7,4% , 6,8% 6,1% 6,1% 6,5% 5,8% 457 3,7% 349 42 38 49 73 83 3,6% 226 206 126 5,4% 5,3% , 146 233 188 111 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 12M1012M11 Organic Capex WEG Day Capex as % of Net Revenues 4 Adjusted Return on Invested Capital * 13,5% 14,7% 15,9% 12,1% 10,4% , 2005* 2006* 2007* 2008* 2009 10,0% 10,3% , 2010 2011 (*) Adjusted for the “deemed cost” from the adoption of IFRS WEG Day 5 Solid capital structure WEG has room to increase leverage Net Debt to EBITDA 2011 WEG 0,3 Brazilian Iochpe Industrial A 1,35 Brazilian Randon Industrial B LLarge Electrical El t i ABB l Multinational A 0,7 0,3 Large Electrical Schneider Multinational B Large g Electrical Siemens Multinational C WEG Day 1,3 0,9 6 Selling, General & Administrative Expenses (R$ million) 14,9% 14,2% 14,3% 14,5% 15,1% 15,8% 14,8% 768 652 634 2008 2009 695 536 374 2005 428 2006 2007 SG&A WEG Day 2010 2011 % Net Revenues 7 Research & Development (R$ million) 2,5% 2,4% 2,5% 2 3% 2,3% 2 3% 2,3% 2,0% 131 2,0% 101 86 89 2007 2008 83 73 63 2005 2006 R&D Spending WEG Day 2009 2010 2011 % Net Revenues 8 Dividend Pay-out Policy Net Earnings and Dividends (R$ million) 55% 52% 37% 35% 39% 40% 40% 43% 44% 54% 587 560 548 520 503 375 308 299 176 173 125 46 68 301 300 306 339 229 220 82 29 58% 45% 5% 575 403 59% 89 165 124 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Net Earnings WEG Day Dividends Pay-out (%) 9 Recent capital markets related activities WEG Day Sponsored level 1 ADR (JP Morgan) M k tM Market Maker k att BM&F Bovespa B (C dit S (Credit Suisse) i ) New web site, with intensive use on social media tools G d ll iimprove iinformation Gradually f i di disclosure l Increase sell side coverage More intense investor contact Increase sustainability communications 10 Liquidity – WEGE3 Average Daily Traded Volume (R$ th) Average Daily Traded Volume 5.001 4.744 5.156 4.900 6.614 7.365 4.680 7.406 6.745 6.060 7.693 9.882 5.483 Average 2012 Average Daily Trades Average Daily Trades WEG Day 6122 791 5066 6500 7388 8344 5044 7933 5999 4644 4522 3788 658 Average 2012 11 Closing Remarks WEG's Investment Case Direct exposure to fast growing energy efficiency and renewable energy generation businesses Internationalization strategy, in line with large addressable market, market supported by global manufacturing footprint Strong position in Brazilian market and global consolidator in segment with rising technological content Strong cash generation and solid financial position Opportunity to gain broad exposure in Brazilian and global industrial sector Unique business model based on vertical integration and production flexibility WEG Day 13
