Welcome to WEX 20 17 Second Quarter's Earnings Results Conference Call. As a reminder, this conference call is A session where new instructions will be provided. And the accompanying slides, which can be accessed by our IR website at www.web.net/ ri. We would like to remind you that we are recording this conference call and after its conclusion, the audio will be available on our IR website. Journalists should direct their questions to the press release office at 4 5.
Any forward looking statements contained in these documents or any statements made during this conference call regarding future events, business perspectives, projections, targets, operational and financial results and WEG's future growth potential are assumptions and expectations of WEG's administration and are based on information currently available. These statements involve risks and uncertainties and therefore, depend on circumstances that may or may not take place. Investors should understand that general economic conditions, industry conditions and other factors may affect the future performance of WAG, and results may differ materially from those expressed in such forward looking statements. We would like to remind you that this conference call is being conducted in Portuguese with simultaneous translation into English. With us today in Jaragua Duso, we have Mr.
Andre Luis Rodriguez, Managing Director, Financial Superintendent Mr. Paulo Polez, Finance and Investor Relations Officer Vilso Vasco, Controller Officer and Mr. Andres Salgueiro, Investor Relations Manager. Mr. Andre Rodrigues, you have the floor.
Good morning to everyone. It's a pleasure to be with you in the conference call of the results of the Q2 of 2017. As usual, we will highlight the 3 main points of this quarter. Number was the performance of the net operating revenue growth of 6.9 percent visavisa1st quarter this year, although there is a drop of 2.3% in this quarter visavisa2nd quarter of 2016. In the domestic market, we saw the opportunity of the stabilization process after a long recession period.
The different segments industrial product growth in the short term that are series, we see a stabilization of maintenance investments and the emergence of projects in geyser productivity and improvement of process. Nevertheless, we do not see a short term scenario change that would be in the engineered program like the high voltage motors. This is valid for the business of generation transmission and distribution because we have not recovered expansion in investments in capacity in industry and in infrastructure, foreign market, the recovery signals are more clear in our main market. But below historic average, we face a competitive scenario, but we continue finding opportunities of growth in revenues in the increase of additional market share participation where we are present or the development of new markets. With this, we are growing, but the negative impact of the exchange rate in the conversion of revenues in the foreign market is still important.
The second point is the recovery of our margin or EBITDA margin result of of in the long term with operating adjustments to broaden margins and returns. Our EBITDA margin totaled 16 point 2 percent with a positive evolution of 220 bps visavis the Q2 of 2016. Net revenue followed the same trend with a growth of 6.7% when we compare it to the Q2 of 2016 6 with a margin of 11.9%. And at last, I would like to highlight as the last point the opportunity of our efforts to increase efficiency and productivity, our discipline in capital use allow us to maximize investment capital and continuity in the operational cash generation. Now Paulo Polese has the floor.
Thank you, Andre. Good morning to everyone. Now when we go to Slide number 4, we see the behavior of the revenues in the different markets during this quarter. In Brazil, as Andre mentioned, we continue observing the continuity of the stabilization process of the industrial sector, the industrial products in short cycles and series are in a recovery process. In dynamic markets, this process will follow a natural path with each market reacting their way and the diversification present in our business model will be relevant.
The demand by engineered products that depend on CapEx of expansion and infrastructure investment is shy from its target and depends on investment. Outside of Brazil, the global market of industrial electrical products presents growth in local currencies. We have been able to grow with entering new markets with gains in market share. During the Q2 of 2017, revenues of the foreign market showed a drop visavishe2ndquarterof2016of5.8% in real nevertheless, a growth of 2 0.8% in dollars and 5.9% in local currency. Now in Industrial Electroelectronic Equipment in Brazil, we saw a movement of recovery in the market with the stabilization of new orders of series products or short term cycle products.
Abroad, we saw recovery in important markets like the United China, Germany and Australia. The stabilization of the market, both in Brazil and abroad, is still highlighted by series products of short cycles. Now for customized products of long cycles, the recovery depends on the rebound of investments and the increase of industrial capacity or infrastructure. The demand in Brazil is weak due to a lack of investments in oil, gas, mining, cement and petrochemical sectors of foreign market. We see signals of recovery of these industry but below the historic average.
