Good morning, welcome to WEG's conference call on the results for the second quarter 2020. We would like to inform you that we are broadcasting this conference call accompanied by the slides on our investor relations website at ri.weg.net. At its completion, the audio will be available on our IR website. If you need support during the conference call, please request assistance from an operator by typing star zero. Any estimates contained in this document or any forward-looking statements that may be made during this conference call about future events, the business perspectives, the operational and financial projections and goals, and the potential future growth effects constitute mere beliefs and expectations from the management based on the information currently available. These involve risks, uncertainties, as they refer to future events and therefore depend on circumstances that may or may not occur.
Investors should understand that general economic conditions, industry conditions, and other operating factors could affect WEG's future performance and could lead to results that differ materially from those expressed in such forward-looking statements. We would like to remind you that this conference call is being conducted in Portuguese with simultaneous translation into English. With us today in Jaraguá do Sul are Mr. André Luís Rodrigues, Chief Financial Administrative Officer, Paulo Polezi, Chief Financial and Investor Relations Officer, Wilson Watzko, Controlling Officer, and André Salgueiro, Investor Relations Manager at WEG. Mr. André Rodrigues, you may proceed, sir.
Good morning, everyone. Once again, it's a pleasure to be with you in this earnings call to discuss WEG's results. We start with the highlights of the quarter, the first being the net operating income, which grew 23.7% compared to the second quarter 2019. The demand for long-cycle equipment both in Brazil and abroad, together with the positive impact of the exchange rate variation, were relevant factors for this positive performance despite the difficulties imposed by the COVID-19 pandemic, which caused important negative impacts in part of our short-cycle businesses. Another highlight in the second quarter was the EBITDA, which grew by 36.3% and reached BRL 732 million. The EBITDA margin increased 1.7 percentage points, reaching 18%. Throughout the presentation, Paulo will give more details about this variation. Finally, we had another quarter of ROIC evolution, as we will see in the next slide.
With a growth of 3.2 percentage points over the second quarter 2019, reaching 21.6%. The consistency of this indicator in recent quarters reflects the improvement in our operating performance, demonstrated by the combination of revenue growth and expansion of EBITDA margin, surpassing the increase in the need of working capital and investments made in the past 12 months. I turn the floor over to Mr. Paulo Polezi for him to continue.
Good morning, everyone. Moving on to slide five, I present the evolution of the business areas in different markets. I start with industrial electronic equipment in Brazil, where we have seen significant growth in long-cycle equipment as a result of the product supplied mainly for paper and pulp and mining projects. We observed an important reduction in the placement of short-cycle equipment orders in the first half of the quarter, especially in the low-voltage electrical motors, limiting the revenue from this product in this period. The T&D area was once again the highlight of the quarter, where most of the revenues are associated with the long-cycle equipment. In Brazil, we had deliveries for important projects mainly linked to transmission auctions held in recent years.
The distributed solar generation business, as well as other short-cycle businesses of the company, suffered a drop in demand in relation to the first quarter 2020 due to the restrictions adopted to combat the pandemic. Even so, it performed well when compared to the second quarter 2019, given the relevant growth of this business presented in the last 12 months. In commercial and appliance motors, as we had already informed in the first quarter 2020, the demand reduction started in March, expanding throughout the beginning of the second quarter 2020, a period in which important customers had their operations affected due to the consequences of the pandemic. In paints and varnishes, there was also a drop in the orders placed in March, adversely affecting sales during the beginning of the second quarter 2020, a period in which important segments were affected due to the pandemic.
At the end of the quarter, we saw a partial return of demand levels, with emphasis on the activities related to agribusiness and road implement. In the foreign market, it's important to highlight that the exchange rate variation played an important role in the 23.2% growth in revenue measured in reals. In local currencies considered according to the weight of each market, net revenue from foreign market dropped 4.8% when compared to the second quarter 2019. Short-cycle industrial, electrical, and electronic equipment showed a drop in revenue, a movement partially offset by the good performance of the operations in China, which presented activities similar to the pre-pandemic periods in the local market. As for long cycle equipment, we continue to perform well with important deliveries made in the oil and gas, mining, and water and sanitation segments, contributing positively to the quarter's results.
