Weg Sa S/Adr

Good morning and welcome to VEG's conference call to announce the results of the first quarter of 2024. We are streaming this conference call and after it's ended, the audio will be available. During the company's presentation, all participants will be in listen-only mode. And then we are going to start the questions and answers session. If you want to ask a question, please click on the raise hand icon on your Zoom screen. Once you hear your name, you're going to get a pop-up saying to activate your microphone, and then you can open your microphone to ask your questions. If you have more than one question, please ask all of them at once. If we do not have enough time to answer all questions during the live streaming, please feel free to send your question to our email, ri.veg.net. And we are going to answer the questions after the conference call. And any statements made during this conference call about future events, business prospects, operational and financial projections and goals, and the future potential of growth of WEG via mere beliefs and assumptions of WEG's management. and they are based on information currently available. Forward-look statements involve risks and uncertainties, and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operational factors may affect the future performance of VEG and may lead to results that will be materially different from those expressed in such forward-looking statements. Today with us in Jaraguá do Sul are André Luiz Rodrigues, Superintendent and Financial Administrative Director, and then Meneghete Salgueiro, IRO, Wilson Vatsko, Controller, and Felipe Scofield Hoffman, Investor Relations Manager. Please, Mr. André Rodrigues, the floor is yours. Good morning, everyone. It's a pleasure to be with you once again for the conference call to announce the results of it. I start with the highlights of the quarter on slide three, where the net revenue grew 4.4% as compared to the first quarter of 2023. In Brazil, we had a good performance with a highlight of long cycle equipments in the areas of transmission distribution of wind energy. In the international market, we have good performance. demand in the areas of generation, transmission, and distribution, and with good opportunities in North America and generation businesses with a robust order portfolio that we built along the last portfolios. EBITDA has reached 1.8 billion BRL. with a 4.8% growth as compared to the first quarter of 2023. The EBITDA margin ended the quarter at 22%, a growth of 0.1 percentage points as compared to the same period last year. Along the presentation, André Salgueiro is going to give you more details about these points. ROIC continued to evolve with a 38.9%, an increase of 7.5 percentage points as compared to the first quarter of 2023. And you can see more details on the next slide. where the improvement in our operating performance with revenues and margins more than offset our higher need of working capital and more investments in fixed assets. One important point to be emphasized is that ROIC had the positive impact of tax incentives that were booked in the fourth quarter of 2022. So taking out this non-recurring effect ROIC would have been 35.8%. Now I give the floor to André Salgueiro to continue. Thank you, André. Good morning, everyone. On slide five, you can see the evolution of our business revenues. In Brazil, industrial performance had a good performance with demand for short cycle products. We continue with good performance in long cycle products, especially medium voltage electric engines with a highlight oil and gas and mining industries. In GTD, we had another quarter of good results. driven by deliveries of large-sized transformers and substations to projects related to transmission auctions and distribution networks. And a highlight, too, to the wind generation. In distributed solar energy, despite the good growth in the volume of... Volume of sold, we had the same performance as last year, influenced especially by the reduction in solar panels prices, which impacted the prices of products sold. In terms of commercial and appliance motors, we had a good demand in many segments, into a strong growth with a highlight to air conditioning and pumps for residential use. In coatings and varnishes, we had stable demand, pulverized in different segments of operation with a highlight of oil and gas and maintenance. In the external markets internationally, we had a drop in short-cycle products, especially low-voltage industrial engines. In addition to the FX rate, lower demand in China and in some countries in Europe, a reduction of inventory is important. Customers have contributed for the results of the quarter. For long-cycle products, we had good results in high-voltage engines and automation systems, especially in the segments of oil and gas, water, and sanitation. In GTD, we continue with a very warmed-up market, especially with... transformers for renewable energy complexes and reinforcing the electric grid in the United States. In commercial appliance motors, demand dropped in the same markets where we operate, especially as compared to the lower inventory replacement of our