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Edited Transcript of WEGE3.SA earnings conference call or presentation 24-Oct-19 2:00pm GMT

Q3 2019 WEG SA Earnings Call

Jaraqua Do Sul Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of WEG SA earnings conference call or presentation Thursday, October 24, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Luís Rodrigues

WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board

* André Menegueti Salgueiro

WEG S.A. - IR Manager

* Paulo Geraldo Polezi

WEG S.A. - Chief Finance & Investors Relations Officer & Member of Executive Board

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Conference Call Participants

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* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Augusto Akihito Ensiki

HSBC, Research Division - Latin America Analyst

* Catherine Kiselar

BB-Banco de Investimento S.A., Research Division - Analyst

* Lucas Marquiori

Banco BTG Pactual S.A., Research Division - Research Analyst

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Murilo Freiberger

BofA Merrill Lynch, Research Division - VP

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to WEG's conference call to announce the results of quarter 3 2019. This call is being broadcast, and the slide presentation can be accessed at ri.weg.net. After the call, the audio recording will be available on the same website. (Operator Instructions)

Any forecast contained in this document or statements that may eventually be made during this conference relating to WEG's business perspective, projections and operating and financial goals and for WEG's potential future growth are management's beliefs and expectations as well as information that is currently available to the company. These statements involve risks, uncertainties, and they depend on circumstances that may or may not be present. Investors should understand that the general economic conditions, conditions in the industry and other operating factors may affect WEG's future performance, and these results may differ materially from those expressed in such future considerations.

This conference call will be conducted in Portuguese with simultaneous translation into English.

Today, we have with us here at Jaragua do Sul, Mr. André Luís Rodrigues, Chief Financial and Administrative Officer; Paulo Polezi, Finance and IR Director; Wilson Watzko, Controller; and André Salgueiro, IR Manager at WEG.

Now I turn it over to Mr. André Rodrigues.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [2]

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Good morning, everyone. It's a pleasure to be here for the conference call to announce the results of quarter 3 2019.

Let's start with the highlights of the quarter. Our net revenue grew 3.5% versus quarter 3 2018. The good performance of mature businesses in Brazil along with the growth in our solar power generation business and the growth of the GTD revenues in the external market have supported this good performance, even in a scenario with a lower share of wind power generation and with some times of deceleration of the global economy as seen recently. The details on this performance will be presented by Mr. Paulo later on.

The second highlight was the increase of 18.4% in our EBITDA, reaching BRL 579 million. The EBITDA margin grew 2.2 percentage points, reaching 17.3%. This is a result of a favorable combination of cost rationalization, reduction in our expenses, gains in scale in addition to a better mix of products sold. And finally, we were able to maintain a good level of ROIC.

Now moving on to Slide #4. We have here more details on the ROIC with a growth of 2 percentage points versus quarter 3 2018, reaching 19.2%. The consistency in this indicator in the last quarter reflects the better operational performance of the company demonstrated by the growth in our revenue and improvement of our EBITDA margin, combined with a business development strategy with attractive return on the capital invested and discipline on the use of this capital, demonstrated by the management of our working capital and optimization of our investment program.

Now I turn it over to Mr. Paulo Polezi.

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Paulo Geraldo Polezi, WEG S.A. - Chief Finance & Investors Relations Officer & Member of Executive Board [3]

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Thank you, André. Good morning, everyone. On Slide #5, we see the evolution of our business areas in the different markets. I start by Industrial Electro-Electronic Equipment in Brazil, a segment in which the sales of short-cycle equipment still present a very good performance with highlight to serial automation equipment and low-voltage electric motor, which has been showing continued improvement in the last quarter. Also in this quarter, we saw a concentration of the sales due to the new regulation of energy efficiency for electric motor, which is in force in Brazil since September 1.

Another highlight was an improvement, however discrete, of the demand for long-cycle equipment, automation panels and high-voltage motors destined to a specific segment, such as pulp and paper, oil and gas and mining. This improvement is still based on the maintenance of current assets.