In equipments for generation, transmission and power distribution, this scenario is still challenging. In generation, there is a surplus of offer in Brazil with drops, the needs of new investment and the entry of orders. In transmission and distribution, there is no surplus capacity TV auctions in October 2016 April 2017 gave us a positive perspective with new players in the process. But the reflection on the portfolio of ordinary orders will only be seen in the next quarters up to 2021. Now domestic motors, we have seen a stabilization when we follow the consumer goods market abroad.
We have been positioned as the main suppliers of manufacturers of consumer goods in although a downturn in the revenue, there is an improvement in some segments, although a downturn in the revenue, there is an improvement in some segments like machines and equipment for agriculture. Now the recovery of preventive maintenance in important segments like oil, gas mining and the Navy industry. We were focused on market diversification, evolving, added value product for sectors where we still do not perform and looking for new clients, especially in Latin America with Brazilian consolidated products. As Andres said, our focus on preserving margins guaranteeing the maintenance of our competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive competitive environment. We have seen the EBITDA evolution in 2017.
We can see that despite the drop of revenues, we maintained our focus in the maintenance of costs and operating expenses. Our EBITDA presented a growth of 13.7% visavis the Q2 of 2016, and there was a significant increase in the EBITDA margin that was up 16.2%. We continue believing that the stabilization of business conditions in Brazil will provide the stabilization of our margin. On Slide 6, you can see the net financial result and a continuous positive, although below recent periods totaling BRL 9,900,000. This result was mainly impacted by lower interest rate verified throughout the Q2 of 2016.
Additionally, we had a negative impact of the mark to market of derivative operation used to protect the indebtedness in foreign currencies. These operations have an accounting effect once the disbursement of cash only carries out when net financial result that is positive is a result between the difference of financial growth and attractive conditions and the compensation in investments due to the solid capital structure of Web7. We have a cash flow analysis. The cash generation and operating activities totaled BRL623 1,000,000 during the 1st semester. Despite the better operating performance, the cash flow was below $2,060,000 This is a result of working capital in 2017.
We would like to highlight that despite the consumption of working capital, we can see that we've maintained our operating indicators, investment activities, consumed 183.8 Investment activities consumed $183,800,000 in the quarter, focusing on productivity capacity and maximization of invested capital return. With this, we adapted the disbursements in investments and capacity and expansion. Financing activities consumed $208,000,000 in the period with next $274,900,000 in financing. N20 on Slide 8, we see the investments in the past quarter. During this quarter, the investment totaled BRL61.7 million, 60% gold of raw and 40% in Brazil.
And we are 25% shy from the results of the 2nd quarter of 2016. Part of this difference is explained by the exchange variations in the investments abroad. With this, I finalize my part, and I give the floor to Andre Paolo. Thank you very much. Before we start our Q and A session, I would like to strengthen some point.
One, as we have mentioned, our focus continues being the preservation and competitiveness at the long term, carrying out operating adjustments for better margins and returns. The adjustments in the last month have long lasting effects and we are ready to make the best of the opportunities of sustainable growth that start emerging. Another point is the diversification. That is the base of the business model of what will continue positively contributing through out the stabilization process. Point number 2, in Brazil, the recovery of economy is gradual and slow.
Although there is a continuity of recovery of short cycle products, we depend on investments and expansion of capacity and infrastructure for the recovery of long cycle products we're facing, the worst recession of the country's history and uncertainties with political crisis. They are reasons to continue believing on something that we call during the Q1 of cautious optimism. In the foreign market, we see recovery signals that were below historic average. We see the recovery of new orders of short cycle products and for oil and gas and mining projects that have emerged. We announced on June 21, the acquisition of CG Power USA, a company specialized in manufacturing transformers of distribution and our with very relevant in the market of transformers in the U.
