WEG S.A. (OTCPK:WEGZY) Q3 2022 Earnings Conference Call October 27, 2022 10:00 AM ET
Andre Rodrigues – Chief Financial Officer
Andre Salgueiro – Finance Director & Investor Relations Officer
Conference Call Participants
Lucas Laghi – XP Investimentos
Daniel Gewehr – Santander
Renata Cabral – Citigroup
Victor Mizusaki – BBI
Regis Cardoso – Credit Suisse
Lucas Marquiori – BTG
Marcelo Motta – JPMorgan
Lucas Barbosa – Santander
Good morning and welcome to WEG’s Earnings Conference Call for Q3 2022. We inform that this conference call is being broadcast online ri.weg.net, where the slide presentation can also be found. And after the call, the replay will be available on our website. [Operator Instructions]
Any forecasts and the documents or any forward-looking statements that may be made during this conference call relative to future events to the company’s business perspectives, operational and financial projections and targets and the potential future growth of WEG are based on beliefs and expectations of the company’s management and based on information currently available to the company. These forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry factors and other operating factors may affect the future performance of WEG and lead to results that differ materially from those expressed in such forward-looking statements. We would like to remind you that this conference call is being conducted in Portuguese and we have simultaneous translation into English.
Today, here in Jaragua do Sul, we have with us Mr. Andre Luas Rodrigues, Superintendent for administration and finance; Andre Menegueti Salgueiro, Finance and IR Director; Wilson Watzko, Controllership Director; and Felipe Scopel Hoffmann, IR Manager.
Mr. Rodrigues, you may proceed.
Good morning, everyone. It’s a pleasure to be here with you for another earnings conference call for WEG. I’ll start with the quarter highlights. Our net operational income grew 27.6% year-over-year. The consistent performance of this growth was a reflection of good demand, combined with our capacity to maintain good availability of supply of our products and services, leveraging opportunities for growth in the markets where we operate. In Brazil, we had strong growth, resulting both from our industrial activities, mainly motivated by businesses related to global commodities as well as the generation transmission and distribution segment, leveraged by the wind power, solar power and transmission and distribution projects.
In the external market, we saw an industrial activity that was heated up and supported the revenue increase in our main markets with highlights for the demand in oil and gas, mining and water and sanitation. The EBITDA was BRL1.6 billion, growing 37.1% year-over-year. The EBITDA margin closed the quarter at 19.8%, growing 1.3 percentage points considering the same period last year. During this presentation Andre Salgueiro will give you more details about our performance. And finally, our ROIC, as we can see on the next chart, reached 27.9%, a 3.4 percentage point decrease year-over-year and this was mainly due to the increase in the capital invested, explained by the greater need for working capital and investments that we had in the last quarters. On the other hand, it’s important to highlight the increase â€“ the one percentage point increase quarter-over-quarter, supported by the growth of our revenue and operational margins.
Now, I turn the conference over to Andre Salgueiro.
Thank you Andre. Good morning, everyone. On Slide number 5, we have the evolution of our business areas in the markets where we operate.
In Brazil, the performance of industrial electro-electronic equipment showed an evolution resulting from a good demand for short-cycle equipment such as electric motor, reducers and serial automation equipment with highlight to agribusiness and mining. We also saw good demand for long-cycle equipment, particularly dose destined to projects in paper and celluloses and pulp and paper and oil and gas. In GTD, we saw an increase in all our businesses in Brazil. In generation, the highlight still goes to the high level of sales of distributed solar generation, the delivery of new aero generators and the increase in alternators and thermal generation.
The T&D business maintained good revenue volumes driven by large transformers and substations for projects connected with transmission auctions, combined with the sales of transformers for distribution grids. In Commercial and Appliance Motors, we had a continuation of the increase that we saw in new orders for appliance motors after the culmination of the market that we observed in the last quarters. The revenue increased quarter-over-quarter with better demand for commercial motors for applications such as water pumps and also for appliance motors, particularly those who are washing machines.
Finally, the demand for paint and varnishes kept the same level of high sales, mainly supported by agribusiness and Infrastructure segments. In the external market, segments like oil and gas, mining and water and sanitation continued to contribute to the good performance of our industrial electro-electronic equipment division with highlight for short-cycle equipment, such as low-voltage electric motors. We continue with a good number of orders despite the oscillations in the entry of orders observed during the quarter, notably some European countries. In GTD, the revenues again had the typical oscillations of long-cycle businesses, particularly after the delivery of important T&D projects in Colombia and South Africa and the steam turbines in Europe during 2021.
