WEG S.A. (WEGE3) Earnings Call Transcript & Summary

[Interpreted] Good morning, and welcome to the conference call of WEG to announce the Results of the Second Quarter of 2022. We are transmitting this conference call along with its slides in our Investor Relations website at the address ri.weg.net. And after its completion, audio recording will be available in our IR website. [Operator Instructions] Any forward-looking statements contained in this document or statements that might be made during this conference call about future events, business prospects, operational and financial projections and goals and to the potential of future growth of WEG are near beliefs and assumptions of the Company's management because they are based on information currently available. Forward-looking statements involve risks and uncertainties, and therefore, depend on circumstances that may or may not occur. Investors should understand that overall economic conditions, industry economic conditions, and other operational factors may affect the future performance of WEG and may lead to results that will be materially different from those expressed in such forward-looking statements. Now, we would like to remind you that this conference call is being conducted in Portuguese, and you are listening to the simultaneous interpretation into English. Today with us in Jaragua do Sul, we have Mr. Andre Luis Rodrigues, CEO and CFO; Andre Menegueti Salgueiro, CFO and IRO; Wilson Watzko, Controller; and Felipe Scopel Hoffmann, Investor Relations Manager. Please, Mr. Rodrigues, you may start.

[Interpreted] Good morning, everyone. It's a pleasure to be with you once again and to announce the results of WEG on this conference call. We'll start with the highlights of the quarter, where the operating revenue grew 25%, as compared to Q2, '21. We have maintained a good performance in the main markets, where we are operating, reinforcing our strategic direction of developing products and solutions of greater added value to our customers. We had a strong performance in the domestic market with good demand for our business of low voltage electric motors, reducers, automations and especially business related to the generation of renewable energy and energy transmission and distribution. In the foreign market, demand for industrial business is still very busy with a growth of 23.7% in local currencies, as compared to the same period a year ago. The adjusted EBITDA was BRL 1.3 billion, up 14.5%, as compared to the adjusted EBITDA in Q2 '21. The adjusted EBITDA margin ended the quarter at 17.4%, down 1.6 percentage points from last year's adjusted margin. Throughout the presentation, Andre Salgueiro will provide more details about this performance. Lastly, ROIC fell as expected in this quarter, as we are going to see on the next slide. It dropped 5.3 percentage points, as compared to Q2, '21, reaching 26.9%. An important point that we should highlight that from this quarter on, ROIC will suffer a greater effect of the impact of the booking of non-recurring ICMS credits on the PIS and COFINS calculation basis since 2Q, '21. The operating income after taxes over the last 12 months no longer has the greatest benefit of these credits, which were booked in Q2, '21. But on the other hand, our invested capital still considers most of the adjustment since the amount of taxes to be recovered are still booked in our balance sheet. In addition to this effect, the growth of invested capital is explained especially by the greater need of working capital and higher CapEx, which also contributed to the reduction of the ROIC despite the growth of the operating profit after taxes over the last 12 months. Now, I would like to turn it over to Andre Salgueiro to continue.

