WEG – Earning Release 2Q 2023

Improved operating margins and return on invested capital with continued growth

 

Highlights

• Net Operating Revenue (NOR) was R$ 8,171.3 million in 2Q23, 13.7% higher than 2Q22 and 6.2% higher than 1Q23. 
• EBITDA(1) reached R$ 1,833.1 million, 45.9% higher than 2Q22 and 8.5% higher than 1Q23, while EBITDA margin was 22.4%, 490 bps higher than 2Q22 and 50 bps higher than the previous quarter. 
• Return on Invested Capital (ROIC(2) ) reached 34.4% in 2Q23, up 750 bps from 2Q22 and an increase of 300 bps from 1Q23.

 

Message from the Management 

We reported consistent revenue growth this quarter, reflecting the good performance of the long-cycle businesses, combined with good demand for our products and services in the main regions where we operate, contributing to a quarter of growth in operating margins.

In Brazil, we maintained a positive performance, with continued good demand for industrial equipment in relevant segments such as oil & gas, pulp & paper, and mining. Highlight for long-cycle equipment, with good performance in the Energy Generation, Transmission and Distribution (GTD) area, especially in transmission & distribution (T&D). despite the lower level of revenue in the distributed solar generation business when compared to the same period last year.
 

In the external market, we highlight the good performance in the GTD area, where the T&D business in North America continued to present important evolution in this quarter. We presented good results in the other markets in which we operate, with emphasis on the mining and oil & gas segments in the Industrial Electro- Electronic Equipment area.

The control of our working capital requirement, combined with the accommodation of material costs, product mix and performance improvement in the operations outside Brazil, contributed to the growth of the return on invested capital. We remain confident in our strategy, where the diversification of products and solutions, together with our global presence, makes it possible for us to take advantage of the opportunities present in our markets. We seek to be always attentive to market risks and uncertainties, and we believe that our long-term vision, financial flexibility and constant search for operational efficiency contribute to the Company’s continuous and sustainable growth.

The following financial and operating data are presented on a consolidated basis, except when otherwise indicated, in thousands of Brazilian Reais (R$) according to accounting practices adopted in Brazil, including Brazilian Corporate Law in convergence with IFRS international norms. Except when otherwise indicated, growth rates and other comparisons are made to the same period of the previous year. Share data is adjusted for split or bonus events.

 

Net Operating Revenue 

Net operating revenue grew 13.7% compared to 2Q22, up 2.9% in the domestic market and 24.8% in the external markets, as shown in Table 1. The evolution of revenue proportion between markets is shown in Figure 1. Adjusted for the effects of the consolidation of the Gefran Motion Control business acquisition, consolidated revenue for the quarter would have grown by 12.5% over 2Q22.

 

Net operating revenue from the external market, measured in the quarterly averaged US dollars, increased by 24.5% in relation to 2Q22 and increased 15.2% in relation to 1Q23. The distribution of net revenue by geographic markets is shown in Table 2

Net operating revenue from the external market was little impacted by the average US dollar exchange rate that moved from R$ 4.93 in 2Q22 to R$ 4.95 in 2Q23, 0.4% appreciation over the Brazilian Real. 

It is important to consider that we set our sales prices in different markets in local currency and according to their competitive conditions. Measured in local currencies, weighted by revenues in each market, net operating revenue from the external market increased by 27.5% when compared to 2Q22.

 

 

Performance by Business Area

Industrial Electro-Electronic Equipment (EEI)

Domestic Market

• We continued to have good industrial activity in Brazil, with positive demand for short-cycle products, especially for serial automation products, mainly destined for the mining and pulp & paper segments.
• Continued good performance for long cycle equipment, such as medium voltage electric motors and automation panels, with emphasis on the oil & gas, mining and pulp & paper segments.

External Market

• Global industrial demand remains positive for the company’s main products and solutions. Short-cycle equipment, such as low voltage electric motors and serial automation products, showed good demand in most of the markets where we operate, with especially in North America
• Long cycle equipment showed consistent results, reflecting the backlog built in last quarters. High voltage motors, mainly for oil & gas and mining projects, contributed to this quarter’s result

 

Energy Generation, Transmission, and Distribution (GTD)

Domestic Market

• Another quarter of good performance in the T&D business, driven by the deliveries of large transformers and substations for projects related to transmission auctions and projects for distribution networks.
• Demand for distributed solar generation (GD), despite showing an evolution in relation to 1023 remained below the same period of the previous year, still influenced by the change in regulation in the sector associated with the higher cost of financing and reduction in the cost of energy in Brazil.

