Welcome to WEG SA 2017 third quarter results conference call. Thank you for standing by. As a reminder, this conference is being recorded. At this time, all participants are in the listen-only mode. Later, we'll conduct a question-and-answer session. Instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by 0. We are simultaneously webcasting this conference and the accompanying slides available at our Investor Relations page at www.weg.net/ri. We'd like to remind you that this conference call is being recorded. After its completion, the audio will be available at our Investor Relations website. Journalists should direct questions to our press office at 4732764295.
Any forecasts contained in this document or statements that may eventually be made during this conference call relating to WEG's business perspectives, projections, operating and financial goals, to WEG's potential future growth, are management beliefs and expectations as well as information that are currently available. These statements involve risks, uncertainties, the usual assumptions as they relate to future events and as such depend on circumstances that may or may not be present. Investors should understand that general economic conditions of the industry and other operating factors may affect WEG's future performance and lead to results that may differ materially from those expressed in such future considerations. We would also 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 Luís Rodrigues, Managing Director, Financial Superintendent, Mr. Paulo Polezi, Finance and Investor Relations Officer, Mr. Wilson Watzko, Controller Officer, and Mr. André Salgueiro , Investor Relations Manager. You may proceed, Mr. André Luís Rodrigues.
Good morning, everyone. Once again, it's a pleasure to be here with you to discuss the results of the third quarter 2017. I would like to start drawing your attention to what we believe to be important about our results this quarter. The first point is the performance of our net operating revenues, a growth of 8.8% in comparison to the third quarter 2016. We'd like to remind you that since August, we have been consolidating the new company of transformers in the United States, former CG Power USA.
Even eliminating the effect of this acquisition, our revenues would have grown 6% in relation to the same period of the previous year. In the domestic market, we continue observing normalization in the industrial sector after a long recession. Short cycle products continue providing the means to growth in the industrial electrical equipment area. In this quarter, we have seen the first signs of the motors for household use. The performance wasn't better because we haven't observed any changes in the short term for the business using long cycle products. Both for high voltage products as for GTD business, because we still do not have the rebound of investment in the expansion of capacity in the industry, nor in the project of infrastructure.
In the external scenario, we have seen clearer signs of recovery, both for industrial equipment, when we see more products being placed, and for GTD, because we started the process of consolidation of the transformer unit in the United States. The second highlight is the recovery of our margin and EBITDA. This is a result of the growth in sales of short cycle products and operating adjustments that we made in the last quarters. Our focus continue with the focus on competitiveness in the long term, making operating adjustments to expand the margins and returns. Our EBITDA margin reached 16%, with positive evolution of nearly one percentage point in relation to the third quarter 2016. Net income has also followed the same trend with a growth of 21% when compared to the third quarter 2016.
I would also like to highlight two other important aspects in our effort to preserve our competitive capacity. Namely, the discipline in the use of capital and our efforts to preserve operating cash generation with a focus on efficient use of current capital. As you all know, our focus is always to maximize the return on invested capital. I now turn the call over to Mr. Paulo Polezi for him to continue the presentation.
Thank you, André. Good morning, everyone. On slide four, we can see details on the behavior of revenues in different markets. In this graph, we can observe from the growth of the net income along 2017 that the gradual normalization of the market is ever more clear. In the domestic market, it grew 1.7% year-on-year.
In the international market, it grew 14.4% in BRL, 14.6% in U.S. dollars, and 17.3% considering local currencies. When we eliminate the effect of the consolidation of the unit of Transformers in the United States, we show a growth of 9.5% in BRL and 12.4% in USD. As for industrial electric electronic equipment in Brazil, the improvement in demand was predominantly related to short cycle products and sales concentrated on manufacturers of OEMs. Industries related to consumption and agribusinesses. For customized product of long cycle, the demand is still very weak. We haven't observed, in Brazil, any expansion products for increasing of capacity that we name as brownfield, or also new investments such as greenfield. Abroad, revenue growth is also propelled by short cycle products, and countries in Europe and Asia showed important growth in their revenues this quarter. The main sale channel continues to be OEM.