In the GTD area, the major contribution was from the transformers business in the USA and Mexico, with deliveries of important projects. Another highlight was the operation of generators in the USA, which continues to have positive performance due to the solid order portfolio previously made. In commercial and appliance motors, the drop in demand was also observed in a generalized way in the foreign market in the first half of the second quarter this year. On the other hand, we highlight the positive performance in commercial motors in Mexico, which performed well in the period, reflecting gains in market share in the USA and Mexico due to the new customers that were gained. In paints and varnishes, the stoppages in operations due to the restrictions adopted to defy the pandemic, especially in Argentina, impacted our performance this quarter.
Slide six shows the evolution of EBITDA in the second quarter 2020, where we presented a growth of 36.3% in relation to the second quarter 2019. The EBITDA margin ended the quarter at 18%, showing an increase of 1.7 percentage points in relation to the second quarter 2019. We highlight the margin gain in long cycle operations, mainly in GTD and high voltage industrial motor businesses, the agility in making operational adjustments due to the pandemic, and the impact of the strong exchange devaluation. Finally, on slide seven, we show the evolution of investment in CapEx. In the second quarter 2020, investments reached BRL 107.4 million, 44% of which were allocated in Brazil and 56% to units abroad.
Already under the effect of the revisions of the investments plan announced last quarter as part of the measures adopted to mitigate the impact of the business as to pandemics, we remind you that our production system is based on what we call modular expansion, which allows us to adjust CapEx according to the demand, maximizing the return on invested capital. With that, I finish my part and give the floor back to André.
Thank you, Paulo. Before moving on to the question and answer session, I would like to reinforce some recent achievements and comment on our prospects for the remainder of 2020. We recently announced the acquisition of two new businesses in line with the company's strategy in the development of the digital business area, increasing our offer of solutions aimed at Industry 4.0. In June, we announced the acquisition of control of Mvisia, a company specialized in artificial intelligence solutions applied to the computer vision for the industry. Earlier this month, we announced the acquisition of BirminD, a technology company active in the artificial intelligence market applied to industrial analytics. Despite the gradual improvement in the short cycle business dynamic seen at the end of the quarter, we cannot yet say that the crisis has been through.
Uncertainties regarding the economic recovery of the countries where we operate and a possible second wave of global contagion may impact our businesses in the coming months. On the other hand, our portfolio of long cycle products is likely to bring stability and resilience to our businesses for the rest of the year. Despite the improvements in the company's margins, we remind you that they may present some volatilities due to the uncertainties present in the market and the very dynamics of WEG's business. It's important to highlight that we also had some occasional impacts in this quarter, such as reduced working hours, anticipated vacations, which will not be recurring in the coming quarters.
Finally, I would like to emphasize that we will continue to take all necessary measures for protection, prevention, and mitigation, aiming to preserve the integrity of our employees and minimize as much as possible impact on our operations, as we have done since the beginning of the pandemic. I will end my presentation here. Please, operator, we can move on to the Q&A session.
Thank you. Ladies and gentlemen, we can now begin the question- and- answer session. To ask a question, please enter star one. To remove the question from the list, type star two. Our first question comes from Mr. Alex Falcao, HSBC.
Good morning, everyone. I first would like to talk about solar and distributed generation. I would like to understand what can be the impact of zeroing the imports to your business. What's the evolution of the distribution center that you have seen, and how are the sales doing? If you could make some comments on your intention to open as a business division this Industry 4.0 automation, what is it like today, and what do you expect in the future? Thank you.
