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

Good morning, and welcome to WEG's Second Quarter 2026 Earnings Conference Call. I would like to highlight that simultaneous translation is available on the platform. The interpretation button Globe icon at the bottom of your screen. Please note that we are broadcasting this conference and a replay of the audio will be available on our Investor Relations website after the event. [Operator Instructions] We would like to remind you that any forward-looking statements contained in this presentation are made during this conference call regarding future events, business outlook, operating and financial projections and targets and WED's future growth prospects are based on current beliefs and expectations of WEG's management and on information currently available to the company. Such statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect WEG's future performance and could cause actual results to differ materially from those expressed in such forward-looking statements. Joining us today from Jaragua do Sul, are Andre Luis Rodrigues, Vice President of Finance and Administration, Andre Menegueti Salgueiro, Finance and Investor Relations Officer; and Felipe Scopel Hoffmann, Investor Relations Manager. Mr. Andre Rodrigues, you may proceed.

Good morning, everyone. It's a pleasure to be with you in this earnings call to discuss WEG's results. I'll start with the key figures for the quarter on Slide 3, showing a slight decrease in net operating revenue of when compared to the second quarter of 2025. Although the same effect that impacted revenue performance in the first quarter of 2026 to present this quarter. We have managed to virtualize virtual nurses impact with the continued growth of revenues abroad. And speaking of those effects, the first effect on Brazil, relates to the fact that we already had a significant order book for centralized solar generation deliveries in the second quarter of 2025. When compared to the absence of these deliveries in the second quarter of 2026, this had a negative impact on revenue in the domestic market. Despite this, other businesses contributed positively the quarter's results. with continued deliveries of transmission and distribution projects, coupled with improved industrial activities. The second effect was related to the impact of exchange rate fluctuations during the period, which for conversion purposes, reduced the growth of BRL despite another quarter of good growth in local currencies in the main regions. Industrial activities remained positive in our main markets, particularly in segments such as oil and gas and ventilation and refrigeration systems. Furthermore, we continue to see a good volume of deliveries from the T&D business in North America called with strong demand from generation business. The EBITDA margin remained healthy, in line with our expectations, with a slight adjustment compared to the same period last year. and in the quarter at 21.8%. Our EBITDA reached BRL 2.2 billion a decrease of 2.1% compared to the second quarter of 2025. Throughout the presentation, Andre Salgueiro will give more details about this point. And the ROIC, 1 of our main financial indicators showed growth of 0.7 percentage points and ended the quarter at 3.6% as we can see in more detail on the next slide. Our ROIC remained healthy, growing compared to the second quarter of 2025, reinforcing the quality of our investments, the discipline in capital allocation and the consistency of our long-term strategy. I now turn the floor over to Andre Salgueiro to continue.

Thank you, Andre. Good morning, everyone. On Slide 5, I present the evolution of revenues in our business areas. In Brazil, positive industrial activity with growth in demand for short-cycle equipment such as low-voltage electric motors and gearbox reducers spread across various sectors. Long cycle equipment such as high-voltage motors and automation panels also showed sales growth particularly in the paper and pulp segment, a result of the strong order backlog built up in the recent quarters. In GTD, revenue continues to be impacted by the decline in solar generation business mainly due to the lack of centralized generation projects in 2026. We continue to see positive performance in the business, driven by deliveries of large transformers and substations. The commercial motors and appliance area showed sales growth linked to relevant market segments such as washing machine and compressor manufacturers. And in Tinton furnishes, demand remains strong, spread across different segments with the oil and gas segment standing out. In the external market, demand for short-cycle industrial equipment remained positive in several operating regions with particular emphasis on the strong performance in Europe and in the U.S. in the oil and gas and ventilation and cooling systems. For data centers. Good results were also seen in long cycle equipment such as high-voltage motors and automation panels and action to a healthy order intake contributing to the building of an order backlog for the coming quarters. In the GTD area, the T&D business presented another quarter with a good volume of deliveries in opportunities related to strengthening the electrical grade infrastructure in the United States. In the power generation business, the Marathon Generator business in the U.S. continues to perform well. In addition to the contribution of its European operations. In commercial motors and appliances, demand remained healthy in key regions, particularly in U.S. operations, although revenue growth was impacted by currency fluctuation when compared to the same period of the previous year. And lastly, in paints and varnishes, demand continued to grow, mainly due to the strong performance of operations in Mexico as well as the contribution of Hadasit business. On Slide 6. We show the evolution of EBITDA. The EBITDA margin remains positive and in the quarter of 21.8% supported by a favorable product mix despite the challenges brought talk about by the rising cost of some raw materials, the effect of import tariffs in the United States and the increase in regional expenses, mainly related to the execution of our strategy to our production capacity. On Slide 7, we show the evolution of investments, which totaled BRL 795 million out of which 45% in Brazil and 55% abroad. In Brazil, we continue making investments to expand production capacity in and the constant modernization of low-voltage electric motor factories. In addition to investments to increase the production capacity of large equipment in Jaragua do Sul. And abroad, there was a progress in investment in transformer factories and Colombia and the United States in addition to investments in expanding production capacity in China. With that, I finish my part, and I give the floor back to Andre.