Projects to increase the capacity and constructions of new plants, which also demand a long cycle product, start to come up moderately, especially in the industry connected to infrastructure. As for GTD equipment, generation, transmission, and distribution of energy, the main factor for the drop in revenue in this quarter was the new scheduling of deliveries and an important project of the wind power generation for 2018. For other renewable sources, hydraulic and thermal, the improvement in the orders continues. There's expectation of this trend for the next quarter. This is not going to change the dynamics for this year with few investments in the sector. In the area of motors for household use in Brazil, there is a gradual recovery in consumption, combined with low inflation, low interest rates, and increase in consumer confidence, all reflected in the first growth of revenues in this year.
In the international market, even though the market indicators indicate a certain stability, revenues presented a drop, which is a reflection of the strong quarter that we had last year. As for paints and varnishes, even though there has been a decrease in revenues, we observed some improvement in some segments, such as agriculture implements and road equipment, as well as the normalization of preventive maintenance in important segments such as oil and gas, mining, and naval. We continue to focus on diversifying markets, developing products with higher added value in sectors that we do not operate yet, going for new clients, especially in Latin America. As André has mentioned before, our continuous focus has been preserving margins and returns, ensuring the maintenance of our competitiveness.
Slide five shows the EBITDA evolution in the third quarter 2017. The major highlight in the quarter comparison was the growth in revenue. EBITDA grew 14.9% year-on-year, and there was an increase in the EBITDA margin to 16%. Whoever attended the WEG Day could observe how our effort in research and development is focused on the continuous improvement of our products in our production, with a focus on continuous reduction of costs and increase of production efficiency. These investments allow us to maximize the growth effect in sales on the margins, as we have seen throughout this year and again this quarter. On slide six, we provide detail of the net financial results. Positive, even though it's lower than the third quarter 2016, reaching BRL 26.9 million.
This result was impacted especially by the lower interest rate that was seen throughout the third quarter 2017. We'd like to mention that even though the impact has been negative on our financial results, we believe that the reduction of interest is very positive to the company because it reflects a more stable economic environment with a greater trend for consumption and, as a consequence, a higher level of industrial investment. On slide seven, we have the cash flow analysis. The cash generation in operating activities reached BRL 975 million in the period of nine months ended in September. In spite of the better operating performance, cash generation was lower in comparison to the same period 2016, which was a result of the working capital of 2017. This higher investment in working capital is a natural result of sales growth.
Investment activities consumed BRL 289 million for the quarter, focused on the use of productive capacity. As always, we made adjustments to the rate of disbursement for investment in expansion and capacity so that we could maximize the use and return on the capital invested. The financing activities consumed BRL 709.3 million in the period, especially with the disbursements for the payment of dividends related to the first half of the year that was made in August. There was also inflow of BRL 131.9 from loans and financings. Finally, on slide eight, we show the investment of the last quarters. In the first nine months of 2017, investments reached BRL 109.8 million, out of which 58% was allocated abroad and 42% to the production unit in Brazil. We can see that the normalization of market behavior is demanding a gradual growth of disbursements in capacity expansion.
This positive movement makes us expect that we should have more consistency in growth, and it may continue in the quarters to come. I turn the call back to André.
Thank you, Paulo. Before starting our Q&A session, I would like to highlight some points. First, as we have seen in Brazil, the major highlight was the continuity of industrial recovery. We expect that this trend will continue in the quarters to come, especially related to short cycle products. The resumption of long cycle products depends on expansion of capacity and infrastructures, which are not observed in Brazil yet. On the other hand, the combination of low inflation, low interest rates, and higher consumer confidence may impact consumption in the next months, and in the average term, may turn into industrial investments. The second point, in the external market, recovery signs are consistent.
We observe recurring growth in the order placement for short cycle products, especially in Europe and Asia, and some projects of long cycle products in South America and Europe and Australasia. Some events that we expect to happen in the next month may bring some visibility to GTD. One is the scheduling of the deliveries of the windmill energy for 2018, as Paulo commented, that brought in some impact in the revenue for 2017. That created a gap that was expected for 2018. Considering the new production expansion rate, the portfolio of windmill generation will extend up to 2018. Next quarter, we will have the beginning of the recognition of the revenue of the major projects of solar energy. Additionally, the Brazilian electrical sector announced the 2 new auctions of new energy.