Falcao, good morning. Thank you very much for your question. This is André Salgueiro speaking. I'm going to answer the first part of your question related to solar energy, and then the answer will be continued. Recently, we announced the solar panels and other equipment. In fact, this is a process that is valid not only for solar products, but also can be applied to other pieces of equipment. It's usually used for products which are not manufactured in Brazil. There is no interference related to the products we produce in Brazil. In general, it tends to be very positive to the market because the imported products will have their price pressed down, just as solar panels, which are very important for the system.
The initiative is very positive for the business, and it tends to encourage this business along this period, since this tax have been dropped for solar energy. You asked about the dynamics of this business as to distributed generation, and then I will talk about centralized generation as well. As for distributed generation, I can say that it's a business that has been evolving well, and this is something we have been operating in for some time. As for short cycles, we see that the pandemic affected this area. In the month of April, we had some problems for integrators to go into places. This was affected negatively. In June, there was a resumption in the operation, but the operations are lower than expected.
The segment has good perspectives in the medium and long terms, and we believe that by using our business model of using integrators and also considering that WEG is a well-recognized brand in the market, we will continue addressing this market, and we are going to take all the advantages that the resumption of business will offer. We still don't know the speed it's going to happen. As to solar farms and centralized generation, in the past auctions that were held, we had a number of projects dedicated to solar generation. Many of those projects still do not have their suppliers defined. We showed this information on the last WEG Day, when we mentioned that many of the projects that were in the auctions have not been contracted yet, for many reasons, currency exchange rate or other factors.
We have seen that some projects do not have an incentive to be brought forward. People are holding back so that they will then decide what they will do about those projects. Those projects are likely to be materialized in the years to come. The perspectives in the medium and long terms are very positive, and we still suffer some of the impacts due to the pandemic in the short term.
This is André Rodrigues. In relation to the Industry 4.0 and the latest information announced, we announced the acquisition of two new businesses, which are part of our strategy to expand our resources, WEG Digital Solutions and our platform. With acquisition of Mvisia, which specializes in computer vision for the industry, and also the provider of artificial intelligence and machine learning, which are applied for solutions with industrial analytics. We understand that today we complete our digital ecosystem. In a simplified manner, we can say that our proposal of digital solutions connect, integrate sensors, equipment by means of WEG Motor Scan solution, and transmitter with solutions provided by V2COM. It also monitors, automates operations by means of management software. Now, considering all the acquisitions we have made, we are going to use machine learning and artificial intelligence applied to the industries, such as the solutions provided by our acquisitions.
We will use those technologies to promote continuous development of Industry 4.0. We informed that these businesses which are adjacent to what we already produce. We announced all the figures, but we haven't reached the moment to have the openness of these businesses in a separate way. We expect to grow in a very positive manner, and this is something we have been mentioning lately. At this time around, it's very important to close this ecosystem, and this is what we have done. Part one of our strategy, so as to say, is already completed, and we have already offered some product in the market, such as WEG Motion Fleet Management, which is a system that controls a motor fleet using all the knowledge that are offered by those companies. This is an initiative that is likely to grow together with the solutions which are associated.
I would like to understand the order of magnitude of those businesses. More than BRL 100 million, more or less? Just for me to understand the magnitude of the investment.
Falcao, I can say that it's still very small. Now we have work to be done so as to create synergies and involve all those businesses so that they can become more relevant a long time.
Okay, great. Thank you.
Excuse me. Our next question comes from Gabriel Rezende with Bradesco BBI.
Good morning, everyone. I have two questions. One is related to long cycle. André mentioned that some companies are postponing their solar energy projects so that they will wait for the regulatory deadlines. How do you understand of long cycle recomposition risk, considering other segments in addition to GTD and industrial equipment? If we think about the impact of the pandemic on the global economy, how do you think the customers will behave to recompose the portfolio? My second question is to understand how the regulations will play out in the third quarter. Have you adopted the regulation or not?
