WEG S A : Conference Call Transcript

WEG S.A.

Conference Call - Earnings Results 2nd Quarter 2022 July 21, 2022 - 11:00 a.m. São Paulo (BRT)

Transcript of the simultaneous translation from Portuguese into English

CORPORATE PARTICIPANTS

risks and uncertainties and therefore dependent circumstances that may or may not occur.

Mr. André Luís Rodrigues - Chief Financial

Officer

Mr. André Salgueiro - Finance Director and Investor Relations Officer

Mr. Wilson Watzko - Controller Officer Mr. Felipe Scopel Hoffman - IR Manager

PRESENTATION

Operator: Good morning and welcome to WEG's conference call on the results of 2Q22.

Investors should understand that overall economic conditions, industry economic conditions and other operational factors may affect the future performance of WEG and may lead to results that will be materially different from those expressed in such forward-looking statements. Now we would like to remind you that this conference call is being conducted in Portuguese and you are listening to the simultaneous interpretation into English.

Today with us in Jaraguá do Sul we have Mr. André Luis Rodrigues, CEO and CFO; André Menegueti Salgueiro, CFO and IRO; Wilson Watzko, Controller and Felipe Scopel Hoffman, Investor Relations Manager.

Please Mr. Rodrigues, you may start.

We inform you that we are transmitting this conference call accompanied by the slides in our investor relations website at the web address ri.weg.net and after it finishes the audio will be available in our investor relations website. Should you need any assistance during this call please request the help of the operator by typing star zero (*0).

Any forward-looking statements contained in this document or statements that might be made during this conference call about future events, business prospects, operational and financial projections and goals and to the potential of future growth of WEG, are mere beliefs and assumptions of the Company's Management because they are based on information currently available. Forward-looking statements involve

Mr. André Luís Rodrigues - Chief Financial Officer

Good morning everyone. It is a pleasure to be with you once again to announce the results of WEG on this conference call.

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We start with the highlights of the quarter, where the operating revenue grew 25% compared to 2Q 21. We have maintained a good performance in the main markets where we operate, reinforcing our strategic direction of developing products and solutions of greater added value to our customers. We had a strong performance in the domestic market with good demand for our business of low-voltage electric motors, reducers, automation and especially businesses related to the generation of renewable energy and energy transmission and distribution.

In the foreign market demand for industrial businesses is still very busy, with a growth of 23.7% in local currencies as compared to the same period a year earlier.

The adjusted EBITDA was 1.3 billion BRL, up 14.5% compared to the adjusted EBITDA in 2Q 21. The adjusted EBITDA margin ended the quarter at 17.4,

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WEG S.A.

Conference Call - Earnings Results 2nd Quarter 2022 July 21, 2022 - 11:00 a.m. São Paulo (BRT)

Transcript of the simultaneous translation from Portuguese into English

down 1.6 p.p. from last year's adjusted margin. Throughout the presentation André Salgueiro will provide more details about this performance.

Lastly, ROIC fell as expected in this quarter, as we are going to see on the next slide. It dropped 5.3 p.p. as compared to 2Q 21 reaching 26.9%.

An important point that we should highlight is the that from this quarter on ROIC will suffer a greater effect of the impact of the booking of nonrecurring ICMS credit on the PIS and COFINS calculation basis since 2Q 21. The operating income after taxes of the last 12 months no longer has the great benefit of these credits, which were booked in 2Q 21; but on the other hand our invested capital still considers most of the adjustment, since the amounts of taxes to be recovered are still booked in our balance sheet.

In addition to this effect, the growth of invested capital is explained especially by the greater need of working capital and higher CapEx, which also contributed to reduction of the ROIC, despite the growth of the operating profit after taxes over the last 12 months.

Now I would like to turn it over to André Salgueiro to continue.

Mr. André Salgueiro - Finance Director and Investor Relations Officer

Thank you André, good morning everyone. On slide 5 you can see the evolution of our business areas in the markets where we are operating, starting with Brazil where the performance of industrial electronic equipment continued positive this quarter.

The good demand was heavily pulverized in short-life equipment. This is equipment such as electric engines, reducers and serial automation products with the highlight on agribusiness, pulp and paper and mining segments.

2Q21	2Q22	2Q21	2Q22	2Q21	2Q22	2Q21	2Q22
2Q21	2Q22	2Q21	2Q22	2Q21	2Q22	2Q21	2Q22

In the GTD area we had a relevant delivery volume of wind turbines, as well as an increase in demand for distributed solar generation.

T&D business was another highlight, with good volume of revenues driven by large transformers and substations for projects related to transmission auctions, along with transformer sales for distribution networks and industries.

In commercial engines and appliances there was a reduction which we already expected in the domestic market, after strong sales volume in the same period of last year. It is worth mentioning that we noted a gradual reduction in sales volumes at the end of the quarter, especially in engines for home appliances.

Lastly, the demand for paint and varnish products maintained the high-level of sales with emphasis on sanitation, mining and metals structures.

