Welcome to VAG's Audio Conference on the Earnings of the 4th Quarter 2018. We are broadcasting this conference call together with slides on our Investor Relations website, ri.dom. Net. And after conclusion, the order is going to be available on the IR website. Any statements made in these documents or made during the conference call with regard to future events, business outlooks, projections and operating and financial goals and the future growth potential of WAG are based on the beliefs and expectations of WAG's management that rely on information currently available.
Forward looking statements involve risks and uncertainties and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions and discriminations and other operating factors may affect the future performance of AG and lead to results that will be materially different from those in the forward looking statements. I would like to remind you that the conference call is being made in Portuguese with simultaneous translation into English. Today with us in Jaragua do Sul are Andre Luis Rodriguez, Superintendent Director, Administrative Financial Paulo Polese, CFO and IR Officer Virgil Sombasco, Controller and Andres Alvaro, Investor Relations Manager. Please, Andre Rodriguez, you may go on.
Good morning, everyone. It's a pleasure to be here once again to release our earnings of the Q4 2018. Before starting with the highlights of the quarter on Slide 3, I would like to remind you that in the beginning of 2018, we said the growth of revenue and continuous focus on ROIC would be the main drivers for the year. With the numbers presented, we feel we have accomplished our objective. Talking about the highlights of the quarter, net operating revenue grew by 16.9% in 4Q, closing the year with growth of 25.7%.
Paolo is going to provide more details on the performance around the presentation. And ROIC reached 17.6%, going to levels observed only before the global crisis of 2,009. Other two highlights in the quarter were the growth of 30% of OIBDA that reached BRL 4.9 million with margin growing 1.6 percentage points, reaching 15.7 percent and the increase in the pace of investments, totaling BRL 170,000,000 in the quarter, including 60% of investments that were made in industrial complexes and other facilities overseas. Going to Slide number 4, we have more details on ROIC, who had growth of 1 percentage point compared to the 4Q 2017, reaching 17.6%. The best performance of operating profit after taxes is explained by the growth in revenue and improvements in operating performance.
This growth more than offset the more capital invested necessary to support business growth, both because of recent acquisitions and for investments in working capital, fixed intangible assets performed along the year. The consistency of this indicator proves our strategy to develop new businesses like wind and solar that although half margin structurally lower presents a very attractive return on capital invested. Now I'm going to turn the call to Paulo Poise. Good morning, everyone. Going to Slide number 5, we show the evolution of our business areas in the different markets.
I will start with industrial electroelectronic equipment in Brazil, where sales of short cycle equipment continue with the trend of growth. Additionally, in this quarter, we observed growth of revenue of long cycle equipment, especially automation panels. We also observed an increase in the search for equipment to expense capacity expansion projects like brownfields and new investments, greenfields, most of them already being posted, but already signing for the beginning of a resumption of this project in Brazil. DTD had a drop in revenue in this quarter in Brazil. The less projects of wind generation in portfolio are already being concluded and already recorded a lower revenue along the Q4 2018.
Additionally, transmission and distribution always contributed to a lower revenue in the quarter, showing the oscillation in delivery of projects in the quarter. On the other hand, solar generation continues to stand out and the prospects for the business continue positive, especially in distributed solar generation that has been showing continuous growth with our backlog in recent months. In domestic use models, there was a small reduction in revenues, a reflex of the consumption dynamics in Brazil for the segment that did not present consistent recovery compared to last year. The performance of the Paints business reflected the performance of industrial markets in Brazil that started to recover in recent quarters. Overseas, electroelectronic equipment continue to grow, mainly driven by short cycle products.
As mentioned in previous quarters, we have already observed projects to increase capacity and build new plants that also demand long cycle products, especially in industries connected to oil and gas, pulp and paper and mining. GTD, the greatest contribution comes from the transformer business that has growth in all operations abroad, particularly for the consolidation of the new transformer company in the U. S. In domestic used motors, revenue had dropped especially because a lower backlog in the local market in China allied to a poor performance of the operation in Argentina that is suffering from the recent problems that are being faced by the local economy. In paint, the drop of revenue in the frictional market also reflects difficulties in the Argentinian economic scenario, one of the main markets for this business unit outside Brazil.