Gabriel, this is Paulo speaking. As to your question related to long cycle, it's important to clarify and provide you with some additional information. First of all, it's important to mention that our long cycle portfolio have been made in the past quarters, and it's very solid, it's very positive. It has reached one of the best level of the past few years. When we talk about long cycle, we also include the businesses abroad. Another point is that those projects are not usually affected by short-term volatility, such as the crisis we're going through now. The planning process is very long and involves a lot of resources. When we make a decision, it takes a long time, so it makes us comfortable to be sure that we have a sustainable portfolio for many years. As for the other projects, it's difficult to make an estimate.
We have been working under a reduction, which is normal considering the time we're going through. In the middle and long terms, we'll see something different as the pandemic ends. It's very difficult to provide you with a figure in this sense. Lastly, I'd like to remind you that for next year, we have a wind generation project, which is very important to our portfolio, and the revenue starts to come in as early as 2021. In generally speaking, we have a sustainable portfolio for 2021. Gabriel, in relation to the reduction of working hours, when we announced the results of the first quarter, we mentioned that in the second part of March, we saw that there was a drop in the placement of orders for commercial appliance motors.
Together with paints and varnishes, we saw that we needed to reduce the working hours, and this varied according to the site by 25%-50% reduction. Sometimes we had to reduce their working hours until June. In May, WEG Motors low voltage reduced the working hours of their employees that extended up to June. We made a decision considering the placement of orders. We decided to reduce the reduction in working hours for industrial motors. In other words, as of August, all the operations of industrial motors at WEG will resume their normal working hours. As I said, the visibility for the portfolio is short. It will last two or three months at the most. We see a justification to stop this reduction of working hours, but we are going to analyze in three months whether this is going to be sustainable or not.
Thank you very much. As for long cycle, the order placement reached the levels of pre-crisis then. Is that right?
Gabriel, I wouldn't say that it reached the level of pre-crisis. I would say that this was a portfolio that was built periods before. Some of the orders continued to be placed. As I said, we do not have enough visibility if they are at the pre-pandemic levels. The new orders from now on will continue to be monitored. I believe it's too early to provide you with any of information of this type.
Okay. Thank you.
Our next question comes from Mr. Motta with JP Morgan.
Hello, good morning. I have two question as well. When we look at the margin, you say that some measures were temporary, collective vacations and everything. Is there any process that were improved during the pandemic and then you would like to implement forever? Is there anything that you learned from the crisis that will be implemented on a permanent basis that can provide some results? In other words, can the company operate in a more efficient manner? As for the long cycle backlog, as far as I can understand, is it correct to say that up to 2021, your pipeline or your level of revenue is stable? I could understand the backlog would last up to when. I would like to understand whether this backlog would extend throughout 2021. How big is the backlog you have in your portfolio?
Hello, Marcelo, this is André Rodriguez speaking. Let's talk a little bit about the impacts of the margin in this quarter, and then move on to answer the main point of your question of what could be from temporary become permanent. The improvement in the margin happened as a result of the long cycle improvement. We said in the previous quarter that usually a long cycle would account for 35% of the revenue, and the drop of the short cycle production reached a 40%, and we can talk about T&D and the transformers that were delivered to projects related to the auctions that were held in Brazil. The growing demand of those products for renewable generations in the North American and also in Brazil. In the United States, we are leaders in the market.
As for automation, there is a growing demand for panels and automation. I'm talking about the long cycles and the low voltage equipment, focus on mining and pulp and paper, and also the foreign markets as to oil and gas, and water and sanitation. We also have to mention the speeds that the company has always imposed to address any fixed cost aspects in moments of crisis. This has not been different for this pandemic. We started with a plan of reducing the working hours, anticipated vacations, and we foresaw the companies that would lower their orders. This had a very important impact. We also reduced the number of business travels and the impact was positive in the margin of the quarter. Also the exchange variation. This is also something important to consider.
We always say that the correlation between the foreign exchange rates can be minor, but those products which are more exposed in the foreign market are favored, especially long cycle products. This explains a little the impact on the margin for the quarter. Yes, the company, regardless of the pandemic, we always work with a cost reduction program. For example, reducing the number of travels. Of course, the drop has been enormous. It will go back, but of course it will never go back to the levels we used to record in the past as the world is doing as a whole. We are resorting to digital technology to improve our communication processes, communication, so that we won't need to move around so much. Together with that, the company has been announcing that we have been investing in the modernization of our sites.