The GTD market in Brazil is still reflecting the lower share of wind power generation project. However, on the other hand, solar power generation and transmission and distribution still have a positive contribution, especially for products in connection with the auction held in recent years.

In motors for domestic use, we still see a good performance of our revenues since the beginning of this year in Brazil. And this is mainly due to an increased share in important segments of the market, such as washing machines and air conditioning.

For paints and varnishes, the good performance is mainly due to the increased share in different markets and strategic customers as well as maintenance projects in important industries, such as oil and gas.

Abroad, we can see a consistent demand for long-cycle equipment focused on capacity increase projects and construction of new manufacturing plants in important industries for WEG, such as oil and gas, mining and water and sanitation. For short-cycle equipment, we start to see some signs of deceleration coming mainly from Europe and Asia, which has an impact on the sales of low-voltage motor and serial automation equipment.

For GTD, the greatest contribution was for transformers, particularly due to the synergies observed between operations in the United States and Mexico and the good number of orders for our generator plants in India and also in the U.S.

In motors for domestic use, despite the lower revenue of our operations in China, we were still able to increase our share in some customers in the U.S. and Argentina, despite the problems faced by the economy of these countries.

In Spain, the growth in the revenue results from a constant pursuit for new customers and a gain in share in countries in Latin America.

Slide #6 shows the evolution of our EBITDA for quarter 3 2019. It went from 18 -- it grew 18.4% versus quarter 3 2018. The EBITDA margin closed the quarter at 17.3% with an evolution of 2.2 percentage points versus quarter 3 2018. This reflects the cost rationalization, reduction in expenses, change in scale and a more favorable mix of products sold due to the lower revenue coming from wind power generation with lower operating margin.

Finally, Slide #7 shows our investments in terms of CapEx for the past quarter. In quarter 3 2019, investments reached BRL 134.2 million, of which 37% were invested into Brazil and 63% to production units abroad. This number grew compared to quarter 3 2018, mainly due to the progress in our investments in the first (inaudible) operations of WEG outside of Brazil, which is now in its final stages of construction in Mexico; and a new plant in China, expanding the capacity to assemble industrial motors and first-line automation products.

Now I turn over to André.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [4]

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Thank you, Paulo. To finish this presentation before we start the question-and-answer session, I would like to highlight some recent achievements and our prospects for the rest of the year.

We recently announced the acquisition of 2 new businesses, continuing the company's strategy to develop its digital business area, thus increasing our offer of solutions for the 4.0 industry. In September, we announced the acquisition of PPI-Multitask, a company specializing in MES solutions, IoT and software for the industry. And in the start of this month, we announced the acquisition of the -- of company V2COM, specializing in IoT and telemetering solutions.

Also this month, we announced the continuation of our partnership with Volkswagen trucks and buses to manufacture this first light-duty truck in Brazil, 100% electric, the e-Delivery. WEG will be one of the participating companies in the e-Consortium. We will be responsible for supplying the powertrain system, which is made up of an electric motor and a frequency inverter.

Also yesterday, we announced our investment in the new electric engine manufacturing plant in India, a very promising market, which further strengthens our presence as a global player in low-voltage electric motors.

And finally, I'd like to reaffirm that our expectation for 2019 are still the same. We will continue to grow our revenue, however, at lower levels due to the known reduction of our wind power generation project. About operating margins, we expect to see an evolution in our EBITDA margin versus 2018 due to the better performance of mature businesses in Brazil and the better profitability of our operations abroad. The maintenance of a good ROIC is supported by the growth in our revenue and EBITDA margin this year.

We can now start our question-and-answer session. Please, operator, you may proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Rogério Araújo from UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [2]

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Congratulations for the results announced. I have 2 questions. The first question is about the new energy efficiency regulation. Could you give us more information? First, if it will apply to all low-voltage electric motors, including white line appliances? And how did the prepurchase movement take place? Did it help the results of the quarter? Could we expect a drop in sales due to this prebuy? And does that have any stock? Because as I heard, you continue -- you were planning to continue to sell into February. So what should we expect for the first quarter next year? This is my first question.