On the other hand, we advanced with the increase in the utilization of our capacity of the new plant, the new transforming plant in the U.S., leveraging the opportunities present in that market, particularly when it comes to the sales of transformers for renewable energy generation parks, wind power and solar power. In Commercial and Appliance Motors, we saw an increase in our revenue with an increased share in the markets where we operate. In paints and varnishes, exports from Brazil to Latin American countries and the sales of our operations abroad contributed to the growth we saw this quarter.
Slide 6 shows the evolution of our EBITDA in Q2 — Q3 2022, with a 37.1% increase year-over-year. The EBITDA margin closed the quarter at 19.8%, 1.3 percentage points higher than last year. This result is a reflection of the better margin of some of our important operations abroad, a better occupancy of our productive units and the reduction of the cost pressure observed in the last quarters.
Finally, on Slide 7, we show the evolution of our investments. In Q3 2022, we invested BRL326.7 million in modernization and expansion of our productive capacity, machine and equipment and new products, whereas 50% of these investments were destined to our production units in Brazil and 50% destined to our industrial parks and other facilities abroad.
I stop here and I turn the conference over to Andre now.
Thank you, Andre. Before we open for questions, I would like to go over some of our most recent achievements and talk about our prospects for the rest of the year. In respect to our achievements, I’d like to give a highlight to the recent occurrences. WEG was elected for the eighth consecutive time, one of the most innovative companies in Brazil by the Valor Inovae [ph] Award 2022.
In August, we announced the acquisition of the Motion Control — acquisition of the Motion Control business unit of Gefran, an Italian company that manufactures industrial automation equipment for BRL23 million. We also announced investments to expand our production capacity in industrial motors and electric traction motors in Brazil in a total of BRL660 million to be invested over the next three years. The project will be conducted in our manufacturing park in Jaragua do Sul where the headquarters of the company is and will increase in up to 25% the current production capacity for industrial voters. And we announced that carbon neutral program, defining global targets for decarbonization and reduction of greenhouse gas emissions with the purpose of reducing by 52%, the greenhouse emissions by 2030 and reached neutral net emissions by 2050.
And finally, about our prospects for the rest of the year. First, the positive demand and important businesses such as renewable energies and key industrial segments such as water and sanitation, oil and gas and agribusiness, together with a good portfolio of long-cycle products that we already built, all this should contribute to an increase in our revenues in Brazil and abroad. The second point is about the improved operational performance that we are observing, combined with the lower cost pressure which should contribute to good profitability in 2022. But on the other hand, we will remain attentive to the global macroeconomic scenario and any potential risks and volatilities. And the main — and this is the main point of attention for next year. I will stop here.
And please, I think now we can open for questions.
Ladies and gentlemen, we will now open the floor for questions. [Operator Instructions] The first question is from Lucas Laghi, XP Investimentos.
Andre Rodrigues, Salgueiro and Felipe, congratulations for your results. We have two questions, two points that we want to explore further with you. Two things that were really striking and actually above expectations. One, the growth of your revenue when we compare year-over-year and also quarter-over-quarter and the margins which were also very strong. So let’s start with the revenue. I think that was the foreign exchange factor when we compare with Q2. But also, the industrial electro-electronic segment was very strong, both in Brazil and abroad. So what is the driver of the sequential increase in your revenue that you reported in Q3? Was there any concentration in long-cycle projects, both in Brazil and internationally that could have been a one-off factor contributing to this increase in your revenue? Was there a better response in terms of market share gain?
Because we saw that North America also performed really well. So my first question is I want to understand better what are the factors in addition to the foreign exchange factor which factors could explain the good performance of your revenue in Q3 compared with the last quarters. And my second question is about your margins. We were expecting to see a reduction in the raw material cost pressure. You had been reporting a unit revenue that was already reflecting the drop in commodity prices but the costs were still a little higher. But can you say that a great part of this improvement in your margin was because of this better marriage between unit cost and unit revenue? Or is there any stock gain that we can expect in Q4 thinking only of the raw material effect should we consider this margin at a normal level looking forward? So these are my two questions about the increase in your revenue and also the sustainability of these margins looking forward.
Lucas, thank you for your question. This is Salgueiro I’ll answer your question about the revenue and then Andre Rodrigues is going to answer to your second point about the margins. Yes, indeed, the revenue increase was really strong. And sequentially, it was very relevant again. And what was really striking was that GTD continues with a very good growth rhythm. And what we was really striking this quarter was the point that you raised the industrial after electronic equipment, both in Brazil and abroad. And in practice, I think these are the points that we covered in our presentation. The demand in Brazil is still very heated and in short cycle, it’s very poverized with highlight to every business and some other segments, mining. But very broadly, the industrial demand as a whole is heated.
