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

Brazilian motor maker WEG SA (WEGE3.SA) on Wednesday reported a drop in quarterly net income and said operating margins remained under pressure from supply chain issues, sending its shares down.

WEG’s net income fell 19.5% to 912.96 million reais ($168.64 million) in the second quarter, while operating margins missed 2021 levels amid rising raw material costs.

The company’s shares were down 3.5% at 26.03 reais in morning trading, making it one of the biggest fallers on Brazil’s Bovespa stock index (.BVSP), which fell 0.9%.

“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.

Analysts at Guide Investimentos said the results were marginally negative due to worsening margins, but noted a resilient overall performance with demand still strong, reiterating their “buy” recommendation.

“The company is expected to return to reporting rising figures and better margins in coming quarters as costs cool down,” they said.

WEG 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.

Jaragua do Sul-based WEG 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%.

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.

($1 = 5.4137 reais)