Welcome to WEG's fourth quarter 2017 results conference call. We would like to inform you that this conference call is being recorded and all participants are in listen-only mode. Ensuing this, we will conduct a question and answer session when further instructions will be given to participate. Should you require any assistance during this call, please press star zero to reach the operator. We are simultaneously webcasting this conference and the accompanying slides at our site, ir.weg.net. A reminder, we are recording this conference, and after the conclusion, the audio will be available at our IR website. Journalists should direct their questions to the press office at the number 4732764295.
Any forecast contained in this document or statements eventually made during this conference relating to WEG's business perspective, projects, and operating and financial goals and WEG's potential future growth are management beliefs and expectations and are based on information currently available. These statements involve risks, uncertainties, assumptions. They depend on circumstances that may or may not occur. Investors should understand that the general economic conditions, industry conditions, and other operating factors may affect WEG's future performance and lead to results that differ materially from those expressed in such forward-looking considerations. We would like to remind you that this conference call will be conducted in Portuguese with simultaneous translation into English. With us today in Jaraguá do Sul, we have Mr. André Luis Rodrigues, Managing Director, Financial Superintendent, Mr. Polezi, IRO and CFO, and Mr. Salgueiro, Investor Relations Manager. You may proceed, Mr. Rodrigues.
A good morning to all of you. It is a pleasure to be with you to release the results for the fourth quarter 2017. We have now once again reported a double-digit operating growth, 12.5% in the consolidated results, 10.2% in the foreign markets. In the domestic market, we continue to observe a recovery of short-cycle products, especially in agribusiness and consumption. The long-cycle products have a demand that is below expectations. The recognition of the revenues of an important solar energy project has contributed to the growth of revenues in the fourth quarter 2017. In the foreign market, we observe growth in all regions for the short-cycle products. There is an increase in projects for long-cycle in South America, U.S., and Australasia. Additionally, the consolidation of the new transformer business in the U.S.A. has helped us in consolidating revenues. We also have an EBITDA margin of 14.1%.
We attempted to preserve our margins and returns to guarantee our competitiveness in the long term. This would have happened were it not for impacts on our margins this quarter. The first impact was in the new U.S.A. transformer company. Structural adjustments and the processes that we have been implementing since the acquisition that will offer better results throughout 2018. This impact is normal and considered during the time of acquisition. There was another important impact in South Africa. The low performance of some projects, for example, EPC, compromised our results for the quarter. The participation of new businesses, especially solar energy, has caused greater pressure. It is important to remember that this is a business that is still maturing. It has an attractive return on invested capital, but lower operating margins.
Were we to eliminate those results, the margins of 2017 would be similar to the third quarter 2017. The better operating performance during the year and a very careful use of our capital. We go on to slide number four, where we have more information on the return of invested capital with a result of 1.7 percentage points vis-à-vis 2016. The growth of our operating profit after taxes results from a growth in revenue, the control of expenses, and an improvement in the other non-operating accounts. This has led to a very good use of the capital employed that is necessary to allow for our growth. We needed more working capital and for the investments carried out in PPE during 2017. I would now like to give the floor to Mr. Polezi, who will continue with the presentation. A good morning to all of you.
We go on to slide number five to show you the performance in the different business areas. For the first time, we observe a growth of revenues in all areas in terms of electro, electronic, and industrial equipment. A better demand in Brazil has been impacted by the short-cycle products. We're selling the OEMs Besides having clients that are now changing their obsolete engines with a view to improve their energy efficiency. GTD had, as a highlight, the solar energy that became ever more important in 2017. We had two important solar farms as part of our portfolio. Part of the revenues were recognized in 2017 with a positive impact in motors for domestic use. The combination of low inflation, low interest rates, and an increase in consumption allowed for a growth in several areas, especially in the durable goods, the white line, reinforcing our revenues for this quarter.