[Interpreted] Thank you, Andre. Good morning, everyone. On Slide 5, you can see the evolution of our business areas in the markets, where we're operating. Starting in Brazil, where the performance of industrial electronic equipment continued positive this quarter. The good demand was heavily pulverized in short life equipment. This is of equipment such as electric engines, reducers and serial automation products with a highlight on agribusiness, pulp and paper and mining segments. In the GTD area, we had a relevant delivery volume of wind turbines, as well as an increase in demand for distributed solar generation. T&D business was another highlight with good volume of revenues driven by large transformers and substations for projects related to transmission auctions, along with transformer sales for distribution networks and industries. In commercial engines and appliances, there was a reduction, which was already expected in domestic market after strong sales volume in the same period last year. It's worth mentioning that we noted a gradual reduction in sales volumes at the end of the quarter, especially in engines for home appliances. Lastly, the demand for paints and varnish products maintained high levels of sales with emphasis on sanitation, mining and metal structures. In the foreign market, the continuity of the industrial investment observed in recent quarters was an important factor for the performance of industrial equipment area, despite the uncertainties of the macroeconomic scenario. Sales of short life equipment showed significant increases in revenue, especially low voltage electric engines, whose demand is very pulverized among different industrial segments. In GTD, revenue showed typical fluctuations of long-life businesses mainly after deliveries of significant T&D projects in Colombia and South Africa and steam turbines in Europe throughout 2021. In North America, our main region of operation in this business area, we continue the process of increasing the capacity utilization of the new transformer plant in U.S., taking advantage of the opportunities present in this market to build the robust portfolio for coming quarters. In commercial engines and appliances, the positive sales volume is explained mainly by the good economic activity and market share gains in countries, such as Mexico and China. And in paints and varnishes, Brazil's exports to Latin American countries and sales of other operations abroad, both in Mexico and Argentina have contributed to the growth in this quarter. Slide 6 shows the EBITDA performance in 2022 with a reported EBITDA showing a 9.8% reduction over the same period in the year before. The EBITDA margin ended the quarter at 17.5%. It is important to highlight that in Q2, '21, we booked non-recurring credits related to the exclusion of ICMS from the PIS and COFINS calculation basis. Adjusted for this effect, the EBITDA grew 14.5% compared to the same period of last year, with EBITDA margin 1.6 percentage points lower. The challenges are global supply chain and the consequent increase in raw material costs, together with a change in the product mix and the increase in energy and freight costs still bring pressures to the Company's operating margins. Finally, on Slide #7, we show the evolution of our investments. In Q2, '22, we invested BRL 226.1 million in modernization and expansion of manufacturing capacity, machinery and equipment and software used licenses, 55% of which were meant for production units in Brazil and 45% meant for industrial complexes abroad. Now I end my part and turn it back over to Andre.

[Interpreted] Before moving to Q&A, I'd like to talk about some of our latest accomplishments and comment on our prospects for the remainder of the year. With regards to achievement, I would like to highlight the following events. In June, our Company was the highlight in the Broadcast Empresas Award given by Agencia Estado, in partnership with the Fundacao Vargas Foundation. We were the #1 Company out of 204 companies with shares traded in B3 that generated the most value to shareholders. We also received special awards in the categories of sustainability and new markets. Recently, we announced the beginning of the development of the new wind turbine platform with a power 7 megawatts and rotors that will be 172 meters wide, which will be the largest, largest machine underdeveloped in the Brazilian market. And this week, we formalized the creation of WEG Algeria, a joint venture focused on commercial engines and appliances to serve Algeria and North Africa. Finally, the outlook for the remainder of the year. Number one, we mustn't forget the macroeconomic scenario is more challenging for the rest of the year. Global inflation at high levels and the consequent increase in interest rates in major markets can interfere with the level of growth of the global economy and consequently of our businesses, especially short-life ones. On the other hand, we understand that our competitive advantages help us a lot with that regard. We believe that our business model based on verticalization, long-term vision and especially diversification of products and solutions with different exposures to economic cycles, help us not only expand our range of opportunities, but also mitigate recent uncertainties in times of turbulence like this that we are experiencing. Therefore, despite the challenges presented in a macroeconomic scenario, we expect to deliver another year of revenue growth and profitability within the Company's expectations and historical track record. Now I end my presentation, and we may move to our Q&A session.

[Interpreted] [Operator Instructions] And my first question comes from Lucas Laghi from XP Investments.

[Interpreted] I would like to discuss 2 things with you in terms of renewable. First, I'm going to talk about solar and then wind. So starting in solar, could you give us an idea about the mix in the segment of distributed generation, especially thinking of larger projects or smaller projects, such as in homes, small and middle-sized businesses? And how do you see the growth prospects for the different subsegments in 2023, which will be a year with higher inflation and interest rates, as we saw before and the new regulation in terms of distributed generation. So I would like to understand the positioning of the Company and the growth prospects for the different subsegments in distributed segments. And then, I'll ask about wind.