On Slide 6, we have evolution of OIBDA in the 4th Q 2018. The major highlight quarter on quarter was growth in revenues. EBITDA grew 30.2% compared to the Q4 2017. As Andre mentioned, EBITDA margin closed the quarter in 15.7%, an increase of 1.6 percentage points compared to 4Q 2017. This is a reflect of better profitability in overseas operations, gains of margins in some operations in Brazil, in addition to a lower revenue of wind generation that has traditionally lower operating margins.
Finally, the lower exchange volatility in the period contributed for stability of costs of materials in long cycle projects in Brazil. Finally, on Slide 7, we show investments in recent quarters. In the Q4 2018, investments reached BRL170,000,000, 40% allocated to Brazil and 60% to production units overseas, showing significant growth compared to previous quarters, especially because of an advanced investment in the first foundry outside Brazil of VAG that is built in Mexico and that in this quarter concentrated higher volumes of investments. Additionally, a normalization of market behaviors demands gradually an increase in disbursements to expand our plant capacity and also to modernize our production processes in Brazil and in overseas. With that, I will close and will turn the call back to Andre.
Well, thank you, Paolo. Before we open for Q and A, I would like to reinforce some recent accomplishments and the prospects for the year of 2019. Well, the first thing is that we announced last week the acquisition of 2 new businesses. The first was the purchase of the storage system of energy in batteries of NPS in the U. S.
That can bring good prospects in the future for the growth of Ag and even more synergy to our renewable energy solutions like wind, solar and also electric traction. The second, the purchase of Jera Mia Redutores that will complete our portfolio in the Reducer business following on our strategy to offer complete solutions in a large range of products. Finally, profitability measured by EBITDA margin and our continuous focus on ROIC will be the main drivers for 2019. Even with an expectation of growth, the pace of growth in revenues will decelerate in 2019, especially because of a lower project portfolio in renewable generation as wind. As you all know, these businesses have operating margins that are lower and therefore we expect an improvement in the mix of products.
So that together with best outlooks for other businesses will positively contribute to our EBITDA margin and maintenance of ROIC for the remainder of the year. We are going now to start with the Q and A session. Operator? Ladies and gentlemen, we'll now start the Q and A session. Our first question comes from Ricardo Aldis from Morgan Stanley.
Good morning, Andre and Paolo. Thanks for your time. I have two questions, both in DTD. The first is more objective. This level of BRL 500,000,000 BRL 502,000,000, if I'm not mistaken, that you delivered in the quarter as part of already the deceleration.
Now the drop in wins that everybody is expecting and a bit more volatility in P and D, do you think that we can work with this level along the year? Or from what I understood in your release, you still have something of wind that is going through the results. So perhaps we should work with something like $400,000,000 $450,000,000 if it would make a bit more sense. So a bit focused more on GTD for this first quarter. And then about solar energy more specifically, could you please give us a breakdown in solar for what is distributed?
I believe it's going to keep constant, but I just wanted to check on that. And a bit more color in terms of solo farms, if I'm not mistaken, you would deliver them by June. And what would be their contribution today? And if you have in your pipeline other projects like this to as of June make up your portfolio once again. Thank you very much.
Hi, Ricardo. Good morning. Okay. I'm going to start with wind, DTD and then Andre is going to complement. Wind alone, well, we have to talk about DTD as a whole in Brazil.
As you very well mentioned, we had about RUB 520,000,000 Wind had a considerable share in this amount. It will reduce along the year. This is information that we have been providing and will 2019 in consolidated numbers, mature businesses and other sources of energy, biomass, hydro plants, they will continue to grow along 2019. And so this is a positive trend. So when you look at GTD in Brazil, you have to consider at distribution and transmission that recovered sales along the year of 2018.