The performance of paints and varnishes continues the performance of consumption growth and industrial equipment with an intensification during the last quarter. In the external market, there has been a growth of revenues in all areas except for motors for domestic use. We compare ourselves with a very strong quarter in 2016. In industrial, electronic, and electro equipment, everything was given thrust to by the short-cycle products. The construction of new plants and a demand for long-cycle products are beginning to appear, especially in pulp and paper and infrastructure. In GTD, the growth of revenues was boosted by the new industry in the United States, WEG Transformers USA, contributing with revenues of BRL 84.4 million during the quarter. In paints and varnishes, the increase in revenue reflects that search for new clients, especially in Latin America, with products that already are consolidated in Brazil.
As André mentioned, we have a continuous focus on preserving our margins and returns to guarantee our competitiveness. In slide number six, you'll see the evolution of EBITDA in the fourth quarter 2017. The growth of cost was greater than the growth of revenues, explained by what was already mentioned by André. EBITDA had a growth of 6.1% vis-à-vis the fourth quarter 2016, and we had a 14.1% EBITDA margin. It is important to highlight that were we to eliminate those effects, the margins would be very similar to those we had in the third quarter 2017. In slide number seven, we show you our financial results, BRL 6.6 million negative. This result was impacted mainly by the lower interest rates that we observed throughout the fourth quarter 2017, as you can see in our yield chart.
We also had an impact of BRL 10 million, referring to the rates for the settlement of an old financing line with costs above the yield of our financial applications. This work was done. We maximize our financial results in 2018. Although the impact was negative financially, the reduction of interest tends to be very positive for the company business as it reflects a more stable economic environment, a greater trend towards consumption, and more industrial investments. In slide number eight, we analyze our cash flow. Our cash flow generation reached BRL 1,290 million during the year. In our operating activities, cash generation, despite this, was below the results in 2016 because of the use of working capital in 2017. This is a natural procedure. Even with an increase in value, we had an improvement in all of our items.
In investments, we consumed BRL 382 million for the quarter to optimize our productive capacity. Finally, financing activities consumed BRL 1,153 million during the period, showing a greater flow of payment of dividends and also financing. Finally, in slide number nine, we show you our investments or CapEx during the last quarter. In the fourth quarter, investments reached BRL 75 million, half of which devoted to the foreign market and half to the domestic market. We can see that the more normal behavior in the markets demands that we gradually increase our disbursement and an increase of capacity. This is a positive trend. We hope that this will continue in the Brazilian market. With this, I would like to conclude. I return the floor to André.
Thank you very much, Paulo. Before we go on to the question-and-answer session, I would like to reinforce some points.
Once again, in Brazil, the industrial recovery cycle continues, especially in the short-cycle products. A combination of low inflation, lower interest rates, and good prospects for business should have an impact on the environment in coming months, which could reflect in new industrial investments. A growth in order intake indicates better conditions for the long-cycle products in the long term. Abroad, the signs of recovery seem to be more consistent. Industrial production growth in the main global markets. An improvement in short-cycle products is driven by OEMs. There are important industries that begin to demand long-cycle products. Finally, the revenue growth and our focus on return on invested capital will be the main drivers for 2018. Revenues should increase because of the industrial improvement worldwide and because of solar generation.
Good news to conclude, yesterday, the CADE, by unanimity, approved our acquisition of TGM, which is an important step in the growth of the group. This will bring about opportunities for new businesses in Brazil and abroad. We can now go on to the question-and-answer session. Operator, you may proceed.
Ladies and gentlemen, we will now go on to the question-and-answer session. Once again, we would like to remind you that this conference call will be conducted in Portuguese with simultaneous translation into English. Should you wish to pose a question, please press star one. To remove your question from the queue, press star two. The first question is from Lucas Marquiori from Safra Bank.
Good morning. Thank you for the call. Two important points.
The first, you spoke about the return on invested capital, I think that it is important for the market to have this metric. I would like to know, which is your view of the levels reported for the quarter compared to the mission of the company? As the economy resumes, will this metric improve, decrease? Will it be a nominal value or a spread with a cost of capital? I would like to hear your feeling in terms of the behavior of this new financial metric that you are sharing with us. The second point refers to the bonus that was announced along with the results. It would be wonderful to hear from you why this movement was carried out, if you're simply trying to improve the profits of the company, or if this boils down to a simple remuneration. Thank you.