The offer of energy, especially for auction A-4, will be concentrated on renewables, especially wind and photovoltaic energy, markets that we had important position in the past years. The volume of the auctions has not been announced yet, but the number of projects have been quite significant, showing the confidence of companies and investors in the market of electric energy generation. This can bring positive perspectives in the medium and long term. We can now start the Q&A session. Please, operator, you may proceed. Ladies and gentlemen, we are now going to start the Q&A session.
We'd like to remind you that this conference call is conducted in Portuguese with simultaneous translation into English. If you would like to pose a question, please press star 1. To remove the question from the list, press star 2. Our first question comes from João Moronia, Santander.
Good morning, everyone. Thank you for taking my question. I would like to get more light on this change of trend or this strong trend that market has been showing. I saw a flat growth of 3%, and compared to last year, we had a drop in USD terms. This strong number of 12.4 is the same base as in comparison to last year. Was there any important sale, and how can we look at the quarters to come? Could we say that this is a growth in USD that we should expect, considering the improvement that you showed according to your perception of the external market?
Hi, João. This is André Rodrigues speaking. Thank you very much for your question. Well, what can we say about it? Abroad, our revenue growth has been pulled by short cycle products.
Important countries in Europe, Germany, for example, has been having good performance. We added France, Italy, Belgium, and also China, and some countries in Latin America. The main channel of sales are still the OEMs. Some projects also that we think about constructing new plants, and also some long cycle products that start to come up, especially in Europe and in China. In Australia, when we talk about mining activities and some GTD deliveries, especially some PCHs of Latin America. When I talk about the long cycle products in comparison to short cycle products, where our presence is more intense, we have more opportunities than challenges in this process. You also asked what we expect in the future. What have we been observing? Last quarter, we had reported that the entry of orders was a signal of the market system's recovery in the international market.
We believe that this trend is likely to continue for the next quarter, not as we have seen in this quarter, because it is important that we have to mention that the third quarter 2016 was weaker in comparison to what is happening now. Also we have to mention some important projects in Latin America and Europe and Australasia for this quarter. Our expectation is that this process is likely to continue in terms of recovery. Okay, thank you. I have another quick question. If you could give us an update of the competitive dynamics for winning the orders in the auctions.
João, good morning. This is Paulo Polezi speaking now. I am going to answer your question about the auctions. Auctions for us is good news to us. However, it is difficult to predict the results. The number of projects that have been registered is very large.
We have to monitor it to see if the distributors will have enough demand, and this is likely to be clear in November. We are going to monitor all this demand. On the other hand, we would like to remind you that we have A-4 and A-6 auctions, and the beginning of the supply agreements is relatively long, and this can increase the risk of those who signed the agreement at low prices. This is how we see it. The rational perspective that we can have is that the auction A-4 has a lower demand in relation to A-6, maybe a reflection of the economy that may be slow in the short run. This is what we can say. There is another fact that came to my mind now. This is also good news.
BNDES is going to maintain the finance with the rates TJLP. It flows. That will include transmission activities, too. Another point, and it is recent news, is that the government announced two auctions for the beginning of 2018. All this movement of auctions is starting to resume. We still do not have a definite date. As for T&D, who had two important auctions last year and this year, and there is a third that has been announced to happen for the future. This is all very good news, very positive, and it is going to bring very good dynamics to all of us. Okay, thank you.
Next question comes from Lucas Marquiori, Banco Safra.
Hello, everyone. I have two questions. The first question is about the size of the solar energy project.
Could you give us an idea of the magnitude and how much revenue would be generated? The second question, if you could give us an idea of how the EBITDA margin will be in the next quarters, since there are some effects downwards and some upwards trends related to automation, in net terms, how do you see the margin for the quarters to come? Lucas Marquiori, good morning. This is Paulo Polezi speaking. I'm going to provide information about the solar energy project. I'm going to give a general idea of the solar project. We are prepared to offer the services as providers, we are going to offer a complete solution and also supply the distributed energy. We have a company that we hired that will install the solar modules. We have two different fronts, the two sides are covered. You asked about volume.