S. Market and together with our productive platforms in Brazil, Colombia, Mexico and South Africa will allow us to make progress quickly in our internationalization and business transmission and distribution project. We will now start our Q and A session. Our operator may proceed receiving questions. Ladies and gentlemen, we will now start our Q and A session.
We would like to remind you once again that this conference call is being Our first question from Mr. Have significantly improved your cost control, expense control and gross margin. Margin. Now how much of this control is there, is there space for improvement to increase your marginalization? Now your second question is your EBITDA grew more than your EPS.
How do you see in twelvetwenty four the growth rate in EBITDA or your rate of growth, I would like to understand this effect. Thank you, Daniel, for your growth. We'll start answering the margins. You said if there's room for improvement in our margins. Let's analyze the following.
There are factors that allow us to understand that there is room for improvement, and there are some factors that may go against us here. And I believe that in the future, we will have to observe which one of them will prevail. Now the factors that are semester, favorable seasonality. We trend to observe the recovery of short cycle products, something that we have already observed. Now these cost adjustments that you mentioned in your question, they were implemented properly until today, and they have a long lasting effect.
I believe that they will help us because of the operating leverage and all the indexes that I have just mentioned. These are the factors that may help us to improve a bit more our margin. Nevertheless, we have to remember 2 factors that are very important that can go against us. One would be, well, we are carrying a very significant gap of backlog in our GTD. So the wind mill is stable until next year, but the other business units have didn't help us that much and it was present that was Journee emission.
It has been valid until July. But during the 2nd semester, we will not see this. In a nutshell, we have to assess 2 factors here, the positives and the negatives, and we have to observe the trends. There are more positive than negative factors. Nevertheless, we have to pay attention to them from here on.
Now regarding the second part of your question, if we will have a detachment of the net income and EBITDA margin. Well, yes, so as your EBITDA margin grows, your net income will follow it, something that we saw this quarter. I believe that the question is the financial result. Although we have a highly competitive structure with very attractive financing lines and good cash position. The financial results changes quarter after quarter, and this can be passed a little bit if you see former years.
And this is a flow and gradual effect. I believe that this effect will be clearer as of the year 2018. Next question, Alexandre Falcone, HSBC. Two questions. 1 would be regarding the labor reform.
I don't know if this will affect your results. What can happen in your enterprise? If, for example, these new changes in labor unions, how can they affect you? Do you see this reflecting on your results? And the second question, the GTD.
You said that there is a gap of Windmill Technologies. And what still understanding the aspects of legislation that were changed. This is going to be positive, not only for a web, but for all industries in Brazil because changes will allow us to flexibilize. We will be able to offer more jobs and we be able to recover the economy. It's too early.
We're still analyzing, but I believe that the result is positive, the provision authorization. Now we the negotiations with labor unions are following their normal flow. We believe that we will not change our position. So everything is very normal. Now your questions about the new opportunities on Windmill Technology.
With the portfolio that we have of generators, our portfolio goes until the middle of 2018 and very recently the contraction was announced, a bid that we won in Fortinaz that would allow us do this transition until the market would go would recover, and there was a de contracting. So what can we say right now about this point? Number 1, that WEG is properly positioned with good products, competitive products. We continue exploring export opportunities and we're mapping available opportunities in the free market in Brazil that is a bit lower. And it is very important to remember that in the recent past, we witnessed rigorous cycles of cycles where we were very important.
We can talk about mining. We can talk about sugar and alcohol sector, and we found paths of growth. An example of a pathway of growth that we're exploring that can help us while the wind mill sector is undefined. It's solar energy, for example, through WEG. More and more is a supplier of solar energy project with photovoltaic Energy products.
There is a solar complex of Porrima in Paraiba that will add a 93 Megawatts peak with a revenue of $426,000,000 between 2017 and 2018. It still doesn't compensate, but I believe this is positive. And the important message to convey here these adjustments of idle capacity to see segments that are rising connected to series and short cycles until the market goes back to normality in the future. Okay. Does this answer your question?
Thank you very much. Has changed. Do you believe that things are going to change? I would like to elaborate on the provisions. The information that we have doesn't justify changing our criteria.