Hello, Lucas. This is André Luís Rodrigues.
Thank you for your question. Let's speak about the return on invested capital, Salgueiro will speak about the bonus. Nowadays, the ROIC is the main company indicator. This is how we measure the management performance. In the last quarter of the year, we had the best results in the last eight years for ROIC. In 2017, we had anticipated that we would focus strongly on improving the ROIC. After two years of crisis, we maintained our resiliency, even in the worst moment of the crisis, we maintained the figures of 2015. 2017 was a year for improvement, we reached a growth of 1.7 percentage points, the focus going forward is to improve and develop this indicator further. Of course, this will depend on our business mix.
At some point in time, we may have to make investments that in the short term will have an impact and reduce the indicator. We can revert this quickly, we also have potential acquisitions abroad. The focus continues to be the same, we're working towards improving the indicator.
This is André Salgueiro. Lucas, in terms of the increase of capital, according to the new law, the profit reserve cannot go beyond the amount of the company's stock. Considering the forecast of results for the coming 12 months or perhaps a longer period, we would be very close to overcoming the shareholders' equity. Because of this, we had some options. One was to pay out dividends, another was to increase shareholders' equity, which is the option that was deliberated by the board of management.
This is a proposal that will have to be ratified at the shareholders' assembly. Instead of issuing new shares, we are working with this bonus. We increase the number of shares, we increase the liquidity of our securities. This is an indirect effect that should also benefit the liquidity once it has been approved. Thank you very much.
The next question is from Mr. Noronha from Santander Bank.
Hey, good morning to all of you. Thank you for the question. I would like you to further explore your vision of the evolution of the impacts that have hampered your EBITDA margin in the fourth quarter, how these will evolve throughout 2018. If you could give us more color on this, I think it would be interesting.
Thank you, João. Let's speak about these impacts and how they happened.
The first refers to the acquisition of TGM that took place in June of last year. We had anticipated that the level of profitability would be below our expectations. This, of course, was considered in the price. Now WEG, along with the operation in Mexico, have very interesting and synergic opportunities. We're trying to develop a commercial and operational aspect to increase the profitability of this business. Throughout this year, we hope to improve this and to be very concrete in the second quarter. This is a quarter where we will be able to revert this situation of a deficit. Through time, what we expect is to allow profitability to reach the profitability that we have at other transformer units in Brazil and abroad. We're being very objective. This has been carefully measured. The action plans have been developed.
We have a team of Brazilians that remain one month in Mexico with a specific goal to be able to revert this situation. We are very confident that we will be able to leave this deficit behind us. In South Africa, perhaps we should understand the business environment for WEG in that country. Between the marketing of electrical motors and electro electronic components, we also set up automation panels, transformers, substations, and an industrial electrical installation of an average and large size. We work with this in South Africa. In the last quarter of 2017, we had an increase of cost that was not expected in some of the projects, especially in EPC and the automated panels because of their characteristics. They're very large, they're very complex, and because of the geographical location of sub-Saharan Africa.
Which are the measures we have taken so that this will be a one-time event? This was an unexpected event in the project. We carried out a scan to avoid the recurrence of this problem. Additionally, this impact was concentrated on the more relevant and more complex projects. This is not the characteristic of the other projects that are being developed. The next question is from Felipe. Hey, good morning to all of you. I have two questions. The first refers to solar energy. You have this new endeavor that seems to be coming stronger. If you could compare this with the beginning of the wind farms, which are the differences in these two large markets that are very recent markets for you? Do you think that the solar energy has a better foundation than the wind power?