customers in the United States. In paints and varnishes, we saw a growth in revenue with good results of our operations in Mexico. On slide 6, you can see the evolution of the EBITDA with a growth of 4.8%. EBITDA margin ended the quarter 22%, practically stable as compared to the excellent level that we had in the same period. in the previous year. This is a consequence of costs of raw materials combined with a mix of products sold. Finally, on slide number seven, you can see the evolution of our investments. We have invested $351 million this quarter, 64% in Brazil and 36% internationally. In Brazil, we advanced with the expansion of industrial engine plants and electrical plants. and internationally we increase our production capacity with our plants in Mexico and the expansion of our low voltage engines in China. And now I end my part and I give the floor back to Andre. Thank you very much, Andre Salgueiro on slide eight. Before we move to the Q&A session, I would like to talk about some of our most recent accomplishments and the outlook for the rest of the year. As to our recent achievements, I would like to highlight that in March we announced an investment of 100 million BRL in a new plant in in Mexico for industrial coatings to increase our manufacturing capacity and meet the demands in the market in Central America. We finalized the acquisition of industrial electric motors and generators business from Regal Rexnord. On May 1st, we started the transition and consolidation of our new businesses. Finally, I would like to talk a little bit about the outlook for the rest of the year. We continue with a healthy operational dynamics, with a good mix of products sold and stability in the cost of the main raw materials. This should continue supporting good operational margins and a positive return on capital for the rest of the year. We should continue to benefit from structurally favorable conditions, especially those related to electric infrastructures such as T&D businesses. On the other hand, we are still paying attention to the global macroeconomic scenario and the possible risks and volatility of our operations, especially with regards to the demand of equipment of short cycle. Despite the consolidation of industrial electric motors and generators of Regal Rexnord in May that contributed for higher revenue, this also means that we have some short-term challenges, especially operationally. Our action plan was very well structured, and the transition... team is already working for the gradual improvement of the profitability of our operations in the future periods. Now I end my presentation. Operator, we may move to the Q&A session, please. we are now going to start our questions and answers session as a reminder if you want to ask a question please press the raise hand icon in the lower menu on your screen now once you hear your name you're going to see a request to open your microphone and then you should open your microphone to ask your question we kindly request that you ask all your questions at once. So let's go to our first question from Lucas Macchioli from BTG. Lucas, we are going to open your audio for you to ask your question. Please, Lucas, you may ask your question. Thank you. Good morning, everyone. I have two questions. On the integration of Regal, for us to understand the process here, if you could update the information of the closing, what is the revenue of all the assets that you're buying, margin and utilization level? so that we can gauge the integration for us to update how much is going to come in in terms of Q2. And my second question, I think that it is the second question where CAPEX exists. It's different in Brazil and internationally. I think that this is related to the use of utilization capacity domestically, which is much higher than internationally. I could ask, what about this mix that used to be on the same basis both in Brazil and overseas, but I think here there is capital allocation exercise. But could you explain this trend that we have seen in the last two quarters? Hi, Lucas. Thank you for your questions. This is Andre Rodriguez. First, let's talk about... The merger. Well, we do not yet have all the numbers of Regal Next and the manufacturing industrial system. And this is the entire scope of our acquisition. But what we have are the numbers for 2023, where this division had an operating revenue of $500 million. million EBITDA or 39 and adjusted margin of 7.5%. So where are we in a process? So this is very recent. On Tuesday, we announced it. So we took over the company two days ago on May 1st. And between the closing and our objective was to have a good preparation of the entire preparation process. of the company. Obviously, the teams are not yet too involved, but we could structure our integration teams. So we created a formal committee for the transition with many of the executive officers of our company, and the meetings are overseen by the executive committee and also by the board of directors. I think that that first vexed concern was focusing on new employees. So after May 1st, we received 2,800 new employees. So to have a good communication process, reassure employees, we