Welcome to the conference call of WEG to release the results of the second quarter of 2019. We are transmitting this conference call along with a slide deck in our investor relations website at the address ri.weg.net. After its completion, an audio will be available in our investor relations website. If you need any assistance during this conference call, please request the help of an operator by pressing star zero. Any forecasts in this document or any statements made during this conference call about forward-looking events, business prospects, operational and financial projections and goals, and the potential for WEG's future growth are mere beliefs and assumptions of WEG's management, and they are based on information currently available. Forward-looking statements involve risks and certainties, 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 WEG and may lead to results that will be materially different from those expressed in such forward-looking statements. As a reminder, this conference call is being conducted in Portuguese, and you are listening to the simultaneous translation into English. Today with us in Jaraguá do Sul, we have Messrs. André Luís Rodrigues, Administrative Financial Superintendent Director, Paulo Polezi, Finance and Investor Relations Director, Wilson Watzko, Controller, and André Salgueiro, Investor Relations Manager of WEG. Please, Mr. André Rodrigues, you may start.
Good morning, everyone. Once again, it's a pleasure to be with you here for the conference call of our earnings of the second quarter of 2019. Starting with the highlights, net operating revenue grew 7.5% as compared to Q2 2018.
In spite of the expectation of a smaller share of wind generation business. The details about this performance were presented by Paulo further on. The second highlight was the 15.4% growth in the EBITDA, which reached BRL 535 million. It is the first quarter ever that we exceeded the mark of BRL 500 million EBITDA in WEG's history. EBITDA margin grew 1.1 percentage points, reaching 16.3%. This mark is the result of a combination that was favorable. Margin gains of some operations in Brazil, followed by the better profitability of our operations overseas, in addition to a more favorable mix of the products that we sold. Lastly, ROIC reached 18.4%, showing another quarter in evolution. Factors such as revenue growth, better operational margins, scale gains, and efficiency gains in allocation of capital have supported the growth that we presented over the past quarters.
Moving to slide four, we have more details about the ROIC, which presented a growth of 1.5 percentage points as compared to Q2 2018, reaching 18.4%. The growth of the operating income after tax explained by the growth and better operational margin more than offset the more capital debt we invested to support business growth. The consistency of this indicator in the past few quarters is a reflex of the combination of the business development strategy with an attractive return on capital invested, together with discipline in the use of capital, demonstrated by working capital management optimization of our investment program. I give the floor to Paulo Polezi.
Good morning, everyone. Moving to slide five, you can see the evolution of the business areas of different markets. I'll start in the area of Industrial Electro-E lectronic Equipment in Brazil, where short-cycle equipment sales are still growing.
The performance of this unit was not better only because in the second quarter, the sale of long cycle products remained stable as compared to the same period last year, especially in terms of automation panels. GTD also presented a reduction in revenue in Brazil, especially due to the already expected smaller share of wind generation projects. On the other hand, solar generation, still the positive highlight, especially in terms of distributed generation and the business of transmission and distribution, is still positive this quarter with an improvement in the business dynamics in all product lines. In terms of motors for domestic use, there has been a significant growth in the revenue in Brazil, which is related to the inventory dynamics of some customers that are important and a higher market share in important segments, such as washers.
The good performance in coating business, especially due to improvement in significant manufacturing industries such as mining, metal structures, and home appliances, and important projects in the industries of oil and gas and sanitation. Outside Brazil, we can see a consistent demand for short-cycle equipment and a growing demand for long-cycle projects with orders and deliveries in terms of high-voltage engines and automation panels.
We have projects to increase capacity and to build new factories that also demand long-cycle products and continue with good prospects, especially in industries related to oil and gas, pulp and paper, infrastructure, and mining. In the area of power generation, transmission, and distribution, the greatest contribution came from transformers, which presented a growth in all our operations overseas, with a highlight to the synergies already observed in operations of transformers in the United States and Mexico, and a good book of orders in the factories of generators in India and the U.S. In engines for domestic use, the revenue is still presenting the impact already observed in the past few quarters, with a smaller placement of orders in the local market in China and a weak performance of the operation in Argentina, which suffers because of problems in the local economy.
In coatings, the drop in revenue in the foreign market also reflects the difficulties in the economic scenario in Argentina, one of the main markets for this business unit outside Brazil. Slide six shows the evolution of EBITDA in Q2 2019. EBITDA grew 15.4% as compared to Q2 2018. The EBITDA margin closed the quarter at 16.3%, with an evolution of 1.1 percentage points as compared to Q2 2018. A consequence of margin gains in some operations in Brazil, followed by better profitability of our overseas operations, in addition to a more favorable mix as a result of a better revenue from wind generation, with the characteristic of lower operational margins. On slide seven, you can see the growth of the past few quarters. In Q2 2019, investments have reached BRL 118 million.