How would you compare the ROIC and the margins, which would be the scenario of these two markets for 2018 and 2019, if we keep in mind the auctions? This is only my first question. I will then ask the second one. Felipe, good morning. This is André Salgueiro. I will speak about solar energy. I would like you to confirm, the backlog for solar energy. Solar energy is something relatively new for WEG, not only in Brazil, it's something that's gaining movement in the last few years. Comparing this with wind power, the great difference is that we're going into a period that is previous to this cycle. When we decided to enter this, the main players were already in Brazil. WEG had to come up to par.
With wind power, we worked on substations, transformers, the inverters, all of this was part of our portfolio. What we have done in the last year was to add more services and offer a full package to the clients. It's a new market that is growing, Brazil has an enormous potential for this. We have mentioned this before. In the worst place of solar radiation, it is 30% better compared to Germany when it comes to solar farms. What about the generation, Brazil? What do we have in terms of generation? We have the wind power that is practically stable vis-a-vis 2017 and the projects we have in backlog. The level of revenues was BRL 600 million last year, and we should see this again in 2018. We still don't have any visibility of a project for 2019. We're looking for these opportunities in the market.
We have no project in our portfolio for 2019. For solar farms, we have the projects announced in the last quarter, the projects of Coremas with BRL 400 million. Part of this project came into operation in the last quarter, 2017. The rest will come into operation in 2018. Other projects that add up to BRL 250 million. Very good. My second question is on the evolution of the loss of price in commodities. Are there new opportunities for projects, new revenue opportunities because of the commodities? In the short term, will this have an impact on the fourth quarter? If this is the context, what will happen with the price transfers, especially in the foreign markets where your leadership position tends to be lesser than in Brazil? Felipe, this is Paulo Polezi. Good morning.
When it comes to the commodities and their impact and what happens with our business, I'm going to respond to it in parts. In the domestic market, a very minor impact. We still have not observed the impacts that take place traditionally in mining, oil, and gas, which are traditional segments for WEG. We still do not see a reflection or an improvement, this is what we have mentioned in our releases. On the other hand, we begin to see more mature markets. In our European operations, there is an entry of orders that seems to be more consistent, clients that are traditionally from these sectors that made maintenance orders, only are now placing orders for more complex and larger products. This is what we have observed in the more mature countries.
Another highlight moves away a bit from commodities and is part of the long cycle, it refers to China. China is fostering an important expansion program in infrastructure, the One Belt, One Road program that is very well known. We feel that there is an improvement, a significant improvement. Another economy where we have enhanced our position for long-cycle commodities is India. We have observed an improvement there as well, which means that gradually the conditions are improving. All of this driven by the improvement in the price of commodities. We should remember, nevertheless, that this effect extends to everybody, to WEG and to all competitors. We don't manage the prices. We don't control them. High commodities are good for a short cycle, what we observe now should be the trend going forward.
Thank you. Thank you very much.
The next question is from Alexandre Falcao from HSBC.
Good morning to all of you. I have two questions. The first refers to your cash and your ROIC. Is there something else that you can do to revert what you are doing? I'm imagining your levels of EBITDA and CapEx. The second question refers more specifically to Brazil, which is the indicator that you believe we're going to see more when it comes to the short-cycle and long-cycle products. Thank you very much.
Hello, Falcao. Into our cash situation, we tend to say that financial flexibility is one of the foundations of our business model because we are able to invest when opportunities arise, regardless of the economic situation. In the last years, we have preserved our liquidity and our strength. We made sure to preserve our cash position.
It's normal to say that now that we have a more normal market, we once again explore growth possibilities, both organic and non-organic. Maintain stability and any surplus cash doubtlessly will be paid out to the shareholders, especially if it goes beyond the levels that are normal at WEG. Your question about having an indicator. We follow industrial growth, the growth of the economy. This is what is going to determine what will happen with these two previous points and what will happen in the near future. I would like to remind you that for short cycles, and we have always said this, we can see this in a more consistent way in Brazil, but in the rest of the world as well. The further intact cycle, the more consistent sale.