On Slide 8, and before we move on to the Q&A session, I would like to point out the following. At the end of April, that presented its 2025 integrated annual report, highlighting advances in sustainability and showcasing the company's continued evolution in innovation and social environmental responsibility. Finally, I would like to talk a little about the outlook for the year. Demand remains positive abroad. Coupled with strong order or orders for long-cycle equipment, both in the industrial segment and in the T&D business. Despite the challenges of the first half of the year, we remain confident in the more favorable scenario for the return of revenue growth for the remainder of the year, thanks to the strong performance of our businesses and also due to the normalization of the comparison base related to 2025. And finally, we are continuing to execute our investment package for the modernization and expansion of our production capacity in 2026, supporting the company's strategy and continuous and sustainable growth. I end our presentation here. Now let move to the Q&A session.

[Operator Instructions] Our first question comes from Lucas from XP Investments.

I have 2 topics I would like to approach 1 for the short term and the other longer term. Now thinking about the tariff effects, everything has been quite fluid, but I would like you to try to explain how -- what was the difference of impact of the first and the second quarter, so that we understand the differences. And if the -- if the base scenario continues as it is today, how -- can we think about the impact of the impact of the tariff along the year. And I have a second question, thinking about the ramp-up of the new plant. How do you assess the timing of such investment maturation especially talking about some plans and how can we think about the profitability of those units as they move on along the its maturation process, considering the production maturities, thinking about pork methodology, how can we think about the deleverage impact and also considering the beginning of the operations. How can we think about the margin -- during the maturation of the investments that are likely to bring this significant increase in revenues along 2027 and 2028. These are the 2 points.

Lucas, Andre Rodrigues here. Let me start talking about the tariffs, Thinking about the expectations and the comparison of the first and the second quarter, it's worth devoting some time to explain all the changes that happened and what this can cause the WEG. As of yesterday, on July 27, the Section 301 started to be valid at 25%. They are not cumulative when we consider the 232 sessions, which were more specifically applied that would affect the content of higher and copper of the products. And now it's applied to all the products. The scenario of tariffs and the products are tag, how do they stand now Brazil. In a simple way, average -- Mexico is the Section 231 for large transformers and there is a differential above 10 MVA 50% applied and smaller companies 10 MVA of 25% and large-sized motors, 25% in tariff. When we talk about large motors, we are talking about more than 200 HPs. It's important to remember that the over tax of 12.5% is being considered also based on the Section 301. This is caused by allegation of forced labor and covers more than 60 countries, including Brazil. Brazil is included in the group together with Japan, China, India, among other factors as well. The tariff is not likely to impact the product produced in Mexico because this is according to SCA in Mexico. And drags products are produced there. And it's not clear yet if those tariffs is, if the new tariff will be cumulative to the others of the session. If so, if this tariff is applied in a cumulative way, the total tariff may reach 37%. But it's important to remember that now answering part of your question, when we make the comparisons of the quarters, first and second quarter. And up to February this year, the tariffs applied to WEG products coming from Brazil stood at 50%. And we adopted several mitigation measures. So from 50, we moved to 10%, but then we had the 232 that impacted the major life sizer machine, an equipment and then it became 25%. Now considering the constant changes in the tariff scenario, it's really hard to estimate now the impact for the long term. But it's correct to say that maintaining the current tariffs, we are going to have an impact on the consolidated base of the company. Everybody here, at WEG continues working to mitigate all those effects using the diversification of the footprint, global the company reevaluating the commercial strategy as necessary in order to have the met mitigation. The major message is that we are going to continue evaluating the impact and doing the best to mitigate the effect, always in the search for maintaining the competitiveness of WEG.