31% were allocated in Brazil and 69% allocated in our overseas manufacturing units, with a growth as compared to Q2 2018, especially because of the advance in investment in the first foundry of WEG outside Brazil, which is in the final phases of construction in Mexico. As I now end, and give the floor back to André.
Thank you very much, Paulo. Wrapping up the presentation, and before moving to the Q&A session, I would like to emphasize our recent accomplishment and prospects for the rest of the year. As we have recently published, there is some important development overseas, such as the refinery in Oman and Arkema in Europe, demonstrating the company's growing recognition of solutions in projects in partnership with major global companies through exclusive contracts or inclusion of us as an approved global provider, which makes us unique and provides special opportunities to WEG.
With the aim of advancing towards software and IoT solutions, we announce our new department of digital businesses, which will be responsible for developing products and digital services that will support all business units in development and application of new technologies. In May, we also announced our technological cooperation agreement with Embraer to develop new technologies and solutions to enable electric propulsion in aircraft. Although this is a long-term partnership without any prospects of short-term results, it demonstrates our technological capacity and the recognition of important customers of our projects. Lastly, we keep our expectation to grow in 2019. At a lower level because of the acknowledged reduction of our wind projects. As to EBITDA margin, we expect to present in the year an evolution as compared to 2018, considering the better performance of mature businesses in Brazil and better profitability of our overseas operations.
The growth in revenue and EBITDA margin, together with efficiency in capital allocation, will continue to support our ROIC at favorable levels. Now, we may start our Q&A session. Operator, please, you may proceed.
Ladies and gentlemen, we are now going to start our questions and answers session. If you want to ask a question, please press star one. If you want to take your question from the list, please press star two. Our first question comes from Lucas Marquiori from BTG Pactual.
Good morning, everyone. Thank you for the conference call. I have two things to say. André, you mentioned briefly in the presentation the exclusivity contract with Oman. I think there are some limitations in terms of what you can disclose. Can you give us a little bit more information, volume, when this will be shown in the results, in which lines, the manufacturing, GTD?
Just a little bit more detail about this specific contract. This is the first question. The second, you talked about the recovery in your margin of operations, especially WEG Transformers. What level of margin operation? Is there any room for improvement, or is the run rate already appropriate for you? These are my questions. Thank you. Hi, Lucas. Thank you for your question. I'll talk about the supply to Oman, which is a joint venture project between Oman Oil and WEG Petroleum. The total investment is about $8 billion in investment. Of course, this is not a WEG contract. WEG signed the contract with the engineering company, Técnicas Reunidas from Spain. It was an agreement, and WEG becomes the exclusive supplier of engines and low and high voltage inverters. As to the amount, we signed the first tranche, and there might be another two tranches for the development.
We do not disclose the amount of the contract, but I think that the most important point here is that this contract will make it possible to show WEG as a global player. This is a project that provides great visibility outside Brazil. The brand WEG has a good reputation outside Brazil and internationally, and this places us at a different level of quality as a supplier with our supply agreement. It opens other opportunities for WEG and other suppliers of the type. I may also say, there are some contacts from the past in terms of trying to develop WEG commercially outside Brazil. After this contract, we have opened some doors much more easily than we did in the past. Part of the contract will be developed this year and part of it next year.
About 50/50 each year, and the reflexes of that, you're going to see in industrial, electro electronic products. Are we going to see the results of that in the next quarter? More towards the end of the year, you will be able to see the impact of this. About WEG USA. I'm sorry, about WEG USA. The margin improvement is in WEG USA, but we also are developing margins in other units that we acquired in the past. Yes, WEG USA has been having positive margins since the first half of the year. We expected this to take place right in the second half last year, but we were surprised by an unexpected inflation in the U.S. market. This became a reality this year.
Still in the process, margins are still getting better, and we have the opportunity to continue to develop the margins in that unit and in other units outside Brazil. We still have room for growth.
Thank you very much, André. Our next question comes from Rogério Araújo from UBS. You may start.
Rogério. Good morning, gentlemen. Thank you for the opportunity. I have two questions. One is a follow-up of this thing of WEG being recognized as a provider of project solutions, recognized as a global supplier. I would like to hear if what has happened is that WEG has been approved to take part in these projects. Did you ever try to do that before, and why didn't you win in the past?