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Unidentified Company Representative, [3]

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Okay. Let me tell you a little bit about the impact, try to answer your question. Yes, we did have a concentration of our revenue this quarter due to anticipation of orders due to the change in the regulation. The new regulation is the IR3, replacing the IR2, which is known as premium motors. And the sales -- the deadline for the sales was August this year.

The new regulation ends up inciting a greater search for IR2 motors in the market because although they can no longer be produced, they can still be sold until February 2020. So you ask whether this is applicable to all motors? Yes, it is applicable to all motors, except appliances. Appliances are not included.

For a little bit of the impact, we saw a growth of about 19% in this business area this quarter in Brazil. If we were to normalize this, excluding the IR3 effect, we could say that we would still be growing at 2 digits in the domestic market in this business area. And in respect to the coming quarters, of course, that we have some stock because we were anticipating this movement. So until February, we should see some remaining effects of all this but only in what relates to sales. So we have 2 quarters ahead of us, quarter 4 this year and quarter 1 next year. But we always look at sales on an annual basis, so we should see some changes in our revenue this next quarter but not much distant from what would be sold if that hadn't happened.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [4]

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And about the ROIC. In the conference call for quarter 2 2018, you talked about an expected sustainable ROIC of about 15% to 17%. However, we have seen an increase since then. It's now at 19%, but we still haven't really seen a recovery, a relevant recovery of investments in Brazil or a relevant improvement in long-cycle investments, neither here or in the rest of the world. So what explains this surprising ROIC versus what the company expected? Is it one factor or a mix of factors? I'd like to know. And I'd like to know what is the expected ROIC for the coming years, a sustainable ROIC. What do you have in mind? If you consider -- even considering that investments in Brazil will recover over time. So I'd like to know more about the expected ROIC for coming years.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [5]

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Rogèrio, this is André. About the ROIC performance, we have seen an improvement in the last 3 quarters. We know that this is due to our strategy to invest in new businesses with attractive returns, some operational factors, which we haven't seen the impact of now, such as the gains in scale, efficient allocation of capital. This is what has been supporting the growth in our ROIC in the past quarters. The profit has been improving our results in general, and this all comes along with our discipline, better allocation of the working capital. This all have been really helpful to these positive results. When we started the year, we were expecting to deliver an attractive ROIC, and it's even better than we expected.

For the coming years, we still have some very positive prospects. The ROIC level that we consider reasonable for the company is about 15% to 17% like you said -- like we announced in 2018, so something around that level. A higher ROIC -- we know that we have strict discipline on investments, long-term investments to see growth in the future. So it is possible that in the future, we will be able to allocate more investments to support our growth in other businesses. For example, we just announced yesterday the low-voltage electric motor plant in India to continue with our growth strategy in foreign markets. So of course, this is the main performance indicator of the company, the ROIC. So it's going to be our focus in coming years. And if we can support it at higher levels, higher than the expectation, it's even better. But it's difficult to give you a forecast in the long term of the numbers that we can reach.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [6]

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All right. Just like to here follow up about the ROIC about your investments in the 4.0 Industry and that becoming perhaps a software provider, a software company in the future.

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Unidentified Company Representative, [7]

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Rogério, these were small investments, and the share that these investments have in the company today are still very small. But they are going to become relevant in the future. These are companies that have good profitability, good returns. However, for now, the impact on our consolidated ROIC is marginal.

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Operator [8]

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The next question is from Mr. Alexandre Falcao from HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [9]

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Could you tell us about the report that was published a few days ago talking about investments in distribution, transmission? Will this change your expected results? I know that these results are divided between the coming years, but should we be -- can we be more excited in terms of long cycle from now on? And also about the voltage station -- the voltage-lowering station, can you talk about these 2 verticals a little bit more?