Let's see the details that will come from this reform. But as this is something from the past, the trend is not to change, but we are going to follow this up in detail. We are going to raise this information, and then we will send this information to you because we don't have this on the top of our mind right now. Next question, Lucas Marchiori from Safra Bank. Two questions here.
The first one regarding the purchase of CG Power. I would like to know the major opportunities that you see in the U. S. Market that is your biggest market. In addition to Brazil, I want to know where you can grow more marketproducts that you are targeting in the U.
S. Market? This is my first question. And my second question, if you could update the information, how much from your local production is being exported? What is the percentage of your revenue is being exported?
And what figure would be the natural figure for this? Luca, thank you for your question. Let's start with the CG power we announced on June 21. I would like to explain this acquisition. It's a company that produces strength, transformers.
There are 3 industrial units in the U. S, 2 productive and 1 of service. And during the last year, the revenue was $128,000,000 and it is totally aligned with our GTD strategies. We wanted to find a good asset, and this asset emerged. Together Together with strategic alignment, you asked about products and areas.
This product is a leader in segments where we still did not have a leadership that is strength transformers. They are leaders in windmills, solar, and it's very relevant. Another positive point is it will allow us to have good synergy with our Mexican plant in a number of areas. It has complementary lines with the Mexican units. Mexico, for example, have a strong presence in dry transformers.
Today, it will allow us to increase our market share in forced transformers in the U. S. Our market share is of 1 digit and we want to have a 1 digit high market share and allows us to mitigate an eventual Trump risk. And this can allow us to mitigate the situation, this risk. So I believe this was a very important acquisition.
Are very reassured because we believe we will grow in the U. S. Market. We already have a good presence in low voltage motors. Now exporting hasn't changed a lot.
We continue with the same trend that we announced during last year. Next question, windmill. How much of the revenue does this represent? And when this backlog will change according to profitability in the future a positive cash generation in CG Power this year or next year? Paolo, good morning.
Backlog, and Andre can answer CG Power. From our backlogs, there is a misunderstanding. This backlog of Windmill Technologies in the future. Today, our backlog is very low in high voltage motor generation and transformers. This is where we have our backlog.
This in Brazil and abroad, these sectors are suffering a lot. This is something that comes from the past since last year. This effect was stronger this year. Now the auctions that generate a great deal of demand for these factors, they did not take place during the last year. They took place in 2015.
And this is the main reason why we have a weak backlog. We do strategically it is not convenient to give you the figures in terms of backlog. But what I can say that they are around 20% below history. It's going to depend on ex wind. So this is the current situation.
I believe that this situation will remain during the 2nd semester. And if we do not have new auctions, this may continue next year. A factor that may mitigate this is the industrial recovery. A number of orders in the industrial sector start emerging, and this may help us to mitigate this effect. But what is important, our options, this is low, and we believe that it will continue low during the quarter.
Now CG, the expectation is improvement, especially during 2018, especially because we will redistribute our product portfolio from 1 unit and another and the synergy that we will have with our plant in Mexico, and we expect these results to be reflected on 2018. Lucas Barbosa, UBS. Good morning, Andre Paolo. Thank you for answering my question. First question, because labor hours reduction, how did this help you in your margin?
And what about the agreement with your labor union? This is my first question. Then I will pose the second question. Rogerio, The impact of labor hour reduction is very little in margin. I believe that the effect is more in Brazil, all the units, Santa Catarina, Sao Paulo, Piripu Santo Manao, all our units reduce labor hours, working hours, everybody, corporate, administrative.
This year, it's different. This year, our units are connected to GTD, ex wind. These are the transforming units and the power units. These units, they left representative in where nevertheless the effect of the EBITDA margin is very low. We do not have this figure on the top of our minds.
It is not very relevant. It is very low, and we believe that it will not have a major effect during the second semester. If this is your concern of margin, now the agreement with your labor union that you can do this 6 months a year, yes. We have already taken up this period. Now it ends at the end of July.