External Market

• The main highlight this quarter, deliveries of T&D projects presented another positive quarter, especially in North America, where we continue to take advantage of the present opportunities, both in Mexico and in the US, mainly in the sale of transformers for renewable energy generation parks (wind and solar)
• In the generation business, we highlight the good performance of our operation in Europe and the construction of a healthy backlog for the coming quarters in the remaining operations.

 

Commercial and Appliance Motors (MCA)

Domestic Market

• We observed growth in demand for products in different segments, including durable consumer goods, such as air conditioning. compressors and operators.

External Market

• We showed growth in demand in some important regions where we operate, with emphasis on the continued growth in the US market.

 

Paints and Varnishes (T&V)

 

Domestic Market

• Demand for paint and varnish products was positive, with highlight on the oil & gas and maintenance segments.

External Market

• Revenues in our operations abroad showed growth, offsetting the lower export activity from Brazil in the quarter.

 

 

Cost of Goods Sold 

The Cost of Goods Sold (COGS) and gross margin for the quarter are shown in Table 3.

The accommodation of prices on the main raw materials that make up our cost structure, notably steel and copper, together with the change in the mix of products sold, improvement in the performance of our operations outside Brazil and the constant search for operational efficiency and productivity gains were important factors for the evolution of gross margin in the quarter

 

 

Sales, General, and Administrative Expenses 

Consolidated Sales, General, and Administrative (SG&A) expenses totaled R$ 853.6 million in 2Q23, an increase of 18.4% Vs. 2Q22 and an increase of 3.2% vs. 1Q23. When analyzed in relation to net operating revenue, these expenses accounted for 10.4%, up 40 basis points. vs. 2Q22 and down 30 basis points compared to 1Q23.

 

EBITDA and EBITDA Margin 

The composition of the EBITDA calculation, according to Instruction CVM 156/2022, and the EBITDA margin are shown in Table 4. EBITDA margin showed an important evolution when compared to the same period of the previous year, mainly a reflection of the accommodation of raw material costs combined with the change in the mix of products sold.

 

Net Income 

Net Income in 2Q23 was R$ 1,368.4 million, up 49.9% compared to 2Q22 and up 4.7% compared to 1Q23. The net margin reached 16.7%, 400 basis points higher than 2Q22 and 30 basis points lower than 1Q23.

 

Cash Flow

Operating activities generated cash flow of R$ 3,174.3 million in the first six months of the year, as a result of continued revenue growth and improved operating margins. It is important to highlight the evolution of the process of improving inventory turnover indicators in the period, whose growth during the previous year was necessary to guarantee the good availability of products globally

In investment activities, which include changes in fixed and intangible assets, acquisition of subsidiary and financial investments, we had a cash consumption of R$ 782.0 million. The level of (CAPEX) in modernization and expansion of production capacity increased in relation to the same period of the previous year, continuing the investment of resources in the factories in Brazil, Mexico, Portugal and India.

In financing activities, we raised R$ 931.2 million and amortized R$ 1,443.3 million, including interest on loans, resulting in a net amortization of R$ 512.1 million. Remuneration on equity (dividends and interest on equity) amounted to R$1,301.2 million. The result was a cash consumption of R$1,810.5 million in financing activities in the period.

Note that the chart in Figure 3 shows the cash and cash equivalents positions classified as current assets.
Furthermore, the Company has R$ 592.3 million in financial investments with no immediate liquidity, including derivative financial instruments (R$ 577.8 million in December 2022).
 

Return on Invested Capital

The ROIC in 2023, accumulated in the last 12 months, reached 34.4%, increased by 750 basis points over 2022 and growing 300 basis points over 1023. The growth of Net Operating Profit After Taxes (NOPAT), mainly due to revenue growth and improvement in operating margins, more than offset the growth in capital employed, which expansion is explained mainly by investments in fixed and intangible assets made over the last 12 months and by our better control of working capital requirement in the period

 

Investments (CAPEX)

In 2023, we invested R$ 444.8 million in the modernization and expansion of production capacity, machinery and equipment, and software licenses, 34% for production units in Brazil and 66% for industrial plants and other facilities abroad.
In Brazil, we continue to invest in expanding production capacity for industrial motors, electric traction motors and battery packs. Abroad, we continued to increase the production capacity of the motor and transformer factories in Mexico, build the motor factory in Portugal and expand the high voltage motor and generator factory in India.