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André Menegueti Salgueiro, WEG S.A. - IR Manager [10]

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Mr. Falcao, this is André Salgueiro. Yes, about transmission and distribution in Brazil as a whole, particularly the auctions that we had in the past 5 years, we had a large volume of investments being allocated to this industry in Brazil through different transmission lines that are planned to be built as well as substations in the coming years. So the prospect for this segment is very positive for the market as a whole and also for WEG. So since the beginning of this year, we have been expecting improvements in this business unit with very good prospects for the next 2 or 3 years. This is the overview for GTD.

About the EPS announcement, this shows the expectations for this industry in the mid and long term. We should continue to see investments coming to this market, and we have a very good position in Brazil with a complete solution in terms of transformers. I think we're the only player that can manufacture the whole line of transformers for substations. So we are very well positioned to make the most of the opportunities that will arise in the coming years in this market.

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Operator [11]

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The next question is by Catherine Kiselar from Banco do Brasil.

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [12]

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Congratulations for the results. My first question is about the power lines that you talked about, T&D operations in the U.S. and Mexico. Could you quantify this business so that we can better understand these gains? And then I have a second question to make.

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Unidentified Company Representative, [13]

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Your audio wasn't very good, so let me just make sure that I understood. The first part of your question is about T&D in Mexico, is that right?

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [14]

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Yes. Let me ask my question again. Is the audio better now?

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Unidentified Company Representative, [15]

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Yes, it's better.

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [16]

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So my question is about the gains in synergy that you mentioned. So the gains in synergy in the T&D operations in the Mexico and the U.S., could you please quantify these gains?

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Unidentified Company Representative, [17]

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Yes, Catherine. We have indeed reported a considerable improvement in the profitability of our operations in Mexico and the U.S. And certainly, the acquisition that WEG completed in 2017 was the main driver for this improvement. We recently started selling large transformers produced in Mexico. We've always had this capacity to produce in Mexico, but we didn't really have a sales channel established in the U.S. So this acquisition in 2017 allowed us to start the sales. The first thing is that now we can allocate the products that we produce in Mexico and sell them in the U.S. through this new operation. And in the U.S., this company that we acquired was already a leader in this market for renewable energy. So this puts WEG at a very good position in this market. And finally, this has also translated in profitability. This business had a very low margin for us. But now after these changes, we have some very good expectations for the future.

There is another factor related with the synergy, which has many of the components that was supplied by the American market and American companies are now supplied by our operations in Mexico. So it's a combination of all these factors that increases synergy, improves profitability. And WEG has been gaining share in the U.S. in this business area.

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [18]

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My second question has to do with costs. We see some gains in terms of cost reduction, increased productivity. And we heard all about the initiatives that you designed and are now putting into practice. This cost level, is it sustainable? Can we expect further improvement in the future? What can we expect for 2020?

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André Menegueti Salgueiro, WEG S.A. - IR Manager [19]

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This is André Salgueiro. Thank you for your question. In respect to costs, a large portion of our cost is related with materials. And within the category of materials, I think the main one is metals, which covers aluminum and steel. And of course, the prices will vary according to market characteristics. Of course, we have some hedge mechanisms to ensure some predictability of the costs. But we are subject to the macro movement of these costs, which takes place globally and end up impacting our costs in the midterm. This is something that we don't really have much control over. Although we do have scale and bargaining power with some suppliers, the prices of these commodities will fluctuate according to macroeconomic trends and global growth. We will be monitoring everything from here.

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [20]

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Now following up along the lines of the previous question, we've been hearing about, well, about contracts and business prospects. Do you have a positive outlook? I'd like to hear from WEG.

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André Menegueti Salgueiro, WEG S.A. - IR Manager [21]

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It's like what I said in my previous answer, the prospects for transmission and distribution are very positive for the coming years due to all the auctions that were held and all the investments that will be injected into these projects in coming years. And what we can see in our orders is that our order base is improving year after year. So we have very good prospects.