[Interpreted] Hi, Lucas, this is Mr. Salgueiro answering your questions. And in solar first, we break down solar distributed generation and centralized generation. So WEG works on both fronts, offering products for the 2 types of segments. So the segment of distributed generation, but centralized generation has been growing, especially because of more recent projects that we have announced and the most important is the one at Vale Sun of the Cerrado, we are providing transformers and substations. So the breakdown today is more or less 90% going to GD and a little bit less than 5% goes to centralized generation. If I understand your question is more specific about the breakdown in GD. In GD, WEG has a biggest share in the 3 phase projects, which are the projects, where the customer perceive a value, so there is an engineering company with know-how and knowledge. Today, most of our GD is formed by the 3 phase. And then we have some exposure in mono phase, which is homes, but it's kind of small, as a share of the whole. I don't have the exact numbers to give you now, but the vast majority are related to 3 phase projects. We have mini power plants. It's slightly bigger in industry, large commercial projects. So the dynamics of growth looking into the future is overall, we believe and we are confident that solar generation will continue to grow in Brazil. Of course, macroeconomic conditions such as inflation, maybe even FX rate might have an impact in the cost of commodities and solar plates. But here in Brazil, and we have a combination of good solar radiation and slightly higher energy costs. So solar power makes sense regardless of what happens. And what might happen is that it might grow slightly slower -- more slowly or faster. So the mini power plants, which are the projects that are related to remote generation, they are likely to have a smaller growth and even accommodation of revenue after this year. But other segments in GD, high consumption in retail, and even small customers should continue growing in the mid-term.

[Interpreted] Well, this is exactly what I wanted to know. I wanted to know the breakdown in GD. Now as to wind power, I would like to understand the timing when the profitability will come back in WEG, so I can think of contracts that you closed in the past and many players are having difficulties. And my question is when are we going to see the resumption of profitability of WEG's wind turbines considering that the products are reflecting the lowest equation between higher costs in the chain. So are there products to be delivered this year in 2022 that already -- are related to this equation? Or this is more into the future, your contract with Eletrosul that should be delivered in 2022, would have this normal profitability? And the last point, how are you using capacity today in terms of wind in WEG? And can we think of improved margins at the consolidated level just because of the lower share of wind because other segments will go -- grow more along the year. So these are the points thinking about wind in the Company?

[Interpreted] Well, thank you very much for your question. Wind, in practice, is the business with the longest cycle in the Company. So we have a contract, which was the first that we announced with a new machine with 4.2 with Alianca. It has just been delivered, and we announced it in early 2019. So the timing is kind of long. And as time went by new contracts were signed, the cost structure changed, and then we adjusted prices. So naturally, as time goes by, and we deliver our next project, what we see is that there is a catch-up of profitability. Now when we look at the information that were announced related to Alianca contract and Eletrosul, we can have this perception. And as months go by, our expectation is that in our portfolio today, it's starting 2023 for the whole year and 2024 come today until the end of next year and the beginning of 2024, we should see this regularization, but it's not going to be anything abrupt. It's going to be gradual. So this is more or less a dynamic. So overall speaking, considering everything that is going on projects today have a margin that's lower than our track record because of the cost structure. Once we catch up, it will take a while. Wind even when the scenario is normal, it's still a business with lower margins than average margins. And if other businesses grow, grow more than wind, we are likely to improve the margins if we consider just that effect. In terms of capacity, today, we have a plant with capacity to produce 8 turbines per month, more or less. And then, we have this capacity until the end of next year 2024. We are not expecting to increase capacity. If we have conditions, and if market demand grows a lot, we may reconsider this and increase our capacity over the next few years.

[Interpreted] Our next question comes from Lucas Marquiori from BTG.

[Interpreted] I have 2 questions to ask. Thank you very much for the call. #1 is I would like to ask about the backlog of products and contracted products, especially U.S. and Europe, if you're seeing an increase in demand or increase in backlog because of higher energy prices, especially in Europe because of the gas thing and that is going on there. So for example, in Turkey, how could the Turkey plant help become more competitive in order to gain market share. I would like to know more about the scenario in your new market. And the other question, which is slightly simple, could you talk to us about the working capital inventory and your basings?