This recovery will continue along 2019. And finally, solar that we can answer in separate. But it's important for you to see the whole thing. We tend to see DTD along the year as growing. Of course, there is going to be a step along the year because of wind coming out, but we expect a recovery.
It's hard to give you a hard number if it's going to be below BRL520 1,000,000. We started the Q1 this year with BRL470 1,000,000. So we are going to have some volatility. But we wish you looked at VEGS GTD as a whole, not only wind alone. And the trend is of growth along the quarters.
And this is Andrea Rodriguez. One thing before answering the question on solar is that in recent years, we have given great visibility in terms of quantities for new businesses in renewable energy, wind and solar. They were new businesses that contributed for the growth of revenues significantly. Now we are going to disclose information as we do with all VEGS businesses. So let's talk about solar plants and distributed plants.
We signed 4 large projects, 6 solar farms, 4 delivered in 2018 and 2 are to be delivered in the first half of twenty nineteen. We are almost completing the negotiation of a third project still for this year. Because it is the beginning of the year, prospects are positive, we can say, because there are still projects from auctions of 2017 and 18 in the market that may bring positive prospects for the future. When we go to a distributed generation, you will remember BAG has been in the market since 2011 and we are expanding our network of certified stylers. We have more than 300 now.
And the demand for this project has excelled our expectations, we have been saying. So we have very good prospects for the coming years. And differently from solar plants is that margins here are very good and compatible to other VEGS businesses. So this is what we have today for the portfolio and what we can say about solar. Okay.
It's very clear. Thank you, Andrea. Thank you, Paulo as well. Our next question comes from Lucas Macchiore from Banco Safran. Hello, everyone.
Good morning and thanks for the call. I have two questions. First, Andre, in your presentation, you talked about the 2 acquisitions of last week. I would like to know a bit of your strategic views. 1st, in the U.
S. For the storage of energy and batteries, Is this an application more for urban mobility, electric cars? Is it more for hybrid energy, solar farms together with wind energy? Or is it and is it something more directed to Brazil or more of a global product? And, Jerimia Redutores, well, you have a very large portfolio of Reducers today.
So is it something to get to a group of clients that you didn't have before? So I would like to understand a bit more about the 2 acquisitions. And the second, if you could give me the percentage of domestic production that is exported? So how much of Brazil's total production is being exported? Thank you very much.
Those are my two questions. Hi, Lucas. Thanks for your question. Okay. Let me talk a bit about strategic views, and I'm going to start with the battery stored energy system NPS.
This is a strategic value and the opportunity that this business brings for us to be a relevant player in a business that is just starting to develop worldwide. What is important is that right now numbers are not really significant. This is a project that is still under development. It's a new reality that's starting first abroad to be implemented later on in Brazil. So for now, I already answered part of your question.
Our view is that this is not going to be a local business, but rather a VAGS global business. Today, the market that is most evolved is the United States. Last year, we announced the supply in the city of Vermont. Vermont is a city that is conducting a project on the storage based on batteries. And we have then a smart portfolio to develop new projects so far in the United States.
The applications of the Staris business are quite complementary to what we have been developing in terms of renewable energy. For example, solar, you have solar generation, but the sun is not shining all the time. The wind is not blowing all the time. So you can store this energy and use it at peak times or peak consumptions. So you already mentioned electric cars.
And as I said, you can work with intermediate sources like solar and wind. And you also have a safety system for the distribution and transmission system. So the project that we are developing in the U. S. Is that.
And electric traction is very important because the use of a fast charge station. In the beginning, we know that the networks are not going to be in place and the solution can help. And another thing that is very important is that this type of application finds a solution of what to do with electric car batteries. You know that they have a useful life of 5 to 7 years, but they can be reused for another 10 to 15 years in battery energy storage. So it is a business that is complementary to what VEGS offers, but it's more long term and it will start outside Brazil.