acquire the company to promote continued and sustainable growth, and also, obviously, to have very precise and clear information with our customers. So this was the focus from now on. The teams will go to the field to start the integration process that will take a few years, as we indicated earlier, until we reap all the benefits that we are expecting for the future. When we talk about CapEx, undoubtedly in the first quarter, we had a concentration, especially in Brazil, with 64% in Brazil. And this was relative to investments, increasing capacity, process improvements, productivity improvements. As we announced, we have a new industrial engine factory that is almost ready in Jaraguá do Sul, investments in a new batteries factory. But you should remember, that there may be an oscillation between quarters, so there may be more concentrated on the first quarter. Just as a reminder, for the full year, our CapEx is expected to be 1.9 billion BRL and 55% in Brazil and the rest in the industry. to national markets. So this may vary a little bit, but as a reminder, recent years, investments in foreign markets became much more relevant. But sometimes we need to concentrate depending on capacity demands, new businesses, and to allocate the capex. So this is the main design of everything that happened in the first quarter. Thank you very much. Thank you, Andrei. Thank you, Lucas, for your question. Our next question comes from Lucas Laghi, Southside Analyst of XP. Lucas, we're going to open your microphone for you to ask your question, please. Good morning, everyone. Good morning, Andrei, Salguero, Felipe. There are two things that I would like to ask you. Number one in the segment of external or foreign markets looking year-on-year and considering effects. With what you can see today in terms of backlog and new orders, is it possible to think of a reversal for the growth? of this market, which is quite significant thinking in terms of revenue and then thinking in terms of the short cycle. So external markets are weaker in China and Europe and also in the United States, which must be one of the most important when we look at the integration of And now a more specific question about taxes. We saw a rate that is not too different between the first and second quarter last year, and this is related to the transfer price. So we effectively see a benefit of transfer price in this quarter, but in terms of tax benefits, it compensated. So what can we think about the future, about the combination? of these factors that reduce the rate. And these are the two main points. Thank you so much. Hi, Lucas. Thank you so much. This is Salgueiro. So starting with the electro-electronic and industrial equipment in the international market, we saw slightly weaker demand this quarter. So here, We have the short cycle and long cycle and outside Brazil. And on the whole equipment, there is a higher predominance of short cycle. And this is important because here, this is where we see some demand oscillation. So we tried to qualify the main geographies that are impacting, especially China, which is something that has been going on since last year. And more recently, an oscillation on demand, especially in some countries in Europe. What I can say about the U.S., that you asked your question, we started seeing some oscillation that is not so significant as we see in China and some countries in Europe. But on the whole, this is kind of a global movement. So part of this, this is an adjustment of the industry as a whole, and also the adjustment in inventory of some significant customers after the normalization of a global supply chain. There was very strong demand after the first impact of the pandemic, and then this lasted for quite some time. And now we are seeing the industry as a whole and the chain as a whole going back to normal. and this inventory effect coming. Looking into the future is a little bit more difficult, considering that our portfolio is not too long, considering the product's features, because it's a shorter cycle. But we have a visibility, and we expect this inventory adjustment to take place and to be normalized. And then we can see an improvement when we look into the horizon for upcoming quarters. As to your second question, the rate, you said correctly that when we see the impact of foreign operations, they contribute, they have a smaller share this quarter, and we are seeing an adjustment in the transfer prices. But other lines are flat. So we have some benefits in Brazil, especially if we look at the performance of commercial and appliances and home appliances. And most of the incentives are concentrated in Brazil, both in Linhares and Manaus. So this contributed to this movement. And in the end, we had a rate that was more or less at levels that are similar to previous quarters for different reasons. So looking into the future, we expect this rate to go up a little bit, especially because of the changes in transfer prices. Great. Thank you. Thank you so much, Lucas, for your question. Our next question comes from Gabriel Rezende from Itaú BBA. Gabriel, we are going to open your microphone for you to ask your question, please. You may