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Operator [22]

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The next question is by Lucas Marquiori from BTG Pactual.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [23]

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Congratulations. I have 2 quick questions. I have a question about the project in India. Can you tell us more about the opportunities that you see in India and whether the purpose of this project is to supply to Oman's refinery, the demand that comes from the Oman refinery in the Middle East? Would that be feasible? And would that be the purpose of this new plant in India?

And about the e-Consortium with Volkswagen, my second question is about that. Could you explain at which stage this is? Are you already in Resende? Is Volkswagen already selling or negotiating contracts for the e-Delivery in addition to the [WEG] contract? Or is this still under development? I'd like to hear the status of the project.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [24]

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Lucas, this is André Rodrigues. About the plant in India, let me tell you how this started. We've been in India since 2011. We were able to acquire a plant there. And since then, we've been increasing our market share for this category of products in India. And why did we make the decision to purchase this new plant there? For low-voltage motors, it's still a very interesting market. We are talking about a market that is similar in value to the Brazilian market with very good prospects for the future. We can't forget that India is still investing a lot in infrastructure, and irrigation is a very important industry in that country. We are well structured in India. This Indian unit already has 800 employees. When we built it, we bought a very large piece of land. And we decided that now it was the right time to build a low-voltage motor manufacturing plant, which should start its -- or which should start in the beginning of next year. We are now in the project stage. And in 2021, we plan to start operating to develop this business, which is the main business of WEG globally. And now we're entering a new country with many growth opportunities. And no, this has no relationship with the Oman project. The Oman project is more recent. It's something that will happen in the short term, and this plant will only be ready to operate in 2021. For the Oman project, we plan to supply different types of motors, specialty motors, for example, the explosion motors come from Portugal. A part of them will come from Brazil. A part of them will come from China. And in China, we will be much more focused on the Indian market. This is the plan for now. And about the e-Consortium, there was an official announcement, and WEG is now officially part of the e-Consortium. This is a continuation of the partnership with MAN Latin America to manufacture the first 100% electric truck in Brazil. So WEG is one of the companies in this project. And it will have shared responsibility in assembling these trucks in the Resende plant. And it will supply the powertrain system, which is the electric motor, the frequency inverter and also electric motor inverters for accessory systems, auxiliary systems. The -- Volkswagen expects to start selling these trucks in the end of next year 2020. They already have orders for 1,600 units of a company -- these orders are from a company that tested the e-trucks for 1 year. And now after this formal announcement, the commercial development stage will begin. Of course, they will not sell to one customer only. They will open this for the market. And this plant in Brazil will be a platform for exports as well, export of these trucks. So now we start to see the concrete execution of something that was only a project in the past, but now it's formally announced and formally started.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [25]

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So in addition to this company that tested the trucks, you don't have anything consolidated so far? You don't have any concrete sales?

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [26]

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No. Volkswagen is in charge of sales. And for now, we only have these orders for a certain number of units for one company.

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Operator [27]

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Next question is from Joshua from Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [28]

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Actually, my name is Lucas Barbosa. Congratulations for the results. My question is about Industrial Electro-Electronic Equipment in the Brazilian market. I'd like to understand whether you've seen any price increase for serial products, particularly for IR2 motors. And if you have any expected price increases in the future.

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Unidentified Company Representative, [29]

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Lucas, thank you for the question. In this quarter, we didn't see any changes in prices here in Brazil. However, the product, which has a level 2 efficiency versus level 3, because level 3 has -- it is manufactured a different way and the costs are higher, that's why the price is higher. And the market knows this, that's why we have more demand for IR2 motors at this moment but not necessarily because of any changes in prices. And WEG, once a year, usually in the beginning of the year, we review our prices to [pass on] the costs of the previous year. So we update our prices once a year at the start of the year, and this hasn't changed. That's the plan for next year as well. In the beginning of next year, we will assess the impact of inflation and the costs of our materials to see if we need to adjust our prices. This has no influence whatsoever by these things that you mentioned.