This is Salgueiro speaking. In relation to ramp-up of the factories -- the question was more focused on T&D. And now going back a little, not to remember the history track. We announced the expansion of practically 100% of what we had in 2023 and 2024. Let's say, 100% on increasing capacity, and we had already added 10% in the last call. And now with anticipation of betting in the middle of the year, we are likely to add more 10%, or 15%. So that will amount to 25% of the original announced capacity. Now in the middle of the year, we are going to have the available capacity already in the middle of the year, which is important to say. And the other 75% be operational at the beginning of next year with a new factory in Mexico and another factor in Colombia. We'd like to remind you that those dates are when the factories are going to be ready and not necessarily is when we are going to be running 100% generating 100% of revenues. So we estimate that we will need a little bit longer in order to make the factory fully operational and be close to the optimized level of 100%. How long is it going to take? It will depend on each of the operations. And also since the margin -- how the margin is going to be, it would depend on each operation. In practice, when we look at the T&D segment, which is running at a positive profitability and the does not show any important downside or downturn in the scenario. Of course, when we're in the process of ramp-up of factories, it's just natural that you should have some costs as we have already seen. And we even mentioned this in the previous call, there was an increase of personnel expense because we are hiring more people. So during the ramp-up, we may have some impact on the profitability. And why is it difficult to estimate because it depends on each individual plant. So it is a factor that is being expanded. So the process is likely to happen more quickly. When we talk about Mexico and Colombia, we're talking about new factories. And it's -- the ramp-up should be quicker depending on the size of the transformer. So depending on the characteristics of each plant, we are going to have a different effect. We estimate that a long 2027. And especially in 2028, we are going to be running those factories at very optimized capacity and profitability level as the -- similar to the operations we run T&D operations nowadays.

Our next question comes from Joao Frizo of Goldman Sachs.

My question is related to the tariff SP138348726 Last year, you said that you increased price twice, one in the beginning of the year and the end of the year the 1 in the was to reflect the tariffs. Since then, there has been a lot of trains in the tariffs. So it may become like 7%. But how have you been negotiating with your clients in terms of pricing adjurment abroad. This is the first question. And the second question is in relation to electric and like electronic equipment in Brazil, who has had a very good performance in this quarter, growing 6% year-on-year. So I would like to understand if this was a result of the projects that we had in the first quarter that is usually stronger, but was weaker and then it moved to the performance to the second quarter? Or is it an advance from the third quarter? Just for me to understand the dynamics down the road?

So will let me go back and talk about tariffs. I've already answered the first part. In reality, it's a very complex thesis. When we approach this topic at because in fact, it involves the production platform in the United States, a production platform in Mexico and production platform in Brazil and other countries as well. We also export others at a lower level. We also -- it's for products to the United States. Each case is valid to the client, and we try to understand what happens with the variations of the price of commodities, for example, such as the case of inflation, as we mentioned in the previous call. All this is evaluated, and we define our strategy according to the need. According to what's happening today in relation to the tariffs and also other points that cause variations such as the price of commodities. In relation to the performance of equipment in Brazil, we saw an acceleration of the revenues in the second quarter second half of the year, by the way. We saw an improvement trend across all the industry, especially for the demand of short-cycle equipment. But I would say that the effect, which is important to mention, and was not usual is that we had the contribution from the long cycle equipment as we mentioned in the release, we saw a very positive performance of Popper in Brazil. So we have some projects in our portfolio. And in the second quarter, we started a delivery a very important project. And this is going to continue along the next quarters. And this is a project that will take some quarters for us to complete all the deliveries. And this contributed to the performance of the second quarter. In addition, there is another factor that we always keep in mind. We have the part of new businesses such as mobility. In spite of the fact that it is a small share when we compare to the total revenues when you compare to the industrial equipment. We see that this is something that has been growing a lot such as powertrain and also the recharge station. And this has been contributing to the stronger growth in equipment in the second quarter.

Our next question comes from Luiza Mussi from Bank Safra.

We saw some positive impact on the line of expenses close to 25%. Could you provide some details about how that happened if we can consider this. and the level that is going to continue for the future. And in terms of price, you mentioned tariff prices. I would like to understand the dynamics of pricing of transformers in the United States. Considering the industry current scenario, how the prices of new contracts have been playing out?

Just confirm the first question because we couldn't hear your audio so clearly.

So the question is about other operating revenues.

Yes, that's right. Considering this group, we had some nonrecurring effect in the first quarter, as we mentioned in the call of the first quarter. In the second quarter, we didn't have any nonrecurring effect. In fact, when we look at the breakdown between expenses and revenues, number is a bit above of what we usually see. But this was a result of some movement of assets in the company that were included in assets and also expenses. So net the effect was almost new. The important variation that we saw in this group in relation to the second quarter of last year was a lower expense with profit sharing and bonuses. And this reflects the result the lower result delivered in this period of the year. So there was nothing out of the usual. There was no nonrecurring effect as we had experienced in the first quarter. So for profitability and recurring margin effect, we do not need to consider any adjustments for the numbers of the second quarter. We are talking about pricing. Nothing changed from the viewpoint of demand for transformers in North America. In general, in all countries. And considering the locations where we operate. This is something done for type project. And as we have already mentioned, today, what we are using for the pricing is the price of commodities. All the agreements that we have, we have very metric formats we evaluate what was the price of the copper, the steel the main component of the transformer. So this is evaluated on a case-by-case basis. And as we said along the time, different from the past when we had a more stronger growth of price, this is not what we have seen now but the level of pricing that we see today in the sector is a level which is very attractive, still very attractive, right?