If anyone visited WEG five years ago and visits our company now, we can see that we have many more automated processes than we used to have in the past. This is a trend that continues. Of course, at a moment like this, especially in the beginning when we suffered from the absenteeism where people get sick and the public transportation was not operational. We see the benefit of all this, so the company will continue on the lookout for all the opportunities. If you visited our company five years ago, you will have a totally different view on today. Now we can see that many of the processes were automated, and in your next visit, you will be able to see that we have other units whose benefit has been implemented. We are always looking for new synergies in the purchase of raw materials.
These are all actions that we have been taking, and they are going to continue.
Perfect. As to the backlog.
Oh, yes. This is Polezi speaking. WEG has different business units. It's very complex to talk about a single indicator when we refer to backlog. We talked about wind generation, whose backlog is long, three or four years. Also T&D, that can reach even six years. We also have generation energy that has a backlog of one year in solar farms, which have different periods. These are all portfolios that are being composed a long time. Before the pandemic, we were at a very positive moment where we were building up our portfolios. Every year we have a portfolio that has been made and another portfolio which is about to be formed. In the beginning of each year, so we start building a new portfolio. This is where we were. We have a space to have room to fill.
This is the environment we live in. It's difficult to give you a single answer, but we are totally able to build a very positive portfolio for the future.
Thank you, Polezi.
Excuse me. Our next question is from Victor Mizusaki with Bradesco BBI.
Good morning. Congratulations on your results. I have two questions. The first one is thinking about investment cycle. When we consider the last months in terms of results, first we had wind energy and then solar energy as additional income. Does it make sense to expect for the next years, considering the investments that can be made in the sanitation? Do you believe that this can help sustain the growth of WEG? The second question is related to return. You mentioned in the call the margin, but when we look at ROIC of WEG, we see there's a ROIC consistently being improved. I would like to ask you if we could say that this ROIC above 20% would be the new level that can be expected for the future.
Victor, this is André Rodrigues speaking. Let's talk about the hallmark of sanitation. What's the information that is available to us? First, WEG, as presented in WEG Day, water and sanitation is an important segment to the company. The company has been structured at the global level to handle this topic because many of those opportunities are placed abroad. This is one of the main segments for the company. We already supply equipment to the sector, not only motors, but inverters and other pieces of equipment. It's also important to mention that the solutions of Industry 4.0 can also be used to help in those projects. It's difficult to quantify all those pieces of information because some of the governments are provided by the government. For example, in 2017, only 50% of all households had sewage systems.
The investment may reach BRL 700 billion up to 2030, and this will be extended up to 2040. Based on the information that we have collected, yes, we believe this is very positive because when we talk about water, we have to consider the equipment. Let's think like this. We need pumps, and pumps need electrical motors, and motors require electricity. Electricity requires substation, transformers, automation panels, frequency inverters, and WEG has all this. As to equipment, we also have industrial paints, and we are one of the leaders in the market. How this level of investment will behave along the time, that is something for us to observe. All those, we will need all the pipelines to have them invested. Considering the macro viewpoint, we can understand that what is addressable to WEG is using the CapEx according to this visibility.
This is something that we can see by now, and we are going to provide you with information as we learn about it. As for ROIC expectations for the quarters to come, we announced a very positive ROIC. This year we expect to deliver another healthy ROIC. Even not talking so much about the expectations, it's important to understand that ROIC can oscillate in the next quarters. In the past quarters, we have managed to offer expansion in margin and growth in revenue, and this has helped the ROIC and the margin, which also impacted the results. We also had the reduction in working hours, as we said, the reduction in the business travels. All those are benefits that are going to be seen along the time, along the year. As a result, we cannot say that this expansion trending is going to continue. We cannot say for sure.