We always spoke that we needed to recover maintenance to then be able to make investments in Greenfield. In Brazil, we see that there is a recovery in maintenance. Clients are trying to invest in energy, and this is improving the short cycle scenario. In the long cycle, in the case of Brazil, we need to have more patience. Due to the crisis that Brazil faces, it's natural that the short cycle be the first, and it will bring up the situation cycle. When we're speaking about the long cycle, we have had an order intake that was more positive in the last year, and the prices of commodity are one of the indicators of the global situation of, and this will have positive reflex for WEG, will lead to a price increase, and so on and so forth.
Thank you very much. I would like to know if you're planning on making change in the U.S. If you could do, for example, what is done in the U.S. in terms of the billing or invoicing. I believe that was the question.
Falcao, this is Paulo Polezi. Your question to the recent reduction of aliquot in the U.S. that went from 34% to 31%. What do we have in terms of an update? We're following very closely on what is happening. This change is quite recent, and we need to carefully analyze it before taking any action. What I can say is that we have been involved in this. We have specialized consultants that are working on this, and we hope to conclude this work in mid-year. On that date, we will be able to offer you an update on the impact of this.
At this point in time, I can say the following. From what we have seen, we have perceived, Falcao, that this benefit will not be integral. It will not represent 31% fully because there are several alterations when it comes to the calculation of income tax. We believe that for most of the companies, the aliquot will be between 21% and 34%, but I don't think it will remain at 21% because there are other alterations that will be included. Perhaps in the coming quarter, we will be able to give you a clearer update on the impact for WEG and the measures the company will adopt. Thank you very much.
Ladies and gentlemen, we would like to remind you that should you wish to ask a question, please press star one. Once again, should you wish to pose a question, please press star one.
Ladies and gentlemen, should you wish to pose a question, please press star one. The next question is from Marcelo Silva.
Good morning. About news that was printed in the Estado yesterday about the shares. I would like to know if there's any impact on the company. Hello, Marcelo. This is something that pertains to the holding company. It will have no impact on our operations.
Thank you. Should you wish to pose a question, please press star one. The next question is from Alexandre Falcao from HSBC.
Thank you for the follow-up. What can we think about going forward? What are you going to do with your budget as you're beginning with solar energy, if this will have a negative impact on your return on investors' capital? Simply to gain a better understanding of what you are thinking about in terms of ROIC. Thank you.
Falcao, this is André Salgueiro. The ROIC metric has been disclosed for some time, and it is at the level of 15% or 17%. Some years we have fallen below that, especially in years of crisis. We don't have a long-term metric, but the target for 2018, 2019, is to remain at that level, perhaps with a slight increase. When it comes to your comments, an important issue, wind power and solar energy oftentimes end up causing pressure on our EBITDA margin. We work based on a model of an integrator where we produce part of the equipment, we add services, but we also purchase equipment from third parties. This causes pressure on our EBITDA margin, but our ROIC tends to be similar or somewhat better than other activities. This should not cause any pressure on the ROIC, perhaps some minor pressure on the EBITDA margin.
If you allow me to ask a last question about what you are doing in China and Mexico. At what level are you at presently?
When we began, you mentioned in Mexico, we're making investments in the last stage of verticalization, 2014 up to present. This is a project that should end by the end of this year, and then Mexico will be able to produce its own carcasses and will have a full verticalization process in this cycle. Subsequently, we will be planning minor expansions depending on the market in Mexico and the USA. In China, going forward, the investment was made, and it doubled the production capacity of WEG Motors at the end of 2015, beginning of 2016. This increase of capacity has been fully consumed. Plants are operating at full capacity. Now we will continue to invest in capacity increases more on a one-time basis.
If one day we observe the need of having a special foundry for China, we will make that additional investment as well.
Thank you very much. At this point in time, the question and answer session ends here. We would now like to return the floor to Mr. André Rodrigues for his closing remarks. You may proceed, sir.
Once again, thank you very much to all, and until our next meeting when we will speak about the results of the first quarter of this year, hope to see you soon.
The conference call for WEG ends here. We would like to thank all of you for your participation, and have a good day.