And it’s important to highlight that we are gaining market share and some products here in Brazil, particularly in automation of reducers. This is included in industrial electric, electronic equipment. And we also have all the new businesses that are being developed and they are still under this business unit. So the recharge stations, electric mobility and digital business which are still incipient but when we put them all together, they end up contributing to this increase in our revenue and to our good performance. So this explains our performance in Brazil.
Now when we look at the international market, there is a foreign exchange effect, of course but we are still seeing good demand in the main regions. So North America, as you could see, we had good performance and very relevant growth in Q3. It is a region that’s still demanding a lot of short-cycle products and also projects for paper and pulp and oil and gas as well so this has been helpful. And we are talking about our gain of share. We can’t really say that this is already a result from our Motion drive strategy. But I’d say it’s more linked with our strategy to anticipate the problem in the global supply chain and prepare in terms of stock and be ready and prepared for this situation and having better availability of products to our customers. We have been receiving positive feedback from our commercial units that we have a good availability, a good lead time which is shorter than that of our competitors and this has been really helping.
So yes, we are seeing good demand in other regions abroad. — with special highlights to North America which in Q3 had a very strong performance. Now looking forward, in practice, we didn’t have any non-recurrent factor or any major concentration. So we should see a good pace for our demand looking forward. The only point of attention is the global macroeconomic situation. We mentioned in our release that we saw some observation in the entry of orders, not billing itself but the entry of orders from some countries in Europe. So this is a point of attention, something that we should be monitoring but it’s not that concerning at this point and not in the short term. So we will be paying attention. But overall, the prospects are very positive for the next quarters, particularly for the short term.
Now Lucas, let me talk about the margins. So first about this quarter. In this quarter, we had different factors that had a positive impact on our margins. The first factor, as you said, was the reduction of the cost pressure that we had in the last quarters. And we were already expecting this to happen, that there should be some accommodation in the second half of the year. We always say that when we see a cost increase, our margins are pressed down. But when we see a stabilization of these costs, the margins tend to go back to the structural levels that the company always has.
Another point is that we were able to recompose some of our prices throughout this year, both for long-cycle equipment and also short cycle which led to a better margin in long cycle with the stabilization of the material cost structure. Now when we compare with last quarter, Q2 2022, I think it’s worth noting that there was a foreign exchange variation and the improvement in our mix which were relevant. So quarter-over-quarter, the real dropped 6.7% against the dollar. And in respect to the mix, the wind and solar revenues were stable this quarter, whereas other businesses with better margins had an improvement, important increases that were pointed out by Andre Salgueiro in his previous answer. It’s also worth noting that we will continue investing in cost-reduction programs and industrial process improvements and also administrative process improvements. So this is our analysis for the quarter.
Now looking forward, looking to the future, it’s always important to highlight that our margin analysis is always for longer periods. We always focus on the year. So let’s go back to the last quarter of 2021 when our margin reached 17.2%. It was the lowest for Q4. And we didn’t put it here as a reference. So we don’t like putting a specific reference for the quarter as a reference. But we’d like to talk about the whole year. The accumulated margin year-to-date is above expectations for this year. particularly due to the occupancy of our plans and the cost pressure and the foreign exchange. And as I said in the start of my answer. If this cost scenario remains the same for the rest of the year, our operational margins should be better than expected, better than we estimated in the start of the year. So we have some risks associated in this scenario.
The foreign exchange variation itself is one and potential volatilities of the global macroeconomic scenario. It’s always important to say that we will always be work striving to deliver margins above expectations and above market average.
Very clear. Thank you and congratulations for your results.
The next question is from Daniel Gewehr, Santander.
I have two questions. I’d like to further explain with you the domestic GTP. It has been an important growth factor for the company in the past three or four years. In the last three quarters, it has been flat. So I’d like to know how you’re seeing this if it’s about GTD or if it’s wind power, so what is the growth trajectory in this segment? And my second question is about Andre’s last point about the margins and the cost recomposition. Do you think you can maintain your prices even if you have cost reduction, so if the cost decrease even more, how do you — what do you think in respect to your prices?
Hello, this is Salgueiro. In respect to GTD, sequentially speaking, the quarterly revenue has been stable in the last few quarters. But it’s always important to stress that when we compare year-over-year, we have a very strong increase, a very strong growth. Of course, this growth gradually decreased over time but we grew nearly 50% year-over-year. So I just wanted to highlight this.
And why is it stable in the last few quarters?