go on. Good morning. Thank you, everybody, for the space. I would like to talk with you the dynamics that we saw in the first quarter and maybe what we expected was a scenario of accommodations during the quarter. And we had a positive surprise in Q4 and another positive surprise in your performance there. So you've talked about the mix and the dynamics with raw materials. And if possible, could you give us some more detail on how you see the dynamics of margins profitability in EBITDA for the rest of the year? So which are these factors that are non-recurring? And how much can it change along the future quarters? And what could hold your margins down? at levels that would be higher than we had imagined before. Thank you so much. So I think that some points you have already mentioned, we have said that this time of stability of costs and most of the raw materials have contributed the product mix with different margins. It's always good to remember that we are through a positive time for the demand for long cycles with better margins along the years. And the company has always invested in cost reduction programs, process improvement, both industrial and administrative. And this has also contributed for better margins overseas. So, in analyzing what happened so far, when we look into the future, I think that we can comment that the consolidated margin has proven to be more resilient, especially because of the good performance in the long cycle. And in this scenario, I think that we have no expectations of significant changes and we should continue with a better performance along last years, the recent historical leverage. It's good to remember that the consolidation of businesses in Regal starting in May will have a negative impact for short-term margins. But as we said before, and we have mentioned it, the impact is not so significant, but it goes down a little bit. So we always say that oscillations in margins are common in our industry, but our objective is to always deliver margins that are above the market. So I think that a point here and that the good news is that the consolidated margin has proven to be more resilient. And in the current scenario, we are not seeing too many relevant changes. Great, Andrei, thank you so much. And so as a follow-up, and I would like to hear from you how you've been seeing it for the different segments. I ask this especially because we've heard from global competitors of WEG that the price dynamics is healthy. And companies have been working to improve the strategies, seeking to preserve margins, especially after the inflation that we've been seeing in these recent years in Europe. Could you give us more details about the price dynamics? Well, Gabriel, we are kind of confirming what we've been seeing in the market. So we are not seeing any pressures so far. Great. Thank you so much. Thank you, Gabriel, for your question. Our next question comes from Felipe Lanza from Citibank. Felipe, we are going to open your microphone for you to ask your question. Please, Felipe. Good morning, everyone. And I have two questions. The first question is about the possibility of including power storage system in batteries. The use has been going up and prices have been going down. So you could give us some more color how much including batteries in the auction and how relevant this would be to VEG and the performance for the rest of the year. It's regarding the MoVir program. VEGI was allowed to take part in this program, so with investments in P&D. which can be very relevant for your company. So could you give us a little bit more color and the percentage of your reported caps that would be able to create this financial credit and how much credit you would be expecting for the whole year? Hi, Philip. Good morning. Thank you for your question. This is Salguero. As to power storage in the auction, we are debating it. We are monitoring it close up. And this can be positive for the development of the market and also for demand for this type of equipment in Brazil. So VEG has already positioned as a provider of power storage systems. We've done that a while ago, also because we bought an American company a few years ago. We already have this company. In terms of power storage, we are producing batteries for electric buses. So we've been investing. But in practice, What happens is that, especially in power storage, we are not seeing a structured demand in Brazil. So what we are seeing now are some P&D projects, very one-off and standalone opportunities. And once this goes into the auction, this could be the beginning of a more structural demand. And this can be positive for the development of the market as a whole. Hi, Philip. This is Andrei Rodriguez. About the MoVir program, we see this positively. Undoubtedly, this is a way to foster the growth of technologies related to mobility in Brazil. So this movement is likely to be beneficial for VEG as we continue to develop solutions that are related to powertrains and battery packs, and all of this is directly related to this program. And we also have a significant presence in recharge stations. And we have all the infrastructure necessary for the generation distribution