Jeremias Redutores is a company that was founded in 1973. It is a reference in its market in terms of portfolio and quality product. And it really comes to expand the offers of VEG SESTAR. You know VEG SESTAR has small reducers, motor reducers, but its focus is more mid and large industrial reducers. And with Zeremia, we include the mega reducers.
Zeremia works with smaller reducers as well. So it's complementary. It comes to strengthen our presence in the reducer market. As I mentioned, again, complementary to our portfolio and it will increase our competitiveness compared to global players that are already in Brazil. So I think they were acquisitions that were very important for the company's strategy as a whole.
Okay, very clear. The second part of your question of the percentage that in the end of the year was produced in Brazil and exported. So just as a reminder, the number was 28% compared to net revenue. And in 2018, of course, there was a major impact of the exchange variation. So the number gives an increase that is proportional to what we saw in the external market, but we have a balance of what is sold produced and sold in Brazil, especially in GTD and produced and sold overseas because of an increase in capacity.
Altogether, considered, we went up to 30%, so slightly better but almost flat compared to the previous year. Okay. Thank you, Paolo and Andres. Our next question comes from Bruno Amorim from Goldman Sachs. Good morning, everyone.
I have two questions that are follow ups really in terms of the split of energy. I would like to understand what would be the impact of a deep reduction in revenue coming from wind projects. I understand that the segment has lower margins, lower invested capital. ROIC is good even with lower margins because they have low invested capital. But can you mobilize the capital that is invested in the business because you're going to have a drop in revenues that is significant?
And second, what can you say with regard to the ROIC of the wind division? Is it similar to the average of the company or is it not? I understand you have lower margins and lower capital investments. But in the end of the day, is the ROIC the same, higher or lower than the average of the company? Okay, Bruno.
Well, wind energy, we have always mentioned that the return on capital invested is above company average because Bags didn't have to make strong investments to work with the business. Now if the share of wins will have a negative impact to the company, Well, we always work for the other businesses to offset any drops. Along the time, this is something that we have been proving. There were times that other segments were more relevant in the past. And because of specific drop of one segment.
The other segment kind of stepped up for us not to affect our numbers. So even with the reduction of wins for 2019, we don't see anything that is really going to change our trends of showing appealing numbers in terms of return on capital invested. Well, thank you. Just a follow-up thinking of the company as a whole. We saw since the slides of 2015, 2016 and we have been seeing growth in the company's top line for the last 2 years.
And I suppose that operating leverage has contributed for your ROIC go from 13% to 17.5% that you delivered in 2018. Do you still have room for expanding your ROIC and margins as a whole by means of operating leverage? Or are you already using your full capacity given the strong growth of recent years? What can you say about that? We want to continue to have an appealing ROIC as it was this year, in line or even above the objectives that we had within the company.
You asked if there is room to develop. Well, we always work very hard to work with working There are always opportunities to improve margins, and we are going to continue working on that. But our objective is to maintain interesting levels as we deliver to this year. I think it's going to continue to be attractive to everyone. Okay.
Thank you very much. Our next question comes from Felipe Vinagre from Credit Suisse. Good morning, everyone. I have two questions. Changing topics about revenue.
1st, revenue overseas, you grew 14 percent in local currency. And you also talked about the gain of share. I would like to know what you expect from now on. You are with a good backlog. Are you going to continue at the levels of the Q4?
And in transmission, the last news after the auctions that we had recently is that you already had a backlog of BRL 500,000,000. If you can say if this has increased and what kind of ramp up we are going to have in terms of revenue for 2020? Hi, Felipe. We have the prospect of in 2019 to continue grow at the pace of 2018 overseas. And why are we saying that?
Well, first, there are 2 segments that we always talk about as being relevant in relevant for BAG outside of Brazil, oil and gas and mining, that are in the process of recovery. And we see signs that there is a reception in steel, pulp and paper and energy generation abroad. And we never stopped. We are opening other operating fronts and commercialization in other countries in Asia, Africa, Middle East. For instance, PGMC has a leading position in South and Latin America.