The first supply, which was major and that was signed in the beginning of the year, was in Paraíba, with 3 solar energy, with 3 MW of generation substation and transmission line. The delivery is likely to be in October 2018. The 3 power plants will bring BRL 420 million as revenues, according to the delivery schedules, we'll have about BRL 100 million for 2017 and the rest for 2018. We confirmed the second project as contractor for other solar farms in the city of Mauá. These projects are a bit smaller than the one I mentioned now. It will generate BRL 250 million in revenue, delivery will be in the second half of 2018. This is how we see solar energy initiatives. We also would like to remind you that these came from auctions that happened before 2015.
It took a while to move away from the planning. Is it okay in terms of solar energy? Yes. Thank you. André is going to answer the other part of your question.
Talking about margins, we do not work with guidance in terms of margins. We say that it's very normal to have fluctuations of margins quarter and quarter. The important point to mention is that our company has a long-term vision in its Way of managing. Our eyes is always on return on invested capital. When we start a project such as with energy, the more integrator we are at a certain level of activities, you may have lower margin, lower but with the return on invested capital, which is higher. With wind energy, this is going to happen the same way. Thank you, André. The next question comes from Alexandre Falcão, HSBC.
You may proceed, sir. Thank you very much for taking my question. Good morning, everyone. I have two questions. The first one is related to the delay of GTD orders to 2018 to close the gap. About this, I would like to understand whether you're going to have a gap for 2017 because you're delaying this for 2018. I would like to understand this magnitude and how much of revenue deficit you still have for 2018. In relation to international market and your competitors, if you look at the activities in investment in CapEx. This was planned for the other quarters, this is the only quarter when you are able to catch up in terms of volume. Why did that happen? Is this what we are going to expect in terms of growth in the future, or is there any other reason? Hi, Falcão. Good morning.
This is André Salgueiro speaking. I'm going to answer your question about wind energy. Then external markets will be completed by my colleagues. It's very natural in the longer cycle to have some new scheduling. This is what happened in the specific project that you mentioned. You know that we do not give the disclosure of a standalone revenue about windmill energy. What we can say to you is that we do not have new revenue. What we did is to redistribute this revenue along 2017. The remaining amount was left for 2018. For windmill energy, it will stand at the same level that we had in 2016.
For 2018, considering the project that we have in our portfolio, without considering any new potential project, the revenue remained at the same level or a bit higher considering the OEM revenues that are starting to come in that were delivered in the past. This is the distribution. This is why we say that the revenue was equalized. We decreased the gap because before this reprogramming, we were working with the delivery of product up to May next year. Now we have a portfolio which will last up to October next year. Falcão, I do not know if we quite understood your question. I'm going to include some points and make yourself comfortable if it's not very clear. First, our expectation is to have some recoveries in some segments abroad.
We were observing some moderate recovery in the oil and gas and the mining segment where WEG stands out. Markets didn't change a lot for short cycle products. This is what we have seen lately. We are probably going to follow the trend that we saw in the U.S. and Europe. In the U.S., we see that there's a flat performance. There's no loss in market share, but we don't see an increase as we saw in Europe. We are monitoring this evolution in the key market, especially Germany, Europe in general. Our sale channel, especially for short cycle products are the OEM. It's very difficult for us to measure where the products are being delivered. You sell it to the OEM manufacturers. They distribute themselves to different sectors. It's difficult to make this kind of measurement.
For long cycle products, it's more related to where we are positioned. How is the country being developed? For example, as to GTD, our position is quite relevant in Mexico and the U.S. Central America has been very difficult. Last year was a very good year. This year we are facing problems. We hope that next year we'll recover this production. When we think about how high voltage motors is doing well in India because the characteristics of products that are sold in Indian market. For long cycle products, we think about the regions where we have a stronger presence because our exposure is not as relevant as we have with short cycle products. Perfect. Do you have any possibility of expecting some significant change because of the NAFTA extinction? Is there anything relevant as you saw in Mexico?