Our next question comes from Andre Mazini from Citi.

Maybe a follow-up of the different pros pricing. You noticed there is more pricing power with data center client when compared to other clients. Data center clients are appreciating the shortly time more than others, more than price itself as typically. And I would like to know if the product there demanding is changing transformers. Maybe there's a hyper scalers and the state solid transformers that has a technology, which is probably newer since they're trying to find the resources to feed the data center. So the question is the type of product and also pricing for those clients.

Mazine, Salgueiro speaking. So I'll get it speaking. We have some level of exposure to data sales. As we've mentioned previously, in some segments, maybe the which are clearer to us are the sales of marathon alternators for energy backup, transformers that are used in the connection of data centers or grids and we started to see more demand in industrial equipment, especially for pumps and ventilation systems, cooling refrigeration systems. But a does not sell directly to data center. So it's difficult to have this perception at the end. So to understand how the activity is behaving in terms of pricing. What we actually see is a very positive demand. And when we see this positive demand and talking about transformers and longer-cycle equipment. It's not such a long cycles such as T&D. But anyway, the scenario of specification is more favorable for the producers manufacturers.

In relation to the changes of interest infrastructure within the data centers, we have been the discussion to understand what's going on. Basically, what's happening is the migration of the electrical structure into the data center, this is something which is likely to happen in the years to come. And then there would be some demand for different pieces of equipment from the ones that we provide nowadays, one of them is the state solid transformer, which is a transformer, but it's much more likely an energy conversion. It's much more electronic than mechanic equipment as we understand the format to be nowadays. And this has some implications for products and we also see some changes in the demand of equipment. But in relation to breed and connections, this is not something that's going to change. And this is something we're studying and accompanying monitoring, but we have no visibility that any significant change will happen in the long term because this is -- this is business equipment that is in be developed by some players of the market. And it has not reached the commercial scale. And this is something that's happened is likely to happen just in the future. within some years.

Our next question comes from Alberto Valerio, UBS.

I Would like to congrats to you on the results -- and on the improvement quarter-on-quarter. I have 1 question on my side related to the United States tariffs. I remember that in the beginning of the year -- at the end of last year, by the way, we were talking about the 25% of the revenues that you had was divided between the productions of United States exploring Brazil. I would like to know how it stands today. And I would like to know if there has been any change in comparison. And the second one would be relating to the ramp-up of the tin factory. I'd imagine that Mexico has advanced more -- but if you could provide some details on when we could expect the revenues to start coming in, the 10% or 15% that will be ready in the middle of the year. That would help us for us to do the modeling for the end of the year. And congratulations again on the results.

Alberto, let me start to answer your first question, and Salgueiro will add to the second question. It's important to say that VAG is going -- is evolving in different regions. And this share tends to change along the time closer into reality is the following: Everything that is related to the revenues of -- in the United States, 33% is produced and sold in the United States by our local companies. And Brazil is -- has about 20% or 20% of all this related to something which is produced in Brazil and exported to the United States. And this used to be important, such as 2024, which would stand at 30%. So when the tariffs started, we decided to change to increase production in Mexico and also in the United States, and we can see the effect now. And Mexico is a country that is becoming ever more important in terms of supply, 41%, is produced in Mexico and exported to the United States. And other countries have -- there's more share accounting to 4%. So it shows that a longer time, the company has prepared for all those movements in order to mitigate those possible effects of the tariff. The point of the recovery of what has been taxed. We have been monitoring all the topics. We have been adopting all the measures with the competent authorities, but we do not have a time when this is going to be concluded and we'll provide you with the update.

In relation to Betim, in the press answer, I said that the factory is being expanded, and we are going to use the capacity, there's a tuna capacity of this factory to generate revenue, and there is going to be a ramp-up process. the machines there are very relevant. They are very large-sized equipment. So if this is something that is going to help us gradually to add to our revenue, significant achieve but we can expect more of this contribution along 2027.

Our next question comes from Marcelo Motta with JPMorgan. You may proceed, Marcelo. Good morning -- good morning.

I have 2 questions. The first is related to the working capital. There was a little increase in the receivables and also in the stock. I would like to understand how this happened. Okay, there are materials other to accelerate production was just an increase in raw materials. I would like to understand the lines? And also a question about CapEx. Is that an expectation that To invest, you said that is an expectation to invest more than BRL 3 billion million for this year. So I would like to understand that the BRL 3.6 billion are the amounts that are going to be invested for this year? Or is it going to be use also next year.