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Operator [30]

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Next question is from Mr. [Daniel Solomon, Argo Capital].

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Unidentified Analyst, [31]

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I'd like to go back to the costs to understand if that gross margin gain that you showed comes 100% from raw materials as you said in your release or is there any impact of a greater cost dilution due to the concentration of sales in IR2 motors as we saw in the quarter. So can we expect a similar cost level and gross margin for the next quarter? And the second question, still about costs, how long will it take for us to feel the effects of materials? So where is the lag if we have an increase or drop of prices of copper or aluminum, for example?

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Unidentified Company Representative, [32]

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Daniel, thank you for your question. Yes, indeed, the main driver of costs -- main driver of the gross margin this quarter was costs. But actually, it's a mix. And the best way to understand the impact on WEG's margin this quarter is the combination of different factors. Let me give you some more details. We have mature businesses in Brazil, particularly for automation and power generation. These businesses have been showing more efficient and profitable operations, so this is one of the wins in Brazil.

Also, and this has to do with your -- with the previous question about the operations in the U.S., our foreign operations are also better with highlights to our U.S. operations with transformers. So we have a better margin there, which improves our margin here. And the third factor is a mix, the product mix, which has 2 components to it. The first one you know, which was the lower number of wind power generation projects, which had a much greater representation, representative in our portfolio last year. We know that the net margin of these businesses is lower. However, the ROIC is very good. But now we have fewer projects of this type. And the second factor is a large concentration of electric motors due to that effect of IR2, IR3. And this type of equipment also gives us a good margin.

And finally, we had a positive effect on the SG&A expenses, which dropped 5% versus last year. So it's a combination of all these effects. And costs were helpful, but the improvement in our foreign markets and improvement in the product mix were also good highlights. And the second part of your question, as we see this volatility in prices or costs and how long does it take for them to impact our results, well, that is a diversified company. But for mature businesses, I'd say that in a 1 year time, the effects can be seen in our businesses.

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Unidentified Analyst, [33]

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Okay. So your expectation in terms of margin, provided that you still have a positive perspective for these mature businesses, you expect to maintain the margins at a slightly higher level than in the first half of the year, for example?

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Unidentified Company Representative, [34]

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Well, it's complicated to predict the behavior of our margins in the future. But I think that they should stay at that level at the average of this year. Of course, that will depend on other economic factors that we cannot predict, but a good reference was the average that we had over the course of 2019.

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Operator [35]

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The next question is from Rogério Araújo from UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [36]

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I'd like to know your thoughts about the auction last week. I think the start of operations is planned for 2025. So what were your impressions about the relevance and the price of the wind power and solar power in this auction? And about the time frame for investments, did you have any contract with the winners? And I'd like to hear your impressions about the auction.

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Unidentified Company Representative, [37]

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Rogério, thank you for the question. Let me give you an overview of what happened in the auction and what it means for the market in WEG. For our business, the auction was very positive because it points to an increase in the demand for power in our country. So this is the first thing that we can see clearly about the auction. Also, there is this positive expectation about the resumption of investments in capital projects, which are closely linked to auctions in general. So a little bit of the figures of this auction, 2.9 gigawatts of installed capacity and about BRL 11 billion of total investments.

Linking this to our solutions, let me start with wind power. Wind power saw a recovery in price. It was sold at about BRL 99, which is better than the last -- the previous auction. In total, they talked about 6 projects, BRL 4.5 billion in terms of opportunity. And for WEG, we quoted with some customers. We didn't have any previous contracts signed. And for most projects, we have not really defined a supplier, so we're still looking for the best opportunities for wind power. We have a very up-to-date machine of 2.4 giga, which allows us to compete fairly in the market.