Well, as we said, we filed our aero generator portfolio. So we have a stable revenue in wind power generation. The solar-powered generation is growing compared with last year. But sequentially, it’s growing less in less quarter after quarter. And the T&D business, we have been running with very high utilization rates in our plants. And we even announced investments for the coming years to increase the productive capacity in Brazil. And of course, we also have all the other businesses, alternators, thermal and thermal power, hydropower, that also have some oscillation. But when I look at solar power and T&D which are the largest businesses under GTD, the evaluation of these other businesses do not have a major impact in the overall variation. So in T&D, our expectation is to continue to grow and this additional capacity, for example, expanding the Betten [ph] plant and also some investments here in BlueManel. They’re very important in this process. We estimate to see some growth next year. In solar, everybody knows that we have some regulatory changes taking place right now.
So solar has been having a positive year this year and for next year, the expectation is to have a lower speed of growth than what we saw in the recent years. And for wind power, we have an important portfolio for the next quarters. There could be some fluctuation depending on the timing of production and the delivery of machines. So there could be fluctuation between quarters. But when we look in the long term, there shouldn’t be a major increase year-over-year. So next year, looking at GTD, we won’t see the same levels of growth that we saw in recent years. GTD will tend to present a more moderate growth than what we saw recently in the last two or three years. And Daniel, now in respect to the prices, I think the readjustment should be made according to market conditions. It’s important to stress that in addition to the material costs that have a lower pressure in the last few months, the personnel cost, freight cost, power cost, they’re still very high, particularly international freight which was negotiated this year and the prices are higher than last year’s.
So this movement can even justify some of the increases in adjustments in our prices for exports in the last few quarters. As these factors normalize, depending on market conditions, we will evaluate potential adjustments in prices case by case. But we will always be striving to preserve the profitability of the company.
The next question is from Renata Cabral Citigroup.
My question about investments and growth in North America. Something that we have been hearing for all industries is onshoring and you have a large unit in Mexico. So I want to understand whether you’re already making investments, having this in mind if this is already a reality for you. And my second question, you talked about margins but I just want to further explore one point here about the productivity increase initiatives that you are implementing because considering your mix, you could expect some extra pressure on your margins. We understand that there is a raw material cost. But what’s really striking to me is, can you please give us more color about your initiatives to increase productivity?
Renata, thank you for your questions. So let’s talk about North America first. So yes, North America is one of our strategic regions and we’re always looking for growth and investment opportunities there. When we talk about T&D, the new units that we not really last year was about this. We’re also expanding one of our plants in the United States, a T&D plant that already exists there. So which reinforces the company’s search for more market share and penetration in segments to which were not that exposed in the U.S. For example, T&D, even if we are leading distributors of transformers, we still have space to enter the segment of large utilities in the U.S. and also the industrial segment. Now combined with this investment, considering we have very good synergy with our Mexico unit, we are also making investments in the Mexico unit to increase the production capacity for some components that are made in Mexico and exported to the United States. And there is no doubt that we are also seeing opportunities in other business areas, including industrial electro-electronic equipment.
As you heard from Andre Salgueiro, we have been seeing very good opportunities in this area as well. And the second point is that, yes, the company is always trying to come up with products to reduce costs and improve productivity. We had an Investor Day, I don’t know which edition we presented the WEG [ph] factor system which was a productivity increase program. And at the time when we presented it in the back day, it was a pilot at the time. And today, it is already a broadly disseminated program that is present in different units all over the world. So we are continuing this effort also in administration. We have some initiatives focusing on process automation, virtual robots and the creation of shared services center in a global structure, also aiming to improve our administrative expenses by an improving productivity. And part of the investments that we are announcing, for example, last year and also next year, part of these investments also involve modernization and robotization of our units to increase our productivity.
The next question is from Victor Mizusaki, BBI.
Congratulations on your results. I have two questions. The first question is about your export prepayment operations. Looking at the ITR, can you please confirm because apparently, there was a large operation of about BRL1 billion. So my question to this point is whether it would make sense to consider that in the next 12 months or maybe for a longer operation. So this could have a higher impact looking forward. So should this operation generate a positive spread for you of at least 600, 700 basis points? Does it make sense to make this calculation, should this have a positive impact on the bottom line of ag looking forward? And whether there’s room for other operations along the same lines?
And my other question, going back to the discussion of the gross margin in Q3, where we saw a significant evolution of our gross margin. You mentioned operational leverage and raw materials. Can you give us any — can you give us a notion of how much came from operational leverage and how much came from raw materials? And in the case of raw materials, is this something that you can capture? Or do you think that looking forward, that should have any reflection on your prices?
