Welcome to WEGS S. A. 2017 Third Quarter Results Conference Call. Thank you for standing by. As a reminder, this conference is being recorded.
And at this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions to participate will be given at that time. We are simultaneously webcasting this conference and the accompanying slides available at our Investor Relations page at www.web.net slash ri. We'd like to remind you that this conference call is being recorded and 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 and operating and financial goals and to WEG's potential future growth, our management beliefs and expectations as well as information that are currently available. These statements involve risks, uncertainties and the use of assumptions as they relate to future events and such depend on circumstances that may or may not be present. Investors should understand that general economic conditions, conditions of the industry and other operating factors may affect WEX'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 Jaragua, do Sul, we have Mr.
Andres Luis Rodriguez, Managing Director, Financial Superintendent Mr. Paulo Palese, Finance and Investor Relations Officer Mr. Wilson Datsko, Controller Officer and Mr. Andre Solgiel, Investor Relations Manager. You may proceed, Mr.
Andre Rodriguez. Good morning, everyone. Once again, it's a pleasure to be here with you to discuss the results of the Q3 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 Q3 2016.
We'd like to remind you that since August, we have been consolidating the new company of transformer in the United States, former City Power USA. But even eliminating the effect of this acquisition, our revenues would have grown 6% in relation to the same period of the previous year. And with domestic markets, we continue observing normalization in the industrial sector after a long recession. Short cycle projects continue providing the means to grow in the industrial electrical equipment area. And 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 DTD business because we still do not have the rebound of investment and expansion of capacity in the industry nor in the project of infrastructure. In the external scenario, we have seen clear signs of recovery, both for industrial equipment when we see more projects being placed and for GTD because we started the process of consolidation of the transformer units in the United States. The second highlight is the recovery of our margin and EBITDA. This is a result of growth in sales of short cycle products and operating adjustments that we made in the last quarters. Our focus continue with a 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 1 percentage point in relation to the Q3 2016. Net income has also followed the same trend with a growth of 21% when compared to the Q3 2016. I would also like to highlight 2 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 Polendi for him to continue the presentation. Thank you, Andres. Good morning, everyone. Now on Slide 4, 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. And in international market, it grew 14.4% in real, 14.6% in U. S. Dollars and 17.3% considering local currencies. When we eliminated the effect of the consolidation of the unit of transformers in the United States, we show a growth of 9.5% in Brazil and 12.4% in dollars.
As for Industrial Electric 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 products of long cycle, the demand is still very weak. We haven't observed in Brazil any expansion projects for increasing our capacity that we name as brownfield or also new investments such as greenfields. 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 sales channel continues to be OEMs.
However, projects to increase the capacity and constructions of new plants, which also demand the 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 is expectation of this trend for the next quarter. However, 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 rate and increase in consumer confidence, all reflected in the 1st growth of revenues in this year.
In the international market, even though the market indicators indicate of certain stability, revenues were presented a drop, which is a reflect 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 load equipment as well as the normalization of preventive maintenance in important segments such as oil, oil and gas, mining and labor. 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 Andrea has mentioned before, our continuous focus has been preserving margins and returns, ensuring the maintenance of our competitiveness. Slide 5 shows the EBITDA evolution in the Q3 of 2017 And the major highlight in the quarter comparison was the growth in revenue.
EBITDA grew 14.9% quarter on quarter year on year, and there was an increase in EBITDA margin to 16%. Whoever was attended the work day could observe how our efforts in research and development is focused on continuous improvement of our products in our production products with a focus in continuous reduction in 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 6, we provide details of the net financial results. Altice, even though it's lower than the Q3 2016, reaching BRL26.9 million.
This result was impacted especially by the lower interest rate that was seen throughout the Q3 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 more trend for consumption and as a consequence a higher level of industrial investment. On Slide 7, we have the cash flow analysis. The cash generation and operating activities reached BRL975,000,000 in the period of 9 months ended in September. In spite of the better operating performance, cash generation was below in comparison to the same period 2016, which was a result of the current capital of 2017.
This higher investment in current capital is a natural result of sales growth. Investment activities consumed BRL289 million for the quarter focused on the use of productive capacity. As always, we made adjustments to the rate of disbursement, investment of expansion and capacity so that we could maximize the use and return on the capital invested. The financing capital consumed BRL709,300,000 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 SEK 131.9 from loans and financing.
And finally, on Slide 8, we show the investments of the next quarters. In the 1st 9 months of 2017, investments reached BRL 109,800,000, out of which 58% was located abroad and 42% to the production unit in Brazil. We can see that the neuromodization of market behavior is demanding our gradual growth of disbursements in capacity expansion. This positive movement makes us to expect that we should have more consistent in growth, and it may continue in the quarters to come. And then I turn the call back to Andre.