I think that another issue here is whether you see any situations of companies that produce their own low voltage electrical engine might choose to buy WEG instead of manufacturing themselves. Looking slightly more into the future. Do you think this is a possible, a feasible scenario when WEG will start to become a low voltage electric engines for less efficient players in this segment? This is my first question.
Thank you for your question. WEG has only won this contract now. Why didn't we have it in the past? Well, this is a process. We need to develop our brand to have access to bigger and bigger markets. This is what WEG did. We have had the chance of publishing.
In oil and gas, WEG is renowned outside Brazil, and as more and more companies got to know WEG and having access to our products, quality, capacity to innovate our products. Now this has placed us on a different level. I think that once again, in a supply such as this, places WEG at a different level as compared to the past. There are more doors that are open to us. We mentioned Oman, but there's Arkema. Arkema is a chemical industry, French, with global presence. We also closed an energy efficiency contract with them, the replacement of engines. This is an exclusive contract with Arkema for the whole of Europe. We can work with them on the rest of the world, too. This is another opportunity for WEG to develop in international markets. The second question regarding the supply of electrical engine.
Do you think that in the future some companies will start buying WEG instead of manufacturing their own engines?No, I don't think that is likely, Rogério. Globally speaking, in terms of global players, they're all very well established, we have a share with more than 2,000 manufacturers of engines in China. We see more market consolidation in terms of the supply of electrical engines for these companies to resell. I don't see it as likely because these companies will need to do margining on top of margining resale, and it's not going to be competitive. I don't see that trend, and I see the possibility of consolidation. Talking a little bit more about Oman contracts, just another example. All OEMs, it's not just WEG that is selling directly to the refinery.
A pump vendor, the pump has an engine, they will only be able to sell to the refinery if they have a WEG engine. I don't see any companies buying the engine to resell, but develop a strategy growing through the OEMs that WEG has been doing for a long time. This market is very big of projects that you did not participate before, more in terms of low and medium voltage electrical engines. Do we know how big that market is? Are there any major projects?
Well, Rogério, we can calculate an estimate of the value of the global market later on, that happens with exclusivity contracts. We have that in many countries in the world. We may develop this in the United States, I know you can confirm afterwards, we have more than 25 customers for global supply.
There are customers that buy from WEG in Brazil, China, U.S., Europe. They are exclusive contracts with global customers. If we get the evolution of the past three years, this number has been going up. There is also a possibility of development in other geographies too.
Thank you very much. The second question is very quick. What is the effect of IFRS on your EBITDA margin? Also, did you calculate how much that affects ROIC, if it does?
Rogério, this is Paulo Polezi. IFRS 16. For this quarter, according to our calculations, EBITDA margin would be impacted between 0.4 and 0.5 percentage points. Additionally to the impact of depreciation, and this is explained in note 13 of our financial statement, and we need to think about our mercantile lease, and they are outside Brazil at lower rates, and that's why the impact is not so significant.
As to an impact in ROIC, there is an impact that results from that, and just as I said, it's not so representative in the EBITDA neither in ROIC.
Thank you very much.
Our next question comes from João Noronha from Santander.
Good morning, everyone. Thank you for the opportunity. In terms of solar power, could you give us more information about the current size of the business in distributed energy? What is the revenue and how you've been growing? Thank you very much. Good morning, João. This is André Salgueiro. In terms of solar power, in Q1 this year, we mentioned that we were not going to give too much detail in terms of portfolio and backlog as we had been doing last year, because this is a new segment and more representative. It's as we've been mentioning to you since late last year.
This is very positive, very focused on distributed solar generation. Our portfolio has been growing consistently since last year. We're keeping that trend. The placement of orders and billing is evolving, which means that we expect this business to grow over the next few quarters. The point of attention is because of solar farms that last year, we delivered three farms. This year we have four. Two have already been delivered, one. If you compare the solar farms, if you compare 2019 to 2018, the billing or the revenue performance is smaller this year, which will obviously be offset by distributed generation. The overall prospect is very positive because of our GD. If you look year-over-year, what we lose in terms of farms would be offset by the growth in distributed. Yes, GD. We are going to recover the farm.
It depends on how GD evolves in the second half of the year, but we are expecting the consolidated solar power will be slightly better than 2018 if we take the whole year.
Our next question comes from Marcelo Motta from JP Morgan.
