Brazil’s WEG net profit falls, supply chain hurdles weigh on margins

The company logo for Weg is displayed on a screen on the floor of Brazil’s B3 Stock Exchange in Sao Paulo, Brazil, July 25, 2019. Picture taken July 25, 2019. REUTERS/Amanda Perobelli

SAO PAULO, July 20 (Reuters) – Brazilian motor maker WEG SA (WEGE3.SA) on Wednesday reported a 19.5% drop in quarterly net income and said operating margins remained under pressure from supply chain issues despite strong demand for its products.

WEG’s net income reached 912.96 million reais ($168.64 million) in the second quarter, while operating margins missed 2021 levels amid rising raw material costs.

The Jaragua do Sul-based company noted that last year’s second-quarter results had a one-off positive impact from tax credits, and said that excluding this tax impact its second-quarter net profit this year would be up 6.6%.

“The results confirmed our expectations of good demand for our products and services,” WEG said in a securities filing.

But WEG’s EBITDA margin, closely watched by the market, dropped 0.6 percentage point from the previous three months to 17.5%, below the 24.2% seen a year ago.

The company said that having to deal with global supply chain disruptions and rising raw material costs, implied a greater need for working capital. But it also said its long-term-oriented business model helped to mitigate such risks.

WEG’s operating net revenue rose 25% from a year earlier to 7.18 billion reais, driven by a 41.1% jump in local revenues.

Revenues in Brazil were boosted by a strong performance in electric and low voltage motors, highlighting sectors such as renewable energy generation, power transmission and distribution. External markets showed good demand for industrial goods, the company said.

Analysts at BTG Pactual recently upgraded their recommendation on WEG to “buy” for the first time ever, saying the company had a crisis-proof business model and was a good defensive name amid a sharp market sell-off.

Shares in WEG are down about 17% year-to-date and 40% below their 2021 record highs at Tuesday’s closing.

BTG cited the current discounted valuation as a reason supporting its “buy” recommendation.

($1 = 5.4137 reais)

Reporting by Gabriel Araujo, Editing by Louise Heavens and Jane Merriman

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