WEG S.A. Announced Solid Fourth Quarter 2014 Results

WEG S.A. reports preliminary financial results for the quarter ended December 31, 2014.

WEG S.A., one of the world’s largest manufacturers of electronic equipment, and one of Brazil’s largest companies, announced solid fourth quarter earnings results when it reported quarterly results on February 25.

Fourth quarter net operating revenue rose 15.1 percent from 4Q2013 to R$2,179.7 million. This represents growth of 6.0 percent over the immediate previous quarter. Operating (EBITDA) margins reached 17.6 percent, an increase of 12.1 percent over 4Q 2013 and a 9.2 percent increase over 3Q2014. Net income of $263.3 million rose 10.9 percent vs. the same quarter a year ago, and 1.8 percent vs. the immediate last quarter.

This earnings release follows the earnings announcements from the following peers of WEG S.A. – Mabuchi Motor Co., Ltd. Unsponsored ADR, AMETEK, Inc. and A. O. Smith Corporation (MBUMY-US, AME-US and AOS-US).

Highlights

  • Gross margins widened from 33.14% to 35.14% compared to the same quarter last year, operating (EBITDA) margins now 17.10% from 17.86%.
  • Change in operating cash flow of -22.39% compared to same quarter last year trailed change in earnings, earnings potentially benefiting from some unlocking of accruals.
  • Earnings rose compared to same quarter last year, despite decline in operating and pretax margins.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2013-12-31 2014-03-31 2014-06-30 2014-09-30 2014-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 1893.3 1783.54 1821.55 2055.97 2179.7
Revenue Growth (%YOY) 13.9 20.71 7.17 16.92 15.13
Earnings (mil) 237.44 204.89 227.99 258.57 263.29
Earnings Growth (%YOY) 29.64 18.91 11.23 13.03 10.89
Net Margin (%) 12.54 11.49 12.52 12.58 12.08
EPS 0.29 0.25 0.28 0.32 N/A
Return on Equity (%) 20.98 17.79 19.66 21.58 21.2
Return on Assets (%) 9.65 8.18 9 9.73 9.28

Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 33.14% to 35.14%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Versus EBITA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

WEGE3-BR’s improvement in gross margins have been accompanied by a deterioration in the management of working capital. This leads Capital Cube to conclude that the improvements in gross margins are likely accounting trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have risen to 191.26 days from last year’s levels of 189.16 days.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

Operating Cash Flow History

WEGE3-BR’s year-on-year change in operating cash flow of -22.39% trailed its change in earnings. This leads Capital Cube to question whether the earnings number might have been achieved from some unlocking of accruals. On a positive note, the increase in operating cash flow was better than the average announced thus far by its peer group.

Operating Cash Flow Growth Versus Earnings Growth

Margins

Despite a decline in operating (EBIT) margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

Company Profile

WEG SA is engaged in the manufacturing, marketing, importing, and exporting of electric components. It is engaged in the manufacturing and marketing of capital goods, such as, electric motors, generators and transformers; reducers, geared reducers, frequency inverters, starter motors and maneuver devices; control and protection of electric circuits and industrial automation; electric traction solutions; solutions for the generation of renewable and distributed energy, exploring all opportunities in small hydroelectric plants and thermal biomass, wind and solar energy sources; no-breaks and alternators for groups of generators; electric substations; industrial electrical and electronic equipment systems; and industrial paint and varnish. The company also distributes power transformers, large motors and generators, industrial automation, electric motors, industrial paints, and electro insulation. WEG was founded on June 9, 1961 and is headquartered in Jaragu� do Sul, Brazil.

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