[Interpreted] Lucas, thank you very much for your questions. So first, I will talk about the backlog and the long-cycle dynamics. First, starting with electrical electronic equipment, industrial ones, so the orders are being placed as in last quarters overseas. The highlight is oil and gas, mining, pulp and paper and projects related to that. The portfolio is healthy for future months, and we have good prospects to build the positive portfolio until the end of 2023. When we go to generation, transmission and distribution, the portfolio of orders is still robust with deliveries being programmed for 2023 and early 2024, as Salgueiro talked about the wind turbines. And it's very positive, especially for T&D in North America and Central America. Now short life, it's more limited to more or less 3 months into the future. So what we see today is that in the second half of the year, its performance was very positive. Some countries have some fluctuation, but even so above average, as compared to the year before. So in short cycles or short life, we are talking about slightly shorter time spend. As WEG continues, it's one of the avenues of growth, which is to go international. And as you said, having a plant in the future, so it's going to be an assembly line and might become a full factory in Turkey will help us to go into new markets, as in our industrial strategy in Mexico, always creating additional opportunities. And another example is the low voltage engine manufacturing plant in India that is going to help us in this process. So the message is we are not seeing long cycle is doing very well, short cycle, we're still at a better level than we were last year. And we are doing our homework to continue the process of going international and seek new opportunities. As to working capital, we haven't had any major changes as compared to what we've been reporting over the next quarters. We were very fortunate in increasing our inventory levels, as a strategy to assure the continuity of our businesses. We've always been reporting that no -- none of WEG's customers had any shortages of our products because we have this verticalization, which is a competitive advantage, but there is a penalty in terms of inventory levels. Along the second half of the year, we are going to see a reduction and other performance indicators, both in terms of accounts payable and accounts receivable, everything is business as usual. So the increase in working capital, yes, it is concentrated in inventories.

[Interpreted] Now a follow-up, this thing of increasing energy costs, especially in mature markets, I'm talking about Europe. How long does it usually take until it's reflected in your backlog to be converted into orders -- or when you see a commercial, do you see any increase in demand, just so that we can have a feel of the energy market in Europe.

[Interpreted] Well, in terms of energy and new opportunities for energy generation in Europe, we do not have a significant exposure. It's very small in Europe. We have gas turbines, which might generate good opportunities. But this is not WEG's main or core business, and we may have some other opportunities in generation, but it's not immediate. Things will start to happen from now on.

[Interpreted] Our next question comes from Victor Mizusaki from Bradesco BBI.

[Interpreted] I have 2 questions. First one is similar to Lucas in terms of inventory of raw materials, how long is the impact of raw materials reflecting in WEG's margins. In the second quarter, our inventory levels higher in terms of providing products to customers, but there is this time mismatch between spot prices that dropped. So how -- what should we expect in terms of fluctuations in WEG's margins in the future? And the second question is related to the 7 mega wind turbine, how does it impact WEG's competitiveness, both in Brazil and in other markets, such as U.S. market?

[Interpreted] Hi, Victor, this is Salgueiro. Thank you for your question. As to inventory, you should remember that we do have the inventory issue. And as Andre said in his last question, they have -- they are slightly higher, considering the global supply chain. But another factor that we should mention is that, some raw material, especially copper, so in order not to have the impact of fluctuation that is so significant on spot prices directly in our inventory. So that we have predictability, so to have accurate timing. So if we consider the inventory levels that we have plus protection structures and pricing, I think it will be something like 6 months or a little bit more for us to see this transition of changes in raw material costs, so that this is somehow reflected in our results. As to the wind turbine, we have recently announced the development of our 7-megawatt wind turbine, we should mention that this is the biggest machine ever developed for the Brazilian market. And I think that thinking of prices and profitability, so in absolute terms, it will be necessarily bigger than 4.2 megawatts. However, relative prices in terms of BRL per megawatt will provide the gain for each equipment user. So we are expecting higher profitability than we are practicing today. So yes, the expectation is that this is a new product, new technology that will provide better profitability than the current machine.

[Interpreted] Just one point would this allow you to take this wind turbine, the 7 megawatt wind turbine to India and have a slightly faster ramp up of the operation also in U.S. And we see WEG with a very strong presence in transmission and in transformers. Does it open this market for WEG in the U.S.?

[Interpreted] Well, specifically talking about India, we are certifying the 4.2 machine. And today is that -- as far as we know, is the biggest machine available in that country. So I think that now we have many, many opportunities to explore with a 4.2 machine before we think of the new machine and trying to find opportunity for it. So focus today is much more in Brazil. So one thing that we may try to find in other markets in the future is that the new product has a modular configuration with components, separate components that make transporter. And then if we have the opportunity, we can try and find new markets, as you said, the U.S.

[Interpreted] Our next question comes from Andre Mazini from Citibank.