In respect to our export prepayment operation, it was actually a rollout that we made. It’s a line that we use relatively frequently for the funding of the company. We had a recent maturation and we ended up rolling this debt. And in Brazil, we swap it to real, to BRL. So the cost in BRL is similar to the earnings that we get from our financial applications. So it could generate, depending on the time of maturation and the cost of the hedge, there could be some difference but it’s not going to be a major difference. It shouldn’t really have any effect on our financial results. Now as for your second question, Victor, it’s very difficult for a company like WEG to measure precisely because we’re exposed to different currencies, we’re exposed to different cost structures due to different productive processes. But as I said, there’s certainly the reduction in the cost of raw materials was important in the quarter. Also the occupation — the occupancy of our plants which allows us to operate and maximum productivity and also the improvement that we have — this also helped in the price adjustment [ph].
We have a question from Mr. Regis Cardoso, Credit Suisse.
Congratulations on your excellent results. Your results had a very fast evolution in Q3. And I think the main topic that I want to discuss with you is the sustainability of this level of results and also the speed of growth looking forward. So if you could please help us understand if Q3 in particular, had anything different, any one-off effects on your margins, respective to the accounting of your stocks or any nonrecurrent effects? And also in industrial electro-electronic equipment, particularly in Brazil in internal market. Do you expect any potential share gain? And maybe this could be an important revenue driver not in electric motors but maybe in other segments? Or do you think that this revenue line is actually something that is more related with the speed of the economy and the market in general because it will be more linked with the market and there’s not much room to expand your share?
Okay. So about — to your first question, there’s nothing different from what we have been communicating in the past quarters. We started the year with a very positive long-cycle portfolio. And usually the long-cycle portfolio varies from 35% to 40% of the total revenue of the company. So there is already a positive expectation for this segment. As you heard from — on Andre Salgueiro, particularly in GTD, we’re operating at near full capacity which allows us to optimize the use of our plants and also short cycle, the combination of the company’s internationalization, the company is getting to one more markets, gaining market share and launching new products. This has also been helping us have a very positive performance in revenue and consequently in costs because one of the company’s initiatives is also to improve the margin of our operations. So every quarter, we have good news about this as well.
So, I think this was driven by some of the points that I mentioned in my first answer about the margins. There were different factors that contributed to this situation. Now talking about the future. So let’s focus on 2022. I already said that if the year continues to behave the way it is behaving, we expect to deliver a year with better growth and slightly better margins than what we expected initially this year.
And next year, I think we have to wait to talk about next year. We have to see what’s going to happen with the global — for example, the euro situation with the deceleration that we’re seeing in Europe. And we can — we’ll have to wait to be able to talk about that with a higher level of certainty. Well, in respect to electronic equipment in Brazil, I think we have to break down further because there, we have our industrial motor business. We have low and medium voltage. We have the automation business. And in Industrial Automation, we have drives, controls and building infrastructure back home and other products that we launched more recently. We have our reducer business and we also have all the other initiatives related to electric mobility, so powertrain, recharge stations and digital business.
Of course, some of these businesses where we have a larger share, a more relevant share, we depend more on how the market will grow, how the economy will grow. And for these businesses, they are more dependent on the macroeconomic situation. But a good part of the products that we have, we still have opportunities to gain share, to gain market share in automation, in reducers and particularly in the newer businesses, both electric mobility, digital business. So I’d say it’s a mix of both, depending on the type of product that we’re looking at.
Next question is from Lucas Marquiori, BTG.
So two quick questions. First, there’s a comment here about your margins and you talked about your margins in international operations. Can you please talk about which regions and which products were the most relevant? And the second question, you talked about the oscillation of the fluctuation of your orders in Europe. So you just mobilize relevant capital for Gefran. So I want to understand the timing. So this stability of — and how do you see your ability to increase capacity in Europe?
Thank you for your questions, Lucas. So the first point is about the improvement of the margins abroad. This is a continuous process. It’s a journey, actually, that we have been developing. In 2017, when we acquired our transformer business, we talked about the breakeven and we knew that with our domestic synergies, we had — how we had to improve our margins and that’s what we did. In China, also with the automation the [indiscernible] plant and increase in scale which helps with productivity. In Mexico, with more and more steps in verticalization. It’s also an important movement three years — we took three years ago to produce carcasses of the motors. So it’s the shelves of the motors. So this is a continuous process and we see improvements in all regions.