In the foreign market, the continuity of the industrial investment observed in recent quarters was an important factor for the performance of the industrial equipment area, despite the uncertainties of the macroeconomic scenario. Sales of short-life equipment showed significant increases in revenue, especially low- voltage electric engines, whose demand is very pulverized among different industrial segments.

In GTD revenues showed typical fluctuations of long-life businesses, mainly after deliveries of significant T&D projects in Colombia and South Africa and steam turbines in Europe throughout 2021.

In North America, our main region of operation in this business area, we continue the process of increasing the capacity utilization of the new transformer plant in the US, taking advantage of the opportunities present in this market to build a robust portfolio for coming quarters.

In commercial engines and appliances, the positive sales volume is explained mainly by the good economic activity and market share gains in countries such as Mexico and China.

And in paint and varnishes Brazil's exports to Latin American countries and sales of other operations

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WEG S.A.

Conference Call - Earnings Results 2nd Quarter 2022 July 21, 2022 - 11:00 a.m. São Paulo (BRT)

Transcript of the simultaneous translation from Portuguese into English

abroad, both in Mexico and	in	Argentina, have	prospects for the remainder of the year.
contributed to the growth	in	this quarter.
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On slide 6 shows the EBITDA performance in 2022, with a reported EBITDA showing a 9.8 reduction over the same period in the year before. The EBITDA margin ended the quarter at 17.5%.

It is important to highlight that in 2Q 21 we booked nonrecurring credits related to the exclusion of ICMS from the PIS and COFINS calculation basis. Adjusted for this effect the EBITDA grew 14.5% compared to the same period of last year, with EBITDA margin 1.6 p.p. lower.

The challenges in the global supply chain and the consequent increase in raw material costs, together with a change in the product mix and the increase in energy and freight costs, still bring pressure to the

company's

operating

margins.

Finally, on slide number 7 we show the evolution of our investments. In 2Q 22 we invested 226.1 million BRL in modernization and expansion of manufacturing capacity, in machinery and equipment and software-use licenses, 55% of which were meant for production units in Brazil and 45% meant for industrial complexes abroad. Now I end my part and turn it back over to André.

Mr. André Luís Rodrigues - Chief Financial Officer

Before moving to Q&A, I would like to talk about some of our latest accomplishments and comment on our

With regards to achievements I would like to highlight the following events: in June our company was the highlight in the Broadcast Empresas Award given by Agência Estado in partnership with Getúlio Vargas Foundation. We were the number one company out of 204 companies with shares traded in B3 that generated the most value to shareholders. We also received special awards in the categories of Sustainability and New Market.

Recently we announced the beginning of the development of the new wind turbine platform with the power of 7 MW and rotors that will be 172 m wide, which would be the largest machine under development in the Brazilian market.

And this week we formalized the creation of WEG Algeria, a joint venture focused on commercial engines and appliances to serve Algeria and North Africa.

Finally, the outlook for the remainder of the year. Number one, we must not forget the macroeconomic scenario is more challenging for the rest of the year. Global inflation at high levels and the consequent increase in interest rates in major markets can interfere with the level of growth of the global economy and consequently of our businesses, especially short-life ones.

On the other hand, we understand that our competitive advantages help us a lot with that regard. We believe our business model based on verticalization, long-term vision and especially diversification of products and solutions, with different exposures to economic cycles, helps us not only expand our range of opportunities; but also mitigate risks and uncertainties in times of turbulence, like these that we are experiencing.

Therefore, despite the challenges presented in the macroeconomic scenario we expect to deliver another year of revenue growth and profitability, within the company's expectations and historical track record.

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WEG S.A.

Conference Call - Earnings Results 2nd Quarter 2022 July 21, 2022 - 11:00 a.m. São Paulo (BRT)

Transcript of the simultaneous translation from Portuguese into English

Now I end my presentation and we may move to our Q&A session.

Q&A SESSION

Operator

Ladies and gentlemen, we now may move to our Q&A session. If you want to ask a question please press *1. To take your question from the list please press *2.

Our first question comes from Lucas Lague from XP Investments.

Mr. Lucas Lague - XP Investimentos

Good morning André Rodrigues and Salgueiro, congratulations on your performance. I would like to discuss two things with you in terms of renewable. First I am going to talk about solar and then wind.

So starting in solar, could you give us an idea about the mix in this segment of distributed generation, especially thinking of larger projects, or smaller projects such as in homes, small and middle-sized businesses?

And how do you see the growth prospects for the different subsegments in 2023, which will be a year with higher inflation and interest rates as we saw before, and the new regulation in terms of distributed generation?

So I would like to understand the positioning of the company and the growth prospects for the different subsegments in distributed segments. And then I will ask about wind, thank you.

Mr. André Salgueiro - Finance Director and Investor Relations Officer

Hi Lucas, this is Mr. Salgueiro answering your question. And in solar first, we break down solar distributed generation and centralized generation. So WEG works

on both fronts offering products for the two types of segment.

So the segment of distributed generation; but centralized generation has been growing, especially because of more recent projects that we have announced, and the most important is the one at Vale, Sun of the Cerrado. We are providing transformers and substations. So the breakdown today is more or less 90% going to GD and a little bit less than 5% goes to centralized generation.