Thank you, Paolo. Before starting our Q and A session, I would like to highlight some points. First is that 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 rate and higher consumer confidence may impact consumption in the next month and in the average term may turn into industrial investments. The second point is that in the external markets, recovery signs are consistent. We observe recurring growth in the order placement for short cycle products, especially in Europe and Asia and some products as long cycle products in South Asia, South America and Europe and Australasia. And some events that we expect to happen in the next month may bring some visibility to GCD. One is the new scheduling of the deliveries of windmill energy for 2018, as Paolo commented, that's brought in some impact in the revenue for 2017, but that equated the gap that was expected for 20 18.
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 2 new options of new energy. The offer of energy, especially for option A-four, will be concentrated on renewables, especially wind and photovoltaic energy, markets that we have been put in position in the past years. The volume of the auctions have not been announced yet, but the number of projects have been quite significant, showing the confidence that of companies and investors in the market of energy generation, and this can bring positive perspectives in the medium and long terms.
We can now start the Q and A session. Please, operator, you may proceed. Ladies and gentlemen, we are now going to start the Q and A session. I would like to remind you that this conference call is conducted in Portuguese with simultaneous translation into English. Our first question comes from Joao Morrone, Santander.
Good morning, everyone. Thank you for taking my question. I would like to get more light on this change of trends or this strong trend that Mark has been showing. So I saw a slight growth of 3%. And compared to last year, we had a drop in dollar terms.
And this strong number of 12.4 percent is the same basis in comparison to last year. Was there any important sale? And how can we look at the quarters to come? Because you say that this is a growth in dollars that we should expect considering the improvement that you showed according to your perception of the external market? Hi, Joao.
This is Andre Hodres speaking. Thank you very much for your question. Well, what can we say about it? About 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 OEM. And 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 and in Australia when we talk about mining activities and some GTD deliveries, especially some TCHs of Latin America. When I talk about the long cycle product in comparison to short cycle products where our presence is more intense, we have more opportunities than challenges in this process. So you also asked what we expect in the future.
So what have we been observing? Last quarter, we had reported that the entry of orders was a signal of the market systems 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's important that we have to mention that the Q3 2016 was weaker in comparison to what is happening now. And also we have to mention some important projects in Latin America and Europe and Australasia for this quarter. But our expectation is that this process is likely continued 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? Laurent, good morning.
This is Paulo Polaza speaking now. I'm going to answer your question about the auctions. Auctions for us is good news to us. However, it's difficult to predict the results. The number of projects that have been registered is very large.
So we have to monitor it to see if the distributors will have enough demand and this is likely to be clear in November. So we are going to monitor all this demand. On the other hand, we'd like to remind you that we have A-four and A-six options. And the beginning of the supply agreements is relatively long and this can increase the risk of those who signed the agreement with at low prices. This is how we see it.
The rational perspective that we can have is that auction A-four has a lower demand in relation to A-six maybe a result of the a reflection of the economy that may be slow in the short term. This is what we can say. There's another fact that came to my mind now. This is also good news. The NDS is going to maintain the finance with the rate to JLP flows that will include transmission activities too.
And another point in this recent news is that the government announced 2 options for the beginning of 2018. So all this movement of options is starting to resume, but we do not have definite date. As for T and D, we had 2 important auctions last year and this year. And there's a third that has been announced to happen for the future. And this is all very good news, very positive, and it's going to bring very good dynamics to all of us.
Okay. Thank you. Next question comes from Lucas Marciotti, Banco Safra. Hello, everyone. I have two questions.
The first question is about the size of the solar energy project. So could you give us an idea of the magnitude and how much of revenue would be generated? And the second question, if you could give us an idea of how the EBITDA margin will be in the next quarters. And since there are some effects downward and some upward trends related to automation. And in net terms, how do you see the margin for the quarters to come?
Luca, good morning. This is Paulo 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, and we are going to offer a complete solution and also supply distributed energy.
We have a company that we hired that will install the solar modules. So we have 2 different fronts and the two sides are covered. And you asked about volume. The first supply, which was major and that was signed in the beginning of the year, was in Paiva and with 3 solar energy with 3 megawatts of generation substation and transmission line, and the delivery is likely to be in October 2018. The 3 power plants will bring BRL 420 1,000,000 as revenues.