Of course, there could be a certain quarter where the situation is more difficult in a certain segment or in a certain product line. But going back to Renato’s question about the improvement — productivity improvement plans and programs. We use these plans and programs to tackle this problem in all our units. So this is a generalized effort. It takes place faster in some regions and lower in other regions but it’s always in sight for us. Now in respect to Europe, we are focusing on the long term. This motion drive strategy, for example, this is something that we’re focusing on more and more. We are increasing our productive capacity in different regions.
The acquisition of Gefran has been helping in this process. But a company that thinks in the long term, as a company that thinks in the long term, sometimes we don’t make radical changes in our strategy depending on the macroeconomic condition of median or the other. Well, of course, sometimes you have to adjust your cost but we know where we’re heading.
The next question is from [indiscernible].
Congratulations on your results. I have two follow-up questions on the previous questions. The first one is about short cycle. So just to be sure, when you talk about 35% to 40% of your revenue, is that short cycle? Or is it the opposite? And you also mentioned some oscillation in European countries. Is this oscillation representing a growth deceleration or it’s too early to say? And my second point is about gaining scale, particularly for your personnel cost line, it was 2.5% in higher year-over-year and it was also higher quarter-over-quarter. So are you hiring more people? Maybe this is related with the expansion of your plants. But how can we look at this gain of scale looking forward with more growth? With this additional growth, will you have to increase your fixed costs, including personnel?
And thinking of these full capacity factories, full capacity plant, maybe the margins are a little bit inflated and then you’re going to make some fixed investments to increase capacity and that will bring the margin down a little bit but the normal level should be something between the current level and the future level. So, I just want to understand how you’re seeing this.
Now with respect to the breakdown for short cycle, I don’t remember the 35%, I don’t remember which was the answer but it’s actually the opposite. Short cycle in Q3 accounted for 63% in long cycle, 33%, 66, 35 a long cycle has a better representativeness in this quarter, particularly due to our automation panels, automation, dashboards and the centralized generation. So solar — centralized solar generation had a better performance this quarter. So the mix changed more towards long cycle but it’s still within normal levels, 63% short cycle and 37% long cycle. Well and now about our sale gains, our segment, our industry is very labor-intensive and we have to qualify between direct and direct labor. — when we need to make investments, sometimes we need to hire more people. The differentiated at WEG is the fact that we make these expansions modular. This allows us to add capacity according to the need, to the current need without the need for major investments which will leave us with a lot of idle, people idle time which will lead to reductions in our margins.
So this is a differentiator at WEG. Of course, that sometimes, occasionally, that could happen. Sometimes we have to hire more people. And sometimes, we cannot complete our capacity very fast in 100% of the time. And of course, that could lead to a decrease in our margin but then it recovers and goes back to historic levels. And for direct labor, it’s worth noting that a good part of our investments is focused on modernization and automation of our units. With more robots, you have lower need for labor but this modular expansion is something that we do really well at that. We increased our new hires when needed. And for indirect labor, as I said, we have different programs and the company has been growing over time. And the SG&A ratio is always positive. It’s always better year after year due to these programs that we implement.
Perfect. And about the potential deceleration in Europe. Could you talk about that?
Sorry, I forgot to answer that one. So what we saw there, we started to see some fluctuation in the entry of orders in some countries, some European countries. It’s not yet a widespread in Europe. So we can say right now whether we’re going to see deceleration or not. We need to monitor this. And for short cycle which is basically our focus. We usually have a portfolio we can have a 3- to 4-month forecast. And in this time period, we’re not expecting major variations. And then further in the future, it will depend on how we build our portfolio. The feedback that we get from the main OEMs in Europe is still positive. So there are no concerns in the short term. But considering the macroeconomic situation, this is something that we need to closely monitor in the coming months. Also, there’s a long cycle projects in this arena. Our expectation is very positive. We are not expecting any deceleration at least in the time horizon that we can foresee. In Europe, it’s more industrial. So I’d say, for the next six or eight months, we’re not expecting any deceleration. It is a point of attention. We will be monitoring and keeping track but it’s not a concern in the short term.
The next question is from Marcelo Motta, JPMorgan.
I have two quick questions. Can you please talk about working capital, although we saw that sequentially, it was stable when we think of days, maybe year-over-year, is there anything that — is there any acceleration that we could expect? Any release of working capital thinking of the next year? And also India, I know you were conducting your tasks and trying to get certification for your turbine. Is there any news coming from India so that we can estimate when this could contribute — start contributing positively to your revenues?