of energy. Based on information that we have so far, it's small. The most important for us are the financing and incentives. Thank you, Felipe. Our next question comes from Victor Mizusaki from Bradesco BBI. Victor, we are going to open your microphone. You may ask your question, Victor. Good morning. Congratulations on your result. I have two questions. The first, could you talk a little bit about the backlog, the P&D backlog in Brazil and U.S.? And the second one is about cost. In the last 30 days, we saw a spike in copper prices. How do you see the scenario in copper prices? Thank you. Hi, Victor. Good morning. This is Salgueiro. Thank you for your questions. As to P&D backlog, we've been reporting for a few years. And maybe this is the business segment where we have the longest backlog right now. So both here in Brazil and especially because of all the projects that are taking place. In relation to transmission auctions, not just that, we have all the investments of distribution, power distribution companies and all investments in the generation of renewable energy. So we have a quite positive portfolio for this year and also for next year. And now when we look at the international markets, we talk a lot about Mexico and U.S. And those are the most significant operations for us with a quite healthy portfolio. And this year in building our portfolio for next year, sometimes with even longer cycles, which can be positive. But I think that you should remember, that it's not just U.S. and Mexico. In South Africa, we also have T&D operations. So we see a favorable market demand because of electrification, investments in renewable energies. And what makes it clear is an investment that we announced at the end of last year, 1.2 BRL, to increase T&D capacity both here in Brazil, expanding our factory in Beijing, Minas Gerais, and also in Itajubá, and also in Mexico with a new plant, a new plot of land in Mexico, and also a new factory in Colombia. this is the visibility that we have and the prospects that it will continue to grow along next years. As to copper, if we look back, we did not see such a significant impact, but it's fair to say, especially in the last few weeks, we started to see an increase that is slightly more significant, so we need to monitor this, always in In terms of copper, we see a hedge, and we project the consumption for up to 12 months, and then we do the proportional hedge for three to four months, and then trying to have a protection curve to make all these short-term oscillations more smooth. But we need to monitor this and we need to see this trend and maybe looking into the future, we should think of something else. It might be just a market movement. So at first, without any major impacts, I think that hedge helps a little bit. And along the next few weeks or months, we should try and define and see if we need to change anything in our strategy. But for the time being, no major impacts for the company. Thank you. Thank you, Victor, for your question. Our next question comes from Marcelo Mota from JP Morgan. Marcelo, we are going to open your microphone for you to ask your question. Thank you. You may continue. Thank you. Good morning, everyone. I have two questions. Just going back to Regal, just to confirm if to you the idle capacity was still at 50%, as you said, at the time of acquisition. And to think of low-hanging fruits, what are they in terms of margin? So once you can plug it into your structure, in terms of supply chain and verticalization, there could be a significant increase in margin in the short term. So these two points, if you could share some more information about Regal with us. I'm Marcelo. This is Andre Rodriguez. Well, the information that we have so far, yes. Yes. We have a 50% utilization capacity, so this is positive and will continue to grow outside Brazil without any major capacity constraints. As to all the gains and synergies that this is going to provide, we know the level of verticalization, we know if each unit is here. We know that we have many opportunities. The first will always be the acquisition of raw materials, how much we can buy more steel, copper at a wider scale. But after this, we need to take the process of verticalization. Maybe the first step, which might be the simplest, we have a capacity available in Mexico, is that we can manufacture engine carcasses and regal. The other processes will invest and will depend on some investments of tools to produce regal parts So, Greg has one question, which is our manufacturing growth with the level of technology, which is along this integration process. As it develops, our objective is to bring the operational margins closer to to what we operate, our factories in China, is very much likely to be to what we have in other places, just as Monterey, close to the margins that we have in other nearby locations. So we want to bring each unit's margins closer to the closest VEG plant. Thank you so much. Thank you, Marcelo, for your question. Our next question comes from Gabriel Frazon from the Bank of America. Gabriel, we're going to open your microphone for you to ask your question. Please, Gabriel, you may ask