If I understand your question, it is more specific about the breakdown in GD. In GD WEG has a bigger share in three-phase projects, which are the projects where the customer perceives a value, so there is an engineering company with know-how and knowledge. Today most of our GD is sold via three-phase and then we have some exposure in mono-phase, which is at home - but it is kind of small as a share of the whole. I do not have the exact numbers to give you now; but the vast majority are related to three-phase projects.

We have mini power plants. It is slightly bigger in industry, large commercial projects. So the dynamics of growth looking into the future is overall, we believe, and we are confident that solar generation will continue to grow in Brazil. Of course macroeconomic conditions such as inflation, maybe the FX rate might have an impact in the cost of commodities and solar plates.

But here in Brazil, and we have a combination of good solar radiation and slightly higher energy costs. So solar power makes sense, regardless of what happens, and what might happen is that it might grow slightly slower, more slowly or faster.

So the mini power plants, which are the projects that are related to remote generation, they are likely to have a smaller growth and even accommodation of revenue after this year; but other segments in GD, high consumption and retail and even small customers should continue growing in the midterm.

Mr. Lucas Lague - XP Investimentos

Well great, well this is exactly what I wanted to know. I wanted to know the breakdown in GD.

Now as to wind power I would like to understand the timing when profitability will come back in WEG. So I can in some contracts that you closed in the past and with many players are having difficulties, and my question is when are we going to see the resumption of profitability of WEG's wind turbines, considering that the products are reflecting the lowest equation between higher costs in the chain. So are there products to be delivered this year in 2022 that already are related to

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WEG S.A.

Conference Call - Earnings Results 2nd Quarter 2022 July 21, 2022 - 11:00 a.m. São Paulo (BRT)

Transcript of the simultaneous translation from Portuguese into English

this equation or is this more into the future? Your contract with Eletrosul that should be delivered in 2023 would have this normal profitability?

And the last point how are you using capacity today in terms of wind in WEG? And can we think of improved margins at the consolidated level just because of the lower share of wind, because other segments will grow more along the year? So these are the points thinking about wind in the company.

Okay thank you very much for your answers.

Operator

Our next question comes from Lucas Marchiori from BTG.

Mr. André Menegueti Salgueiro - Finance Director and Investor Relations Officer

Well, thank you very much for your question. Wind in practice is the business with the longest cycle in the company. So we have a contract, which was the first that we announced with the new machine of 4.2 with Aliança. It has just been delivered and we announced it in early 2019. So the timing is kind of long and as time went by and new contracts were signed the cost structure changed, and then we adjusted prices.

So naturally as time goes by and we deliver our next project, what we see is that there is a catch up of profitability.

Now when we look at the informations that were announced related to Aliança contract and Eletrosul we can have this perception, and as months go by our expectation is that in our portfolio today it is starting 2023 for the whole year, and 2024 from today until the end of next year and the beginning of 2024, we should see this regularization - but it is not going to be anything abrupt; it is going to be gradual. So this is more or less the dynamic.

So overall speaking, considering everything that is going on, projects today have a margin that is lower than our track record because of the cost structure. Once we catch up it will take a while. Wind even when the scenario is normal is still a business with a lower margin than the average margin, and if other businesses grow or grow more than wind we are likely to improve the margin if we consider just that effect.

In terms of capacity, today we have a plant with capacity to produce 8 turbines per month more or less, and we have this capacity until the end of next year, 2024. We are not expecting to increase capacity. If we have conditions and if market demand grows a lot, we may reconsider this and increase our capacity over the next few years.

Mr. Luca Lague - XP Investimentos

Mr. Luca Marchiori - BTG Pactual

Hello good morning. I have two questions to ask, thank you very much for the call. Number one, I would like to ask about the backlog of products and contracted products, especially US and Europe, if you are seeing an increase in demand or increase in backlog because of higher energy prices, especially in Europe because of the gas thing that is going on there.

So for example in Turkey, how could the Turkey plant help become more competitive in order to gain market share? I would like to know more about the scenario in new markets.

And the other question which is slightly simpler: could you talk to us about the working capital, inventory and your basing? Thank you very much.

Mr. André Luís Rodrigues - Chief Financial Officer

Hi Lucas, thank you very much for your question. So first I will talk about the backlog and the long-cycle dynamic, first starting with electrical electronic equipment, the industrial ones. So the orders are being placed as in the last quarters overseas, the highlight is oil and gas, mining, pulp and paper and projects related to that. The portfolio is healthy for future months, and we have good prospects to build a positive portfolio until the end of 2023.

When we go to generation, transmission and distribution, the portfolio of orders is still robust with deliveries being programmed for 2023 and early 2024, as Salgueiro talked about the wind turbines and it is very positive, especially for T&D in North America and Central America.

Now short-life is more limited to more or less three months into the future. So what we see today is that in 2H TY its performance was very positive. Some countries have some fluctuation; but even so above average as compared to the year before. So in short- cycle or short-life we are talking about slightly shorter time spans.

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