Thank you for your questions, Marcelo. I’m going to talk about our operational working capital. This increase that we saw in Q3 is concentrated on stock increases. We were expecting a normalization in the second half of the year. However, it has not yet occurred. And the reason was because of the global supply chain which has not yet normalized. There was also the stock inflation due to the price increase of raw materials. But here, we are talking more about volume. Strategically, we made the decision to increase our stocks last year due to those market uncertainties. But we’re still seeing a situation in which there was an expectation of normalization in the supply of electronic components which did not — which did not take place in 2022.
The expectation of our team is that this will only take place in the end of next year and start of 2024. We also saw an increase in prices and supply difficulties for some important raw materials such as some special steels that we use in the core of the transformers. So we made a decision to increase our stocks. But one thing is certain, it will normalize at some point. So the expectation is that in the next quarters, this stock indicator will start to improve. We’re not seeing any degradation in terms of the payment terms or receivable terms are — we are focusing today on the stocks. And over the next months, we should see a better situation than what we saw this year. And Motta just to give you some context about India. We have had our operations there for a long time, 11 years for medium voltage industrial motors and generators. So this operation is going well and has been actually improving the number of orders and the portfolio the customer base in the last quarters, we have — and we have good expectations for the future.
And we have two investments taking place at the same time. One is the low-voltage electric motor plant which was recently completed. This is a market. We already talked about this in past calls. It’s an important WEG market that WEG was not — didn’t have a penetration and now- so we’re now entering this market. It’s an interesting opportunity to develop the company internationally. And we are already getting our first orders. We are actually at a start-up and ramp-up phase of this plant. So that’s why we’re not seeing a major contribution at this point or in the short term. Maybe in the start of next year. And in the mid to long term, this is an operation that has a high potential to contribute with our growth, international growth. And this — the investment that we’re making, we’re also making investment in wind power.
We are now seeking — pursuing the certification of the turbine. So we expect to have our turbine certified by the end of the year or the beginning of next year at the latest. And after that, our commercial team will start focusing more on prospecting customers and raising the first order so that we can start producing and delivering the machines to our customers, the arrow [ph] generators in India. But our expectation for wind, we should start seeing more orders next year and this will — but we will only start seeing the revenue from that in 2024, maybe the end of 2023, if we are optimistic.
The next question is from Lucas Barbosa, Santander.
My question is a follow-up question. You talked about investments looking forward. So I just want to organize my thoughts on how — what we should expect in Q3, we saw an acceleration in your CapEx which was something that you already announced that was going to happen in the second half of the year. But now thinking of 2023, can you please share which level of CapEx you expect in 2023 and which will be the main project? Of course, one of them will be the capacity expansion for industrial motors that you talked about in the next three years. But if you can share with us other projects that you have to expand capacity, that would be really helpful.
Lucas, so if you look at our CapEx, if you look at our historical CapEx this year, there’s always an acceleration in the end of the year. So Q3 was stronger and Q4 should be even stronger than Q3. And we even mentioned this last quarter. In the beginning of this year, we had announced a CapEx of BRL1.5 billion. But considering some postponements it should be closer to BRL1.2 billion this year. So this is the information that we have for this year. Now looking to 2023, we don’t have a budget yet a final budget. So we can’t really give you much information right now but we have some projects that were already announced and that will certainly contribute to — will certainly require investments in CapEx next year. The most important is the investment that we will make [indiscernible] for industrial motors and electric traction.
Most of the investments will be concentrated on that next year. We also have some other investments announced in Brazil, the between plant for transformers. We have major investments announced in Ares for our Commercial and Appliance Motors, — but for all units, even in paints and automation and power, we have a lot of investments program for next year. And internationally, I think the main project, well Andre talked about some of them. In T&D, we have a project in United States and Mexico. And we also have the building of the Portugal plant, the third motor, voltage motor plant in Portugal. And as we advance with the budget and we have more information about the project, we will be announcing to you probably together with the Q4 conference call.
The next question is from Andrea Smith.
I have two follow-up questions. First, about your competitive advantage in Europe with the energy crisis and the increase in energy costs, do you see any loss of competitiveness of other competitors that could benefit you in terms of market share? And my other question is a follow-up question about your long-cycle portfolio. Can you please tell us what you have in terms of mobility and if you expect 2023 to have as good a portfolio as you had in 2022? Thank you.
Thank you for your questions. About Europe, Europe is an important region for ag. It accounts for about 14% to 15% of our sales. the consolidated sales. And we do have some operations in Europe, particularly in Portugal, an important operation there for industrial motors in Austria. We also have an important operation for reducers. And we also have other niche operations. We have automation panels in Spain. We have some motor operations in Germany. And now with Jif, we also have automation in Germany and Italy. But it’s important to note that a great part of that 14% to 15% of sales that we have in Europe is not produced in Europe. A very significant part of that is reduced either in Brazil or in China, the two main production hubs that supply to Europe. And when we compare this with some of our competitors, particularly the European companies that today have an industrial footprint that is very concentrated in Europe.