[Interpreted] I have a question about electric mobility line. How is the certification of electric cars going in Europe, which is the next market after you focus on LatAm. So Europe will be starting the production of new electric cars in 2025, and we will increase demand. So we have a partnership with Volkswagen. Should we expect other partnerships? We know that BYD is in Brazil. It has 3 plants with new models, we have more partnerships and even considering batteries.

[Interpreted] Hi, Mazini, thank you for your question. As to electric chargers or recharge stations, we have, our main focus is Brazil. So at first, we want to address Brazil. We think that Brazil has a big opportunity for growth. It's always good to reinforce WEG is the only Company that has developed and manufactured this product here in Brazil. And this is a market that we know really well. So we already have a network of distributors, integrators that can help us in this business. And this is being reflected in the partnerships that we've been announcing with chief OEMs. So major OEMs of electric vehicles, especially light vehicles, whenever they announce light electric vehicles, they approve WEG as a partner in terms of charges. We already work in Argentina, and we have the focus in some other countries in Latin America. In any way, we can imagine that this product, even though, we are starting it here in Brazil, it can have more exposure than just Latin America. We sent some recharge stations, especially to our affiliates in Europe, but there is still a certification process that has not finished yet and the commercial efforts is very much concentrated in Brazil and in Latin America. So I think that Europe and other regions will be left to the future. As to the powertrain, it's always good to stress that in our case, at least for now, the focus is powertrain for heavy vehicles, whether trucks, buses and some other kinds of vehicles. But this overall vehicle, on heavy vehicle, the main partnership is with Volkswagen, where recurring deliveries taking place, but we have some other partnerships that have been announced. We have a bus with Volkswagen. We have a partnership with Marcopolo that is developing an electric-powered bus developing it with WEG's powertrain. And if we have the opportunity of having new partnerships and continue developing this market, we are paying attention at everything, and we'll continue to discuss with potential customers. So this is major focus of our commercial team to seek these partnerships and to develop these markets here in Brazil.

[Interpreted] Our next question comes from Gabriel Rezende from Itau BBA.

[Interpreted] Hello. Good morning for the space. I have questions 2 questions to ask. Number one relates to your CapEx budget, as you announced in the beginning of the year, it looks like that the level in the first quarter and the second quarter is going to be BRL 1 billion to get to the BRL 5 billion that you are expecting for 2022. So are you thinking about this amount? Is it going to be lower or in a scenario with -- considering the commodity prices scenario that might be more favorable to your budget? Are you going to deliver the same CapEx with a more controlled budget? Number two, regarding transmission lines a few weeks ago, we had the auction that was very interesting, a BRL 15 billion investments to be made over the next few years. How much of that could be addressed to WEG, how much is coming from the auction? Is it going to benefit you by how much?

[Interpreted] Hi, Gabriel, thank you very much for your questions. As to the CapEx, it was BRL 145 billion bigger than the last few years because of the delay of projects that were carried over from '21 that we did not implement and also to support our current levels of growth of our Company. Slightly before I answer the question in terms of the outlook, as a reminder of this capital budget about 55%, I meant for Brazil and 45% for overseas operations. Even with 1.5, if we realize BRL 500 million, something like that, in Q1, we expect to be at 1.2 more or less. This is how much we will be able to execute, but not because of delay or cancellation of projects. This is more related. So we approved the budget and then projects evolve, and it's natural that a few things are left for the next year. Considering our visibility today, this number will be much closer to BRL 1.2 billion for the year. And of course, the delta of that amount will be carried over to next year.

[Interpreted] Gabriel, as to the last transmission auction, the main piece of news is that we -- once again, we had a significant auction in 2020, 2021, auctions were much below average, especially because of the pandemic. And now we are back, and we had an auction of BRL 15.3 billion in terms of estimated investments, which is very good for this industry as a whole. In terms of expectation, nothing has been contracted or signed in terms of the projects that have been awarded in the auction. They will be discussed over the next few quarters in terms of its commercial terms but there are some players that have won some slots of the auction, which historically have a close relationship with our Company. Nothing has been effectively contracted. But considering the volume of investment expected for the next few years and considering that this auction had a higher amount in terms of investment, this is positive news for us and good prospects for our T&D businesses in the future.