Additionally, we have to remind you that we've come to a time when we have to increase our investments so that we can provide support to the pace of growth at WEG. This can cause an impact and lead to a drop in ROIC. Yes, because the company needs to invest in order to grow. Even so, our growth focus in a sustainable manner and also in maintaining good results and an attractive ROIC are all things that are going to continue to be considered.
Thank you. Just to follow up on my question, please. When we compare to solar solutions, when you deliver a turnkey as to sanitation, I know it's too early to discuss this, but do you believe that there would be a way to sell a solution or do you believe they would work differently?
Victor, in that case, the models are different. We understand that if we do this, we are going to invade the space occupied by our clients.
Okay. Thank you.
Our next question is from Catherine with Banco do Brasil.
Good morning. Congratulations on the results. I have two questions, one is related to the previous question. When you mentioned that there's a need to increase the investments to support the growth of the company. After the pandemic, what do you expect in terms of level of investment, what would be the focus?
Catherine, good morning. This is Paulo Polezi speaking. WEG has a discipline which is quite stringent in the investment of CapEx. If you observe our history, I can also provide you with a volume of historical CapEx invested, and you will see that the company always keeps a good level of investment after the depreciation. When we have a clear moment for the expansion in the market, we can see that the level increases. From 2014 and 2016, the level of CapEx investment was nearly twice as much as that of depreciation. In Mexico, in China, we saw that. The company can do this in a very disciplinary way. This is a place where the CapEx has a very robust position, and this allows us to grow and maintain the ROIC at a sustainable level, as André has just mentioned.
In 2020, in particular, would be a year when we would reach a level of BRL 700 million of investment at a level higher than that of the depreciation. This is something that the company is reviewing and coming to the conclusion that we are going to be using levels lower than this. As the market provides more visibility, the company will resume its investment. At this time, we are not canceling any projects. We are rather postponing some of them, but the company has not canceled any projects. As the conditions prove to be more favorable, they will go back to the proper levels of investment in order to support the growth as mentioned before.
Okay, perfect. Would you allow me to ask a second question related to digital solutions? Last week, WEG talked about the potential gains of Industry 4.0 related to cost reduction in the use of energy, higher production, and higher demand. We understand that all those gains due to digital solutions are potentials to be considered. If we remove the client from the context, what can we expect as a benefit to WEG from those digital solutions as gains for the operations of the company?
Hi, Catherine. This is André Rodrigues speaking. Yes, without a doubt. This is not applied only to our clients. This can be applied in company. Part of the investments are focused on the modernization of our plants. As for information, we have already completed another capacity increase project in one of our plants. All the storage plants of our plant is done by robots, which are totally automated. We are going to continue improving the improvement of our processes using all those solutions. Another one is the WEG Motion Fleet Management. We apply this in one of the sites of WEG. We use this solution. The advantage that we have is that we can make a test first inside our company. Then we offer the product to the client. The product reaches the market at a very advanced phase when it's offered in the market.
Without any doubt, digital businesses were not developed only to be sold outside. Rather, we are using all those benefits.
Okay, perfect. Thank you.
Our next question comes from Regis Cardoso with Credit Suisse.
Good morning. Thank you very much for taking my question.
I have two quick questions on my part. The first one, sorry if you have already answered because I missed the beginning of the call. My question is if you made an evaluation of the potential impact of the tax reforms that are being discussed today in the conference. What does it mean to the export activities and if there's any other impact that should be considered considering WEG's operation? My second question is related to the effects that were predominantly seen in the first quarter, which was the devaluation of real, BRL. I understand that this is the currency used for most balances, if not all of the companies and all the analysis. Do you understand that the margin of the first quarter was helped by stock level considering that the COGS were based on a BRL currency, which was more valued at that time?