your question. Good morning. Thank you for the opportunity. I also have a question. So can you tell us the revenue shrinking this quarter? Is it due to a drop in volume or is there a drop in prices too? Hi, Gabriel. Good morning. Well, actually, the price effect was small. It's more an effect of volume, especially because of the dynamics that I have just explained. So there is a normalization of the supply chain and inventory adjustment and also an activity industrial investment similar to what happened in recent years in the main geographies. Thank you. It's very clear. Thank you so much. Thank you for your question, Gabriel. Our next question comes from Alejandro de Miquelis from Jeffers. Alejandro, we are going to open your audio for you to ask your question. Please, Alejandro, you may ask your question. Good morning. Thank you. I am going to ask the question in English. Hello, Alejandro. Good morning. I'm going to answer in Portuguese so that we keep the program. As to Copper Hedge, so we have it structured for all operations in the world, but for the operations that we have now, They are not yet within this process. Now we are going to start the integration, and we have started already. Now we are going to look into those operations, and we are going to bring this volume projection of those operations into our hedging methodology for each one of the locations. So it's in our pipeline to solve this. So we will look at this from now on. Alejandro, this is Andre Rodriguez. As to the working capital, along the recent quarters, we have improved our inventory turnover. So we had a normalization of the supply chain. and in the first quarter, if we take consolidated 4.5, 4.4, it's a substantial improvement as compared to what we had in previous quarters. The integration is going to reduce this turnover, which was not fully integrated or verticalized It also suffered greatly with the pandemic, and we have worked to improve the turnover. But I don't see this as a reduction. So we are not expecting any major changes looking into the future. Also, because with a very positive long cycle dynamics, so all these operational working capital indicators have improved greatly recently. Thank you, Alejandro, for your question. Our next question comes from Lucas Esteves from Santander. Lucas, we are going to open your audio for you to ask your question. Good morning, Rodriguez. This is Philip. Thank you very much for the opportunity to ask the question. Going back to what you said about electrification and all the opportunities on this segment, if you could update us on the evolution of market potential with the recharging of electric vehicles. Also in the US. But as you said, South Africa, Mexico. Could you share more with us about that? Thank you for the question. This is Salgueiro. Thank you. As to the recharging, the charging of cars, and so we have the third generation of charging stations. We've changed the product portfolio. This is growing at a fast pace. It's still small business as part, as a share of our total revenues, but it's been growing a lot, especially here in Brazil. We have announced many partnerships with many OEMs here in Brazil. We also announced partnerships with OEMs in other countries. So it's not just here in the Brazilian market. In Brazil, we are more advanced because of our presence, recall of brand. This evolved more fast. But We have the intention of having this in other geographies. This has started slightly more relevantly in other markets in South America, but we also want to develop this market in other geographies, especially in North America and maybe even other regions in the near future. Just to consolidate the knowledge, the product that you develop for charging stations, it is prepared and thought to have access to international markets, especially US and EU. Right or not? Everything that is collected to the electric grid depends on certifications. That depends very much on local standards. So whenever we travel around the world, even the plugs, the plug outlet to charge a cell phone is different in each country. So there are a few unique features depending on the geography. depending on the product, but they are related to the features of each market and the certifications. The equipment in itself and the constitution of the equipment doesn't change so much from one geography to the other. Thank you, Lucas, for your question. And now our next question comes from Victor Antoniuk from Legacy Capital. Victor, we are going to open your audio for you to ask a question. Victor, please. Victor, Mr. Antoniuk, could you ask your question? Victor Cudi Antoniuk, you raised your hand. You may ask your question, please. So I think Mr. Antonio does not want to ask the question. He's taken out his question. And now we're going to wrap up our questions and answers session. Now I would like to turn it over to Mr. Andre Rodriguez for his closing remarks. Please, Mr. Rodriguez. I would like to thank once again everyone for your presence here today to wish you an excellent weekend. Until we meet again next quarter. VEG's conference call has now ended. Thank you so much for your participation. Have a good day. Thank you.