[Interpreted] Our next question comes from Jonathan Koutras from JPMorgan.

[Interpreted] Congratulations on your results. First about margins. You've been saying for a few quarters that there is a mix and wind and its impact and there is an EBITDA margin, which is at about 7.5%, 18%. And copper has slowed down recently. Yes, so I would like to ask about G&D in the international market. Could you give us some more color on that? And in the release, you mentioned that those important units were delivered in the year. Could you disclose that to us?

[Interpreted] Hi, Jonathan, thank you very much. In terms of margin for the future, in terms of what we have announced earlier this year. So in 2021 the margin should be within this expectations. We have no indications that there will be any additional reduction as shown in the last quarter of 2021. So it shouldn't be below 17.2% and shouldn't exceed 18% would be in between. So I think that what happened in the first quarter, I'm talking about the recurring margin and in the second quarter, it is in line with our expectations. We should always say that even though margins are lower, slightly lower than what we had in the last 2 years, I think that the level at 17% something, it's a level, where it still deal with pressures in terms of seeking raw materials in the second quarter. This disturbance in the global supply chain and the increase of revenue of businesses that usually have lower margins such as renewable energy, such as solar and the wind turbines. I think that this is a very healthy and good margin for the Company. You talked about the trends of copper prices. Yes, we are seeing a trend of stabilization in some cases, reduction of our raw materials, such as copper. It seems that this is a more structural movement, but it's good to remember that it takes a while to be reflected in our cost structure. So I think that this effect, if it is, in fact, structural and really takes place, we should see its effects more in the future, not immediately because there's inventory that we bought at the prices that we had before.

[Interpreted] Jonathan as to international GTD, this is a business area that has grown a lot in the last few years, especially after the acquisition of our transformer business in the U.S. So this has been the main highlight in growth, and specifically this year. What happened is that we reported this last year. There were some very important projects going on in South Africa, in Colombia and also some deliveries of important projects in steam turbines in Europe, which ended up creating a relatively strong comparison basis in 2021. Now in the first quarters of '22, we can see the T&D businesses as a whole are growing, especially North America, but because of other regions, when we showed the total consolidated number, we can see a drop in revenue. In any way, the outlook is positive. In September last year, we opened our third factory in the U.S. Now we are investing to increase T&D capacity in Mexico and a second one in the U.S. And the portfolio, as they said, considering previous answers, it's positive, especially considering our businesses in North America. So we have positive prospects and the external market is going to grow over the next few quarters. And we look at the comparison basis comparing the agribusiness and mining, doing very well. But somehow, what we can say is that demand is positive for all products, especially industrial, engines, reducers and automation. Some new businesses that are being developed are part of industrial electro-electronic equipment, for example, digital businesses. So when we add up all the businesses with the good dynamics of the manufacturing market, as a whole, we have this growth performance, both compared to last year, but also compared to the first quarter of this year.

[Interpreted] Our next question comes from Regis Cardoso from Credit Suisse.

[Interpreted] 2 topics I would like to touch on. #1, more general about this risk of recession. Do you -- are you thinking of slowing down your investments, and so considering the risk of recession, I could understand the timing for capacity ramp-up, both in India, China and now Algeria. So how much of that capacity depends on a faster pace of economic activity. This is one question. The second question is about margin and that there has been a drop in sequence. And my question is this reduction in margin and how much of it is explained because of inventory turnover, how much of it can be explained by the FX rate because BRL was higher before and also -- or how much of it is explained by the mix, as we mentioned about the wind turbines and ultimately, whether this is commercial issue and margin pressure in the competitive environment.