 

Research, Development, and Innovation

Expenditures on research, development, and innovation activities totaled R$ 427.7 million, representing 2.7% of accumulated net operating revenue in 2023.
 

Debt and Cash Position

Cash, cash equivalents, invested in first- tier banks and denominated in Brazilian currency, and financial investments and derivatives are presented in Table 5. Likewise, the Company demonstrates the total gross financial debt, with details between short and long-term, in Brazilian Reais and other currencies, resulting in the Company’s net cash at the end of the quarter.

The total duration of our indebtedness was 9.6 months on June 2023 (11.8 months in December 2022).

 

Dividends and Interest on Stockholders’ Equity

For the first half of 2023, the Board of Directors approved ad referendum of a future Annual Shareholders Meeting, the following events regarding dividends:

• On March 14, as interest on equity (JCP), to the gross amount of R$ 223.4 million.
• On June 20, as interest on equity (JCP), to the gross amount of R$ 244.6 million.

The board of directors also approved, in a meeting held on July 18, 2023, intermediate dividends related to the net income for the first half of 2023, to the total amount of R$ 609.3 million.

The proceeds will be paid on August 16, 2023. Amounts declared as remuneration to shareholders in the first half represented 40.3% of net income for the period.

Our practice is to declare interest on capital quarterly and dividends based on the profit obtained each half-year, that is, six proceeds each year, paid semi-annually.

 

 

Other Events

WEG announces agreement for self-production of wind energy
On July 5, 2023, we announced a binding agreement with Alupar for the self-production of energy to be used in WEG’s operations in Brazil. The agreement provides for the annual delivery of around 15 MW average, which will be used in WEG’s manufacturing operations in the form of self-production by equalization, for a period of 18 years. The start of energy supply to the factories will start in January 2024, with energy purchase contracts estimated at R$ 460 million during the period of the contract.

On July 5, 2023, we also announced an agreement with 2W Ecobank S.A. for energy self-production. With energy purchase contracts worth approximately BRL 970 million, lasting 20 years and starting in January 2024, the initiative will guarantee the annual delivery of 30 MW average of renewable energy to WEG’s industrial operations in the self-production mode by equivalence.

Both agreements still depend on the fulfillment of conditions precedent, including the approval of the Brazilian authorities.

In addition to guaranteeing the supply of energy to WEG, these agreements also contribute to achieving the decarbonization targets assumed last year. These two contracts represent close to 90% of energy consumption in Brazil and, together with other projects underway in India and China, account for 75% of our global energy consumption in 2022 coming from renewable sources.

 

Results Conference Call

On July 20, 2023 (Thursday), WEG will hold a teleconference in Portuguese, with simultaneous translation into English, also available on the internet webcast, at the following times:

• 11:00 a.m. – São Paulo (BRT)
• 10:00 a.m. – New York (EDT)
• 03:00 p.m. – London (BST)
   

Connecting phone numbers:

• Dial-in for connections in Brazil: +55 11 4090 1621 / +55 11 3181 8565
• Dial-in for connections in the United States: + 1 412 717 9627
• Toll-free for connections in the United States: + 1 844 204 8942
• Code: WEG
   

Access to HD Web Phone (webphone connection):

• Conference call in Portuguese: click here
• Conference call in English: click here
   

Access to Webcasting:

• Slides and original audio in Portuguese: https://choruscall.com.br/weg/223.htm
• Slides and simultaneous translation into English: https://choruscall.com.br/weg/223.htm 
   

The presentation will also be available on our investor Relations website (riwegmet). Please, call approximately 10 minutes before the conference call time.

 

Forward-Looking Statements 

The statements contained in this report relating to WEG s business prospects, projections, and results and the Company s growth potential are projected forecasts based on management s expectations regarding the future of WEG. These expectations are highly dependent on changes in the market, overall national economic performance, sector performance, and international markets and are subject to change.

 

 

FINANCIAL STATEMENTS – 2Q 2023
Annex

 

 

 

 

Notes: (1) Earnings before Interest, Taxes, Depreciation, and Amortization (2) Capital Expenditure n.a. stands for not applicable n.m. stands for not mentioned bps stands for basis points