And my second question, just a follow-up regarding the backlog we would like to confirm. You mentioned that your backlog is 20% below in GTD or would this be your backlog by and large? And if it's in GTD and how would the backlog be in the entire company with historic comparison. What about PCH sales in India and your sales of transformers in the U. S?
Well, backlog is for long cycle products that are in the GTD, now motors and this is regarding GTD specifically. So this is in abroad Brazil. It's stronger in Brazil and lower below. So the average between 2 would be around products that you want to sell in the markets in India, the PCH generator, what the market is in India like. The Indian market is a market that is a good market.
It is growing and demands a lot of investments in this market. If power and infrastructure and the main driver would be water pumping. Water is very relevant in the country. The main driver is along these lines. Now PCH also exists, but it's not very representative in our portfolio.
The great volume in business in India is connected to water pumping. And we there are actions that we're carrying out, and we want to work in the with wind farms in India. We still have nothing these are the 2 very important sectors, but water these are the 2 very important sectors, but water pumping is very important in India. Thank you very much. Next question, Leandro Fontanesi, Bradesco BBI.
Could you elaborate on the domestic market? You mentioned products with low demand. Could you mention products with a higher demand visavis last year? Because here, we can see there was an improvement. And the second point, Leandro, Leandro, good morning.
Yes, we will recap, and we try to be specific in speech. We will give you details of the domestic market. And Andre, then we'll talk about China and Mexico. We repeat this constantly. We observe continuity in the recovery process.
This is very obvious in the series and short cycle products. This is clear. We have also observed a number of markets that are more dynamic right now. Which markets are these? 1, agriculture 2, food processing and also the part of beverages.
So these markets are gaining momentum right now, especially during this quarter. Although there is a lack of greenfield projects, expansion problems, the stability of orders in small and series products have been consistent in the past quarters. And this shows us that the maintenance CapEx is reemerging again. This is something that we have to register. And on our side, we also continue trying to expand into game markets.
So the dynamic of Brazil is more or less along these lines. GTD is difficult, as we mentioned, when we answer the other questions, and I believe will continue difficult, we are expecting new auctions, 1 of power deconstruction and one of power generation? And I believe that now Andre can answer. Let's start with China. China positive 2016.
We doubled our motor capacity of low voltage, and we are investing to increase our capacity. And expectation is that in 2020, we will double our existing capacity. Our plant is running and our expectations of increase of capacity have materialized. Mexico, let's see the international ization process of Mexico and horizontalization were positive in both companies. Of low voltage motors, very good.
Mexico presents good quality in labor and a cost that is very competitive. And Mexico now we are working with low voltage motor, and we are in the lag state where we can see verticalization that this is an investment to have a smelting plant that will end by 2018. Now both countries have promising results and with promising future. And it is our investments on China and Mexico when it comes to investing in foreign markets. Thank you very much.
We have a number of questions that came in written. I would just like to strengthen a point. And this was a question that came from Santander regarding net revenue and financial results. I would like to highlight something. Although we observe a stabilization in interest rate and a drop in the long term, the main message is that at the end, this is very positive.
An environment where you have a lower interest rate, it goes hand in hand by your growth environment. So at the end, the net income of the company is better because this means that the economy is growing. Positive for the bank than negative. I just wanted to strengthen this message. There is another question here is the percentage market share in Windmill Technology?
This is strategic information, very important for the development of our business. Unfortunately, we cannot disclose this. No, the class entities have a statistic data, and I believe that they can show you the representativity of Brazilian players and what their market share is. I do apologize. This is a piece of the strategic information, and we can not disclose this.
There's another question from Sergio, if WEG is prepared to supply and what kind of equipment and auto parts are they willing to? Are are they can supply for the automotive industry automobile industry, especially now with electric cars. We have technology and we have 50 buses running with a solution of electric engine and frequency and inverters. We have technology. We have the capacity.
And now I'm talking about the burden. When we talk about buses, light vehicles, well, this is a trend. This is going to become a reality, and we are maturing this technology in the company. And company is investing time and resources on this type of technology. Thank you very much for your participation.
So we expect you during our next conference