And according to the delivery schedules, we will have about BRL 100,000,000 for 2017 and the rest for 2018. We confirm the second project as contractor for other solar farms in the city of Malta. These projects are a bit smaller than the when I mentioned now. It will generate BRL 250,000,000 in revenue and delivery will be in the second half of twenty eighteen. And this is how we see solar energy initiatives.
And we also would like to remind you that these came from options that happened before 20 15. So it took a while to move away from the planning. Is it okay in terms of solar energy? Yes, yes. Thank you.
And Andre 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 on quarter. The important point to mention is that our company has a long term vision in its way of managing. And our eyes is always on return on invested capital.
When we start projects such as with energy, the more integrated 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, Andre. The next question comes from Alejandro Falcao, 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 DTD orders to 2018 to close the gap. Well, about this, I would like to understand whether you're going to have a gap for 2017 because you're delaying this for 2018.
So 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 CapEx, this was planned for the other quarters and this is the only quarter when you are able to catch up in terms of value. 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, Falko. Good morning. This is Andrea Falguello speaking. I'm going to answer your question about wind energy and then external markets will be completed by my colleagues. It's very natural in the longer cycle to have some new scheduling.
And this is what happened in the specific project that you mentioned. You know that we do not give the disclosure of 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 and the remaining amount was left for 2018. For Windmill Energy, it will stand at the same level that we had in 2016.
And for 2018, considering the projects 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. So this is a distribution and 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. And now we have a portfolio which will last up to October next year.
Falco, I do not know if we quite understood your question, but I'm going to include some point 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 a moderate recovery in the oil and gas and the mining segment where that has stands out. And markets didn't change a lot for short cycle products and this is what we have seen lately and we are probably going to follow the trend that we saw in the United States and in Europe. In the United States, 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. So we are monitoring this evolution in the key markets, especially Germany, Europe in general and our sales channel, especially for short cycle products are the OEMs. So it's very difficult for us to measure where the products are being delivered. You sell it to the OEM manufacturers and they distribute themselves to different sectors. It's difficult to make this kind of measurement.
And for long cycle product, it's more related to where we are positioned. And how is the country being developed? For example, as to GTD, our position is quite relevant. In Mexico, and the United States and Central America has been very difficult. Yesterday last year was a very good year, but this year we are facing problems.
And we hope that next year we'll recover this production. When we think about how high voltage motors is doing well in India because of the characteristics of products that are sold in Indian market. So 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 naphtha extinction?
Is there anything relevant? As you saw in Mexico, Do you have a plan B? Could you 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 the countries such as the United States and it's performing well. So NAFTA is over. So what happened? What was the impact?
We have devaluation in Mexico. Mexico became more competitive because of this extension. So 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 there any difficult 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. And it's something that will be easy for us to put into operation.
But as to TD, 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 Bibi. Thank you.
Good morning. I have 2 questions. Also the first one is related to the international market. You said that you're gaining market share. And could you confirm that?
And in which markets, if so? And 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. And before talking about this, I would like to go back a little and talk about the decision that we had to hold that WEG Day this year, focused on innovation so that we could show you that WED is a company extremely updated, ready to meet the demands that may come up related to the new technologies. So 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 is we get very happy because we show that the development of that we had with NAM, that's a global company. But it's still very soon to talk about the opportunities to give information because we're talking about pilot project developed with mom and mom has its own strategy of commercialization and we have to respect how the clients operate and we have the opportunity of developing the product in the metered market. And yes, I see opportunities of expansion, all these export initiatives outside Brazil. Electrical traction for WEG is not something new. It's 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. And we also used worked with motor that runs totally on electricity. And the reality is that we have more than 2 60 buses that are running with integrated solution by WEG. So this was something that we had and trucks are an excellent opportunity for us to develop in the urban area. And this is the gain that we see, the great potential because we don't need long distances.
And there's always an appeal in major cities to reduce the CO2 emissions. And this is very important and it comes in good time. We hope that development that we're going to have that Meng announced related to the pilot project as of next year with beverage company that will use this equipment and after 2020, it will be available for sale. So this is very positive and we are very happy with this development. Thank you.
Next question comes from Samuel Alves from BTG Pactual Bank. Thank you. Good morning, Paolo and Greg. 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 BEG? And in terms of representativeness, you disclosed the number for 20 15. 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.
PGM process is under CARDE, and we have to push back the agency pace. And if it does not materialize this year, probably next year, We announced the acquisition at the end of last year. And after the acquisition, we lost contact because we were complying with the rules according to legal regulations. And we said that it was a company that was ready to add the BRL 260,000,000 in revenues to VAC and would also offer opportunities to develop new businesses in the international market. This concludes today's Thank you very much for attending our conference call and see you in our next conference call to discuss the results of the Q4 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.