[Interpreted] #1, we are not seeing any need to change our pace or our investment strategy because of a possible recession very soon or in a long term. #1, the Company has a long-term vision and have a strategic plan, and we are very disciplined in executing our strategic plans. Much to the opposite, these new plants that we are opening help us to have share in markets, where we are not present today, where we have a low presence that help mitigate an unfavorable economic conditions. As to timing, our plant in India is ready. It's just -- we're just waiting about a local issue of installing the electrical wiring or aspects locally. We are finalizing almost all civil works in China. Number one, it will be in assembly line, components will be manufactured in China and Brazil and made available to the local market for the assembly, so that WEG can start participating not just in the Turkish market, but in other countries around, and this will happen over the next few weeks. In Algeria, as we entered the JV, as we announced this week, we are expecting to start production in Q4 this year. So everything that these 3 projects, it's a matter of a few weeks of some weeks or a few months to start contributing and adding growth opportunities for the Company. As to margin, once again, we consider that margin is within expected levels. If we look at the adjusted margin in the first quarter, 17.7%, 17.4% is just what we were expecting. It contributed to this short drop in margin. So the FX rate, for sure, if we consider the FX in the first quarter is doing 5.3%, now 4.92%. There was a 6% reduction. And then if I bought raw materials at a higher FX rate with 5.23%, and I'm going to export at a lower FX rate, there is an impact on margin. There is also an impact or the issue of growth on the renewable energy. So wind and solar that are businesses -- wind is that the production capacity of the first quarter was the same as in the second quarter. But solar -- and solar and wind are businesses with lower margins that may have an impact. But we are not seeing any impact, the commercial issues having an impact on margins. So once again -- so within the macroeconomic scenario, we are dealing with all operational difficulties. So this is a diagnosis of the margins in the second quarter.

[Interpreted] Our next question comes from Bruno Amorim from Goldman Sachs.

[Interpreted] Thank you for taking my question. #1 is about operational leverage. So in the last few quarters, most of that idle capacity that was created in the last crisis of 2015, 2016 was being used. Can you give us an update or product type and geography, where do you have any capacity for operational leverage? Where are you planning investments to continue to grow? And the second question is a follow-up. regarding distributed generation in terms of GTD and you mentioned especially that was a lot of prebuy because of expected changes in regulation next year. And I would like to understand whether this limits the growth next year? Or if there is a very difficult comparison basis, is it still possible to grow? That was my question.

[Interpreted] Hi, Bruno, thank you for your question. As to the utilization capacity, in fact, we have grown a lot in recent years. We have grown in operations here in Brazil and in operations -- in overseas operations. So on the whole, I would like to give you a vision in terms of our capacity and it's never going to be 100%. We can say this is completely full. All operations in terms of engines and automation, also including WEG, power, this is where we have middle voltage and also T&D operations. So these operations are going on today, and we're investing. Andre has just answered about CapEx, and the biggest CapEx this year is for that -- so that we grow on those operations, we are expediting our investment program. We still have some capacity in some long-cycle operations, especially outside Brazil, especially in terms of generation, hydro, thermal and medium voltage engines. Now we have some capacity in commercial engines and appliances here in Brazil because of these dynamics, and we still have some space in paints and varnishes, where we could have some growth without demanding much increase in capacity in terms of qualifying the business unit. As to GD prebuy, given the word prebuy, we have been hearing a lot about that in 2019 when regulation was supposed to change, and then it took a little bit longer. But the fact is that for 2023, the regulation hasn't changed. So it's right to say that 2022 is a positive year, and part of that is definitely projects that people are trying to advance to make them fit into the older rules, and in some cases, even along the first months of next year because there is an issue of the request for connection of the project, and then you can still work for a few months to complete the project. But there is some effect along this year, and this is bringing a higher demand. And obviously, this is going to create a comparison basis that is strong next year. Now to talk about the expectation for next year is still kind of early. So we are talking about GD. It's a short-cycle business. So we have a portfolio. Our portfolio is usually 3, 4 months that we have of visibility. And we imagine that part of GD, and then power plants are likely to fuel a slightly higher impact. And then this part of the business is historically was not so relevant, but it started becoming more relevant in 2022 because this project are being advanced along the year. And the rest of GD involving high consumption and retail in theory should continue to be developed. So it's hard to imagine what will be the performance next year, but the fact is that we have a stronger comparison basis this year, and a challenge in order to have a growth, especially the robust growth that we have had along the last few years will definitely not be possible next year. Now to imagine what will be the effect and how this market is going to develop next year, we are only going to have a better visibility once we get closer to the end of the year.

[Interpreted] Ladies and gentlemen, we are now ending our questions-and-answer session. I would like to turn the conference over to Mr. Rodrigues for his closing remarks. Please, Mr. Rodrigues, the floor is yours.

[Interpreted] So once again, thank you all very much for your attendance and see you in our next call.

[Interpreted] WEG's conference call has now ended. We thank you very much for your attendance. Have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]