About solar energy, the price was also better than in the previous auction. They talked about 4 projects, BRL 2.1 billion in total. And in this case and similar to wind power, we talked to some customers. We didn't really sign any precontracts, but we have a very positive track record with solar power plants. And we can also go after contracts in this area, in this sphere because we know that most of the projects have not yet defined their suppliers. And for hydropower and thermal power, in this case, WEG is somewhat better positioned. We saw a recovery in average prices. For hydropower, they auctioned 27 projects. We are able to supply to 25 of them based on our product portfolio. These 25 projects are for PCH and [TGH]. And within these units, 4 of the projects were already -- they already defined that they're going to use WEG equipment. And for the other ones, we are now working on quotations. We have a real and very good real chance of supplying motors and turbines for these projects.

Also, natural gas, 3 projects, BRL 3 billion. In the case of natural gas in our portfolio, we don't have solutions to be -- directly supply to large thermal power plants, but we have a good chance in smaller projects and we're going to focus on those. And for biomass, they auctioned 6 projects, nearly BRL 800 million. And in this case, we are very well positioned with a great chance of taking part in practically all the projects. And of the 6, in 3 of them, we already supply to the companies. We are their supplier already and 3 of them, we are now negotiating. So in general, overall, this auction was very positive for the market, for the country and for WEG. And it will certainly give rise to many good opportunities.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [38]

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Okay. And can you talk a little bit about the time frame of these investments, when we're going to see the revenues from these projects?

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Unidentified Company Representative, [39]

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Well, that varies project by project. Usually for solar power, we will see the results faster and also for biomass. And the ones that will take the longest are for PCH and wind power. So starting next year, we will start to see the results of these opportunities, and that should last for 6 years in the future. But it varies a lot. It's very difficult to predict, but they will be seen in a time frame of 5 years, I can say.

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Operator [40]

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Next question is from Augusto Ensiki, HSBC.

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Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [41]

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I have a question about Internet of Things and software programs. Can you tell us more about the strategy in this market?

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Unidentified Company Representative, [42]

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Augusto, thank you for your question. What was the rationale for these buys? It has to do with the recent creation of our digital business area, which allows WEG to offer solutions for the 4.0 Industry. In simple terms, the 4.0 Industry has a pyramid of solutions, and the first tier encompasses all the sensors. We have a lot of products in this area, and the latest one developed was the Motor Scan, which is a chip that you put in your motor and you can measure temperature, vibration, rotation.

The 2 acquisitions come as a solution for the next 2 tiers of the pyramid, the communication and protocols tier through V2COM. The main product of V2COM are hardware and software solutions related with connectivity and IoT platform services with a complete range of solutions for telemetering, for power systems and connection to the Smart Grid, which is a product that we already manufacture.

The next layer is -- so you have sensors and communication protocols, and the next layer is manufacturing system management. That's where PPI-Multitask comes into play, which was the first acquisition that we announced in the end of September. And the main product of PPI is the MES, the Manufacturing Execution System, one of the most renowned corporate systems integration software.

So first, you have a sensor, then you need to extract information that the sensor measures. Then you'll use equipment and telemetering solutions. And then you have to send that information to a control and management software, which is the MES. This demonstrates that this is a great start. We just started, but we are already very well structured in terms of our strategy and our ability to provide a complete range of solutions, a complete offer of products and services. So this is the focus, at least in this early stage because when we talk about digital solutions, we're talking about a universe that has solutions of different types, different sizes. And WEG, the purpose of WEG in this sense is to make the most of the businesses in this area, offering complete solutions for our manufacturing customers. This was the rationale for these acquisitions. We may have more acquisitions in the future if possible. We have been studying many options, but we are going to keep to our scope and to the strategy that we have been developing so far.

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Operator [43]

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The next question is by Murilo Freiberger from Bank of America.

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Murilo Freiberger, BofA Merrill Lynch, Research Division - VP [44]

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I have 2 questions. I'd like to know more about this global deceleration and how you see the impact on the main market, particularly international markets, and how this could impact the speed of expansion of international revenues in the coming quarters. And also, the company has a relatively low market share in these foreign markets, so maybe you won't see such a large impact. So could you give us more insights in this sense?