Considering the power crisis and the increasing costs in Europe, theoretically, we could benefit from that. We could benefit from that in terms of competitiveness. It’s difficult to measure how much this will help us. But broadly speaking, I’d say that yes, our positioning and our industrial footprint looks more favorable right now. Now about the long cycle I will use the same argument about the budget. We are working on next year’s budget as of now. So we don’t have enough visibility at this point but the message is positive, both in industrial and GTD, where we concentrate our long-cycle projects, we have good visibility of this portfolio of this pipeline and we will enter 2023 with a positive outlook.
In some cases, we can forecast a lot of what’s going to happen next year. And for other cases, the visibility is about six months and that will depend on how we continue to build this portfolio next year. But the snapshot of the end of this year and start of next year is positive and the long-cycle effort will continue performing really well next year.
The next question is from [indiscernible].
You went over some of my questions and one of them was about the production capacity and the difficulties that the world will face in terms of power costs and raw material costs which is now improving but we had problems for a while. And you said the 14% to 15% of the production capacity in Europe comes from other places. So I want to understand — what is your capacity to improve your productivity in your plants that are the most automated and verticalized? Can you reallocate your production capacity to focus on those plans, considering the dropping cost — freight costs, if you could adopt that strategy. And my second question is about the acquisition of Jeffree and the global context and all the difficulties that we saw, particularly in supply. How many new customers could you acquire with these two movements? And will this help maintain a good volume of orders for next year, particularly in long cycle?
I know that the oil industry didn’t make investments for a while. So I want to understand if it’s access to new clients or if it’s some industry sectors that were slower and are now going back to higher levels of investment. Let me answer the first question and then Andre will answer your second question. Now about Europe, the 14% to 15% that I talked about, Europe is actually how much Europe the share Europe has in our consolidated global sales. It’s about 15% of our global sales, also traded in Europe. It’s not what we produce in Europe. And the other comment that I made is that of the 15%, most of the 15% is actually produced in Brazil or in China. We have some production in Europe but it’s relatively limited. It was just a comparison with the other players, the main competitors that we have to have an industrial footprint in Europe.
Now about the reallocation capacity. That will depend on the product and the unit in some units. For example, industrial motors, we do have greater flexibility. And also for automation. So depending — for other — depending on the product, we have more flexibility or less flexibility. So of course, we can make adjustments from one place to the other and we use this strategically but we will have to look at that case by case and product by product. And the second question, Jifan [ph] is a recent acquisition. We actually had authorization from the Italian authorities in the start of October. So we are now integrating the company but a very high-level comment about the other businesses. Of course, that in the last few quarters, we can say that we were able to gain some important market shares — and this is because we are verticalized and the world was going through a critical moment in terms of supply of raw materials and components.
So we had an advantageous position in terms of that. We had an advantage; we also reinforced our stocks last year and this certainly helped. And some segments that are important for the company, such as oil and gas and mining that in the past, we’re on the undergoing growth and sometimes they even had setbacks but then they recovered, they are becoming stronger in the past year, highlight to mining, the new investments that will be required for the Russia, Ukraine situation, this is certainly driving the oil and gas industry. And another segment that became relevant for the company and important in the last years is water in sanitation at a global level which is also helping us. In our veg Day, we will go over some more market information, market share and business information and we can give you more details about this.
And Andre, just a follow-up question. You talked about water and sanitation. We have good expectations for — in terms of investments coming to Brazil next year. So I want to understand how much of this investment is — gets to you in terms of — particularly for pumps — did you say what percentage of the investment in a sanitation plant can be — we’ve turned into volume — sales volume for you. It really helps with our calculation.
Yes. What we have today is that up to 4% of the total CapEx envelope is destined to the equipment that we sell. Funds only operate with electric motors, you have more power consumption. You need more generation, you need more transmission and distribution. You need transformers and substations. You need more automation panels and frequency inverters. So of what’s been announced in terms of investments from the regulatory framework, up to 4% can be addressable for us.
This question-and-answer session is now closed. I’d like to turn the conference over to Mr. Andre Rodrigues for his final remarks.
Hello, everyone. Thank you again for attending. And once again, I’d like to remind you that on November 8, we will have another addition of the WEG Day and with our Chief Executive Officer and other executives, we will provide you with more information about PEG. So once again, thank you for attending and we’ll see you then.
This conference call is now over. Thank you for attending and have a great day. You may disconnect your lines now.