Hi, Regis. This is André Rodrigues. The tax reform which was presented to the Senate this month. We have a preliminary analysis of this reform. It's very recent yet, and according to our preliminary analysis, we can see that there will be some benefits. First, not only quantitative, because those who live and operate in Brazil understand the complexity of handling all the tax system. We have consistent rules avoiding future disputes. We have the information. We understand that the average of tax dispute will take about eight years and we understand that this will lead to a lot of uncertainties due to this. It also has ample discussion of debt and charges and the gross aspects, have those aspects. We are going deeper into this knowledge.
We understand that when we evaluate the proposal in a preliminary way, we understand that there will be no impact in terms of a higher tax burden to our company. Another point is that additionally, any reform that can provide simplification and lessen the burden. Companies spend about 1,500 hours to declare all these taxes aspects. Simplification is very welcome. We also understand that we pay many more taxes than businesses usually do.
This is André Salgueiro speaking. In terms of the currency exchange rates, we made some regression calculations to show if, or to understand whether there was a correlation between the margin of the company and the foreign exchange rate. We understand that this correlation is very low. We do not like to include the currency tax rate in this calculation, but we understand that part of our cost structure is based on a strong currency, and this is corrected. We have businesses with different dynamics. Some mature products, such as generators and electrical motors, where the exports component is very important in the market, and we can see some benefits. If we consider other aspects, such as components, and many components is very limited to the external market, this impact in the currency exchange is not so positive.
It can even be negative, depending on the magnitude. When we analyze all the business as a whole, the correlation is relatively low because of all those aspects. However, we cannot deny that when there is a currency variation, which is very strong, a devaluation that which is very strong in a very short time, as we saw in the second quarter. Incomes tend to be directly corrected, and the impact happens directly. You understand, we already had some stocks, we had some sales which had already been planned. The impact tend to be more gradual. Yes. The answer is yes. The currency rate exchange has an impact on the margin, but it tends to dilute along the time as for costs and the impact on margin.
Okay. Very complete answer. Thank you very much.
Our next question is from [Fernando Cunha] with JB Investments.
Good morning, sirs. Once again, congratulations on the results. I would like to talk about the digital area of WEG. WEG has been transformed into a conversion company to a company that offers solutions. We have storage batteries. We have the phase 1 of this ecosystem that were completed with the latest acquisition. Considering all those businesses conducted by WEG, how do you see as the biggest possibility to generate results to WEG? My second question would be, so as you said, the phase 1 has been completed. What would be the next phases for 4.0 project? Thank you.
Hi, Fernando. It's hard for us to say for sure which will be our share in the future, where we are going to place our bets as the first development. As you said, the battery storage keeping, which complements the renewables. When we say that the sun doesn't shine at all times, the wind doesn't blow at all times, so that we can use this generation by means of the renewable. What I can say is that WEG has a long-term strategy, and a strategy that we conduct at a very loyal level. This has been built, and it continues to be built so that in the future, we can benefit from all this, and we can also continue growing. This is something that the company searches for along the time. As I answered with Falcao's answer, we have this small business.
These are all complementary to our business operations. The future shows to be very positive in this regard. The second question is related. I'm sorry, could you repeat that?
Yes, you said that phase 1 has been completed.
Oh, yes. Phase 1 in this ecosystem.
The question is, will there be a second phase or other phases?
Yes. Why have we adopted this approach? The Industry 4.0 is all connected in terms of technology, and it's very broad. If you start investing in too many things, you may lose your focus. If you lose your focus, oftentimes it's difficult to have a correct approach with your client in how you can help him. As I said, everything starts with a sensor, you need telemetry, you have to have artificial intelligence and a management software. These are all items that we identified as a good start for us. We are developing the new phases yet, but I'm going to give you an example. Artificial intelligence, in a very simplified way. We are addressing this computation view and analytics. You can also have solutions related to sound and use artificial intelligence focused on this.
These are aspects that can be developed by the company, and we can continue making progress. I give you an example using WEG Motor Scan, using all the technologies, which is technology that you insert into the motor. There are other items that are in line with the company that can continue developing. For example, everything that is related to transmission and distribution, anything related to the information that you can give to the grid by means of telemetry, which is connected to our transformers and sensors, and so on and so forth. There is still a lot to be developed. However, we prefer to focus on what has been described so far, more specifically to the short-term strategy of the company.