Do you have a plan B? Do you have anything to share with us? Our North American growth plan doesn't change. This has always been a relevant market to our company, and the acquisition of CG Power is another step that will bring our growth appetite to this market. When I mentioned this acquisition, I mentioned the synergy that could be created between production of Mexico and other countries such as the United States, and it's performing well. NAFTA is over. What happened? What was the impact? We have a devaluation in Mexico. Mexico became more competitive because of this extinction. We have to understand that the United States do not have the capacity to meet the demand. Any tariff barrier that is imposed will bring inflation to the American market. You mentioned plan B.
What I can say is that any difficulty to supply motors through Mexico, we can use our supply chain because we are diversified in our strategy. We can make a change of capacity, and we can produce more to North America, and we can use Mexico, work with other markets. This is something we can develop. We have already studied this in a deeper manner. It's something that will be easy for us to put into operation, but as the T&D, it will take a little bit longer, and that's why we decided to purchase the company so that we can be protected when something like this happens. Thank you very much.
Our next question comes from Leandro Fontanesi from Bradesco BBI.
Thank you. Good morning. I have two questions. Also, the first one is related to the international market. You said that you're gaining market share.
Could you confirm that, and in which markets, if so? The second point, if you could make comments about the project that you mentioned about electrical trucks, how relevant this could be, and if you have any plans of exporting this product. Thank you for your question. As to market share, what we have seen, can see during the presence that we have in short cycle products. What we have observed in some markets are related to industrial electronic equipment, as we have seen throughout the past quarters. There has been some news last week, and that was very good news.
Before talking about this, I would like to go back a little and talk about the decision that we had to hold at WEG Day this year, focused on innovation so that we could show you that WEG is a company extremely updated, ready to meet the demands that may come up related to the new technologies. We showed with clear examples that we have always been prepared, we have always been ready to compete in different markets using different technological innovations. When some news like this is disclosed, we get very happy because we show the development that we had with MAN. That's a global company. It's still very soon to talk about the opportunities to give information, because we're talking about a pilot project developed with MAN, and MAN has its own strategy of commercialization, and we have to respect how the client operates.
We have the opportunity of developing the product in the domestic market. Yes, I see opportunities of expansion, all these export initiatives outside Brazil. Electrical traction for WEG is not something new. It is important to remember. Our first initiatives related to this dates back to 15 years ago when we started the development of transforming a motor into traction motor. In 2011, we were already a manufacturer using train motors. We also worked with a motor that runs totally on electricity. The reality is that we have more than 260 buses that are running with the integrated solution by WEG. This was something that we had, and trucks are an excellent opportunity for us to develop in the urban area.
This is the gain that we see, the great potential, because we do not need the long distances, and there is always an appeal in major cities to reduce the CO2 emissions. This is very important, and it comes in good time. We hope that development that we are going to have, that Lum announced, related to the pilot project as of next year. With a beverage company that will use this equipment, and after 2020, it will be available for sale. This is very positive, and we are very happy with this development. Thank you.
The next question comes from Samuel Alves from BTG Pactual.
Thank you. Good morning, Paulo and André. Good morning, everyone. My question is related to the acquisition of TGM that you made at the end of last year. When do you expect results to be consolidated with WEG?
In terms of representativeness, you disclosed the number for 2015. Could you update on those numbers and how much this can add to the revenues and to EBITDA to the company for next year? Thank you. Hi, Samuel. TGM process is under CADE, and we have to respect the agency pace. If it does not materialize this year, probably next year. We announced the acquisition at the end of last year. After the acquisition, we lost contact because we were complying with the rules according to legal regulations. We said that it was a company that was ready to add BRL 250 million in revenues to WEG and would also offer opportunities to develop new businesses in the international market. Okay, thank you. We would like to remind you that to ask a question, press star one. This concludes today's question and answer.
I would like to invite Mr. André Luís Rodrigues to proceed with his final statement. Please go ahead, sir.
Thank you very much for attending our conference call. See you in our next conference call to discuss the results of the fourth quarter to 2017. Have a good day, you all. That does conclude WEG's audio conference for today. Thank you very much for your participation. Have a good day.