But we still have opportunities in the rest of the world. So for a development of PGM out of the market in which we are leaders, we might have opportunities to grow. Another example is that we are doing very well in low voltage motors in China. We have a new plant. We started to produce in Jugao in 2016, and now we are making new investments to increase the capacity of Jugao's plant.
China is growing more than 20% in dollar. That shows our successful strategy outside of Brazil. That's why we believe that 2019 may bring good Felipe, good morning. This is Palese. As for backlog, we have to look at what our profile was like in this area and what is going to be from now on.
In last years, we had always had a balance between revenue from generation of energy, another part for the industry and another part for renewable energy. Last year, the share of distributors has gone down significantly. The main player in the market is less active, especially state owned companies are a lot less active. On the other hand, it was renewable energy that took this vacant space. VEG has solutions of substations and transformers in many of these projects.
For 2019, we see the same process to go on, growth and the addition of new orders because of the auctions. So this is already starting to appear along the year, more specifically in the second half. And with all that, we are going to have a bit more robust growth in the level of 2 digits in the area of T and D. So what is really different is the auctions that we already had and orders are going to start more to the second half of this year. If you allow me, just 2 very quick questions, interest rates and income tax.
I see that with prefixed rates, interest rates are going down. Do you think this line is going to get better or worse? And in terms of income tax, if you think you're going to keep the levels of 2018 or even better because you are increasing your mix overseas compared to the domestic mix? Thank you. Hi, Felipe.
Let's talk a bit about the financials. I always like to start by saying the following. VAG is quite different from other companies that helps our business units, which is our financial flexibility. What's that? We have a solid balance sheet with cash liquidity, and this is a must to us.
The opportunities that we have to raise credit below market costs are no longer available. On the other hand, especially in Brazil, we are having the best time in terms of low interest rates in history. All that together, we still have access to the main structures for financial leverage. And we are going to probably continue that cash ratios that are suitable or positive and will support the company's growth. That's on the one hand.
The downside is leveraging debts overseas. We also saw an increase in interest rates in emerging markets and in mature markets. Liber, for instance, went up. And we have some leverages in Mexico, South Africa and Colombia. All that gives us a bit more financial expenses.
Along the year. We are going to work to reduce this leverage in the external market. So we are working today with the best case scenario of having a neutral financial results along there. We don't know when we are going to be able to 0 the debts abroad or change them in for cheaper debt, But we are working to have a breakeven point in 2019 or a neutral point in 2019. And just to add in terms of income tax, we do not have expectations in changing any of the benefits that we have, interest on capital or others.
There is always this mix between Brazil and overseas. So you might have minor changes. But in the basic scenario, we are not going to show anything much different in terms of effective rates for 2019. Okay. Thank you very much.
Our next question comes from Augusto Tanski from HSBC. Well, thanks for taking my question. I have a quick question about nonrecurring numbers of BRL 26,000,000. In the material fact, you had mentioned BRL 46,000,000. Has the amount changed?
Or you're going to have an extra BRL 20,000,000 for the next quarter? Hello. Good morning. This question has to do with our announcement of November. The total agreement was BRL46 1,000,000 divided in 2 installments, 2 parts.
One part is what is non operating expenses, about BRL20 1,000,000. It was already entered in a booked in the results of the Q4 and $26,000,000 is the monetary correction. Since it started to be calculated back in the 1990s, that was booked into financial results. And that's why we had unfavorable financial results. So 46% altogether, 26 in financial results and 20 in the line I mentioned.
Okay. Thank you very much. We are now closing the Q and A session. We are going to turn back the call to Andre Rodriguez for his final consideration. Please, Ms.
Andre, you may go on. Well, once again, thanks very much for joining us in this conference call. Even starting the year with the drop in the wind portfolio, we have the expectations of growing our business in Brazil and overseas. With that, we are going to improve our operating margins and we are going to keep return on capital invested as Good morning, everyone, and see you in our next audio conference. VEGS audio conference is now closed.
We thank you very much for joining us and wish you a good day.