And also, this is something that you already mentioned, but I'd like to know about distributed generation. I'd like to have an idea of what is the pace of growth, your prospect for the future. I'd like to hear about what we can expect, how big this can get in your activity because we know that the GTD has the highest potential for revenue generation in the mid- and long term. So these are the 2 questions that we have.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [45]

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Murilo, thank you. This is André Rodrigues. So I'm going to answer your first question about the signs of global deceleration. Yes, that's what we have been seeing, particularly in the last 2 months, which is a change of the trends that we have been reporting until the second quarter this year. This global movement is much more concentrated on short-cycle products. As you know, we have a lower visibility of our customer base for short-cycle products. The visibility of 2, 3, 4 months at the longest. This is what we can see and predict.

But the demand for long-cycle products is still good. It's still positive. The demand encompasses projects for construction of new plants in the industries that are important for WEG, such as oil and gas, mining and water and sanitation. And also, we must remember that the decision-making for these projects took place 1 or 2 years ago. That's why they are not so impacted by this global deceleration right now.

And even with the first signs of a slowdown, it's important to say that in local currencies, we saw a growth of 2% to 3% in the first half of the year in the main regions where we operate. And as you mentioned in your question, we are on a continuous process of market share gain in different segments, different markets, different products. That's why sometimes we don't really feel these macroeconomic effects as intensively as we would.

These global signs of deceleration, I prefer to look at the cup half full. I'm sure that that still has a lot of opportunities. We have been announcing some important international agreements, deals or markets in which we didn't use to have participation. For example, the Oman refinery was one example. Also the contract for replacement of low-efficiency motors in Europe. We are now going after markets, looking for important markets such as India. We are building a structure there. So I think that WEG, because it has a smaller share in businesses, international -- some international business, we end up having more opportunities and not feeling so much of the impact of this global deceleration.

And about solar power, André is going to answer your question.

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André Menegueti Salgueiro, WEG S.A. - IR Manager [46]

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About GD, we know that GD has been a good surprise in the past quarters. Not just for WEG but also for the entire market. Everybody knew about its potential, but nobody had foreseen that it would develop at this pace. So we are having another year of good performance for solar power generation, particularly distributed generation. As we said in previous calls, we have a very good position for this type of project. We have a very favorable position for the development of this type of business. We have a business model that we think works really well. We work through integrators, so we don't work selling directly to the end customers. And this is also another positive factor. And we are also investing to be even better positioned in this segment. Our latest announcement was a new warehouse close to the Port of Itajaí in the state of Santa Catarina with a greater installed capacity to be able to separate these projects and to keep supplying to an increasing demand in the GD market. Of course, there is a regulatory issue, which is now being discussed in a public audience of our authority or energy authority. We should have an answer for that next March, March next year, focusing on some particular customers with a greater focus on remote generation or customers that have those mini solar power plants in their private properties. It is important to stress that our current revenue in GD, most of it, comes from small retailers, small generation, which is not so affected by regulatory changes. So we keep our positive prospect for the future, and we expect to have very good opportunities in this segment in the coming years.

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Operator [47]

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We are now closing the question-and-answer session. Now I turn back over to Mr. André Rodrigues for his final remarks. Mr. André, you may proceed.

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André Luís Rodrigues, WEG S.A. - Vice CEO, Chief Administrative & Financial Office, IRO and Member of Executive Board [48]

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So once again, thank you very much for being with us for the announcement of our results in quarter 3 2019. And I'd like to wrap up by reinforcing the invitation that we recently made through our mailing list and our IR website. We're going to have the WEG Day on November 22 and November 28 and 29 in Jaragua do Sul, and I hope to see you there. Thank you very much, and have a great day.

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Operator [49]

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This conference call is now closed. Thank you very much for participating, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]