Good morning. I have two questions. The first one, could you comment the company's market share in international markets? Have you won market share in Asia, but I would like to understand better about the U.S. and EU markets. We're thinking GTD, there are many drivers. Less wind and, well, the solar generation, but more distributed energy. How is that compared? Distributed energy would be better or worse. I would like to understand more the direction of your margins. Hi, Marcelo. Good morning. Paulo Polezi. Your first question about market share.
Well, actually, we have a continuous process of market evolution and market share gain. In some of our businesses, we can have more exact information in terms of industrial electronic equipment and other equipment. GTD is difficult to get the information, it's more commercial. It's a continuing process. We don't have details, and we update that every two years. I can give you an example. Four years ago in the U.S., we were three in market presence. Two years later, WEG became second in the U.S. with a presence close to 15% of the market. It's an evolution that is gradual, and it takes place all over the world. We are very careful, and we try to update every two years to give you more precise numbers.
It would be too hasty to give you numbers about the markets, but the perception that we have of the businesses is an advance in all segments of a two-digit growth, and our two-digit growth is an example of that. Just as to GTD margin, we need to separate businesses from GTD. In terms of wind and solar farms that we work more as integrators, a significant part of this business belongs to third parties, and we complement with some pieces of equipment that are manufactured by WEG, and we sell the full solution. We hope margins for these businesses to be structurally lower than in other businesses. This is a first part. The second is the distributed generation with a slightly more constant margin, slightly better margin, which is more focused on retail without any major variations.
There is all the rest that goes into GTD in terms of generation, both wind and solar, plus T&D. We have the long-cycle product dynamics. When the market demands products, we price better, improve margins. When demands go down, we in-source projects with margins that are not so good. We have this dynamic. What we are seeing now is a combination of a recovery of long-cycle products, especially for T&D, and a proportional reduction of wind billing with a smaller margin. If you add the two factors, you see that GTD is improving its margins, and it's likely to continue this trend over the next quarters. Just complementing what Paulo said about WEG's expansion in foreign markets. We have demonstrated consistently that we've been capturing markets, not on a one given geography, but in many different geographies.
WEG has been growing consistently in the U.S., when we analyze not just one segment, but when we analyze the growth rate in the foreign market, so industrial electronic equipment, GTD, this is very consistent in the U.S., in Europe, in China. In the case of China, this is leading us to increase capacity of WEG's newest plant for the manufacturing of electrical engines, which went live in early 2016. Yes, WEG has been seeking and finding opportunities to grow in these markets and to increase its market share.
Thank you very much. Our next question comes from Gabriel Rezende from Bradesco BBI.
Good morning. Thank you for the opportunity to ask questions. I have two questions related to the foreign market. The first one relates to Mexico. When is it going to start operating, and how can you contribute to gaining competitiveness in North America?
The second one regards market share. How can the new contracts with Arkema and Oman, how can it drive market share in foreign markets?
Hi, Gabriel. Mexico foundry will start operating shortly and producing. First in a test phase and then officially. It's just a matter of weeks. It's going to start operating and we follow. This year we might not see any major changes because they're pre-operational, but more consistently, next year when we see a higher production volume. It's a significant investment. We're almost sure that the most modern foundry in the whole of Mexico is our plant. It's really state-of-the-art technology. Right from the beginning, we need to have capacity because it's difficult to reduce the bottleneck afterwards. Next year and over the next few years, you will see the improvement. These contracts, once again.
It's difficult to tell now what this will mean in terms of new markets to WEG. For the international market, WEG, with this type of agreement, it changes its level of qualification as a supplier of equipment that require high technology and reliability and quality. We are mentioning these two examples, which are recent examples, as I have just said, we have 28 or more than that, global contracts with major players and major international players. There are many examples. Recently we supplied a high voltage engine with 45 tons to the north of China, and part of it was developed Brazilian engineering, part of it in India, and final assembly in China, to ensure better optimization of competitiveness of this product. WEG is more and more positioning itself as a relevant brand for these projects in all the markets where we operate around the globe.
One thing leads to the other. As I said, in the case of Oman, we are already getting many calls. Many people and companies are coming to WEG. In the past we had tried to make contact with them, but they didn't know us so well. We didn't have much of a track record. Now, as we have a better track record, they are coming back to us. This is all the result of a strategy focusing on industries. Over the past few years, WEG has created teams that are dedicated to covering certain industries all over the world. Oil and gas, for example. All of this is a result of a long-term strategy that we are being very faithful to its execution.
Thank you very much. Our next question comes from [Gabriela Gordi] from Banco do Brasil.