Okay, thank you. Once again, congratulations on your results.
Thank you.
Our next question comes from Lucas Barbosa, Morgan Stanley.
André, Paulo, thank you very much for taking my question, and congratulations on the result. My question is related to the distributors network. Considering the numbers that you have, and maybe some of the distributors you work with closed because of financial difficulties. I believe that, do you see that there are risks in this area?
Lucas, good morning. Thank you very much for your question. Yes, we work with a network of distributors, which is very broad, both in Brazil and abroad. Most of the elements of this network are WEG. They work with the WEG brand on an exclusive basis, and the history is very favorable in terms of financial solidity. Very rarely would they run into difficulties. As I said, these are companies that have been operating for decades, and they have a whole solid process already built, and their risk is very low. We saw no critical situation from them, but we have a close follow-up on them. Along those lines, as for distributed solar generation, we have been working closely with some distributors and installing companies. These are companies which are new companies, young companies, and they have been developing quite quickly.
We have been monitoring them quite closely, and we have not had any records of difficulties faced by them.
Okay. Thank you, Paulo. Another question. I'm not sure if you can answer this. This is related to short cycle product. Can you tell us what is the profitability of short cycle product as compared to history?
This is André Salgueiro here. We do not disclose the profitability per line. What we provide in terms of information in our institutional information, when we talk about short and long cycle products, what we say is that short cycle equipment does not have a big variation in terms of price and margin, regardless the scenario. They have this more stable price dynamics. Another factor to be considered, as we mentioned in the release, is related to the cost of raw materials. We have not been under any cost pressure due to the FX variation. It's likely to continue as it has been before.
Okay, thank you.
Our next question comes from Alex Falcao with HSBC.
Thank you very much for the follow-up. I would like to have some further information related to the solar energy. I mentioned that many of the projects are still not 100% hired by the suppliers. In 2021, theoretically, you have a relevant number of those projects, and you will need suppliers since CapEx will need to be invested. Can you give us some more details about the market share and who are the main competitors? Does it give you any opportunity to gain more market share considering the new business?
Hi, Falcao. This is André Salgueiro speaking. In terms of solar farms, we can address the topic in two different ways. First, as we did in the previous projects, we could sell the turnkey solution, which is the complete solution where we do all the project already running for the client. We also have the option to sell the equipment, the inverters, central inverters, or transformers for the substations. This is one of the aspects, the first one. Considering this market, you have players who work using WEG's model. They address the market with a complete solution, the EPC. You have other players which are integrators, engineering company or a generation company with its own engineering team. They purchase the equipment on separate basis. They themselves execute the integration. They provide their own solutions. We have the option to sell the complete solution.
The second option is to address the market by means of equipment. Competitors are in both types of businesses. In terms of market share, we do not have precise numbers because of the very dynamics of the projects. I believe that most important is that when we talk about the auctions, let's consider 2018 and 2019 and their auctions, we had I minus four and Y minus six. These projects have to be ready by 2023 and 2025. We have all those projects and whose suppliers have not been defined yet. Maybe the supplier who will provide the complete solution, or the supplier who will provide separate pieces of equipment. Maybe it's an opportunity that will happen in the future, as I said, 2023 or 2025. The solar farm will take about one year or two years to build it completely. We can wait.
The macro dynamics and scenario, the high cost of panel, the cost of the energy, the energy is cheaper now, this is not an encouragement for them to sell the energy in the free market. This dynamic is closer to the date when the products need to be installed. We believe that those projects are going to be implemented as the regulatory deadlines come near.
Okay, perfect. Thank you.
Excuse me. We close the Q&A session. I would like to give the floor back to Mr. André Rodrigues for his final considerations.
Thank you very much for taking part in our conference call, and see you next time.
WEG's conference call is now closed. We would like to thank you for your participation, and have a nice day.