Good morning, everyone.
Thank you for allowing me to ask a question. Congratulations on your performance. We've been talking a lot about market prospects and everything. Could you tell us what you expect in terms of cost of raw materials and other inputs in the second half of 2019? Can you confirm this year's CapEx in the data that you presented for the first quarter? As to debt, there has been a considerable drop in the gross debt. Was it due to any settlement or was it the result of effects, a variation? Could you tell us more about that?
Gabriela, good morning. This is Paulo Polezi answering your question. You asked three questions in one. You talked about the cost prospects. In our case, the first thing that you need to remember in terms of our cost structure are metal commodities.
Number one, copper, then steel and aluminum, in this order. We've been observing an improvement in costs in a strong currency. This has helped us effectively, has contributed to the margin, and we are working with a scenario of maintenance of this condition in terms of costs remaining stable. Of course, we need to look at the effects aspect of that. Compared to last year, in the second quarter, we saw an effect slightly more stable. We need to place the two items in our calculations, commodity prices and FX variation. The second half of the year is likely to be more favorable for our businesses with regards to these commodities that are part of our costs. The second part of your question regards CapEx. We have an annual CapEx program this year. We have already provided a lot of information about it.
The budget that has been approved is BRL 530 million, most of it, 70% overseas, 30% in Brazil. The CapEx has been originally planned to complete our plant in Mexico. In order of relevance, we have the expansion of the engine plant, manufacturing plant in China, as you said. We are also investing a facility to build frequency inverters in China. Lastly, the new generator, the final power. We don't know yet the details. There are lots of investment spread in Brazil and all over the world to improve our processes. This is the overall picture. In Mexico too there was an FX variation that played a role. Number 2, China, and number 3, investments in Brazil that explain this quarter's CapEx. Your third question, reduction of the debt. Debt. Brazil has been working, and this is not new, it's been a year.
A reduction that is in cash and debt, especially because of the foreign exchange rate, reduced many debts that had a higher cost, usually above the CDI. The result is that we reduced debt, reduced cash, and at the same time, there was a reduction in financial expenses. We still have something to do, but most of this work has already been done to reduce our indebtedness.
You think we can consider this level more stable in terms of what you are reporting for June 2019?
Probably, yes. There might be a variation up or down if we find any interesting or competitive opportunities in the market. We are always looking at that. We have an amortization that is consistent. The company is generating cash at the same time, and this is the most important thing.
We are looking at the market, and if any interesting opportunities come up, we might be involved in them. Our next question comes from Mr. Augusto Ensiki from HSBC. Good morning. Thank you for the question. Could you tell us more about your software structure? How is it going to fit into the new businesses that you operate? Are you going to change accounting methods? Hi, Augusto. Thank you for your question. Talking about the new structure that we call WEG Digital Businesses, I think that along its history, WEG has been investing in electrical machinery and automation products and systems for companies in the power industry. WEG is not just a supplier of equipment of engine and inverters, but it works in automation too, with all the bases in industrial activity.
We have frequently, recently published our WEG Motor Scan, but we've been doing a lot there. We have some solutions that comply with the Internet of Things and also internal systems with internal software of our production. What used to happen is that this was slightly dispersed in our business units, and the solution that we found is that we have reached a certain size that we have a new department grouping all our initiatives under a single initiative, and to develop digital businesses outside and inside the company. This is recent. The whole strategy is recent, and it's being refined now. We do not yet have a revenue estimate, but naturally, we are going to start first in Brazil, and then we are going to expand it internationally. I think at first it's going to be slightly more diluted in industrial electro electronic equipment.
Once there is something that we find relevant, we are going to make a disclosure and we might change the way we publish this. I think the key message here is that the company is structuring itself to do that. At first, we were slightly more low profile in terms of publishing our capacity to be in that market in terms of internal development. Of course, towards the end of the year, we're going to have a WEG Day here in Jaraguá, one of the pilot manufacturing plants of this intelligent plant, and we are going to include it in the visit to show what we have developed. Now we want this to be translated into products to be offered to our customers to complement our extensive product line.
Thank you very much. As a reminder, if you want to ask a question, please press star one.
We are now ending our Q&A session. I would like to give the floor to Mr. André Rodrigues for his closing remarks. Please, Mr. Rodrigues, you may go on.
Thank you all very much once again for attending our conference call, and I hope to meet you again in a few months when we publish the results of the third quarter. Have a good day, and thank you very much. WEG's conference call has now ended. We thank you all for your participation, and we wish you all a very good day.