WEG SA

BOVESPA:WEGE3

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome, everyone, to WEG's audio conference to discuss results about the fourth quarter 2020. We'd like to inform you that we are broadcasting this audio conference, along with the slide deck, at our IR website at the following URL, ri.weg.net. After the audio conference, the audio track will be available at our IR website as well. [Operator Instructions]

Any predictions contained in this document or possible forward-looking statements made during the conference about future events concerning the company's business perspective and operating and financial projections and also related to the company's potential growth in the future are based on beliefs and assumptions on the part of the company's administration and are based on information currently available. These forward-looking statements involve risks and uncertainties and therefore depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect the future performance of WEG and lead to results that will differ materially from those expressed in these forward-looking statements.

We'd like to remind you that this audio conference is being conducted in Portuguese with simultaneous translation into English. With us today in Jaraguá do Sul, we have Mr. André Luís Rodrigues, CFO and IRO; and Mr. Wilson Watzko, Controller; and André Menegueti Salgueiro, IR manager at WEG. Please, Mr. André Rodrigues, you may carry on, sir.

[André Rodrigues, executive]

Good morning, everyone, and it's a pleasure to be with you once again to discuss our results. We'll start with the highlights of the quarter, talking about the net operating revenue, which grew by 29.4% vis-à-vis the fourth quarter of 2019.

The continuity of the improvement of the economic activity was an important driver for this result, especially in Brazil, where the economic recovery observed as of the third quarter of 2020 has kept a demand for our products and solutions at a high level. In the external market, we continue to observe a slow gradual recovery in short-cycle businesses, which despite being slower than in Brazil has maintained a constant pace since the end of the second quarter of 2020. As for industrial activity related to long-cycle projects, a few present some level of volatility, reflecting a drop in revenue in the external market in local currencies.

Another highlight was the EBITDA, which saw a growth of 47.2%, reaching BRL 981 million. EBITDA margin grew by 2.5 percentage points, reaching the level of 20.1%. Throughout the presentation, André Salgueiro will go into detail about this variation. Lastly, we had another evolution in the quarter in terms of ROIC, return on investment, as we see on the next slide, which we saw a growth of 5.3 percentage points when compared to the fourth quarter of last year -- of 2019, reaching 25.5%. The consistency of this indicator for the past quarters mirrors an improvement in our operating performance showed or demonstrated by the combination of revenue growth and EBITDA margin expansion, exceeding investments and also showing a small need for working capital in 2020.

I now turn the floor over to Mr. Salgueiro, who will continue.

[André Salgueiro, executive]

Good morning, everyone. On Slide #5, we have the evolution of our business areas in the markets where we have a footprint. Starting by the business in Brazil, where the Industrial Electro-Electronic Equipment was the great highlight. The sales of short-cycle equipment remained up with a good demand for automating or automation equipment, where we have managed to increase our footprint in the market, and also in electric motors of low voltage, in part associated to a high demand for our products by the civil construction and agro industry segments. We also kept good rhythm of deliveries in long-cycle projects with a highlight for pulp and paper, mining and oil and gas.

In GTD, we had the maintenance of the good performance of the last quarters, where important projects being delivered, especially in the [indiscernible] connected to the transmission lines auctions that were held in the past years. Our distributed solar energy, GD, saw good performance as well, thus contributing positively for the quarter results. In Commercial Motors and Appliances, demand remained positive once again. And in segments such as durable consumer goods, especially motors for the white line, food and civil construction, have contributed significantly for this performance. In Paints and Varnishes, the good performance in the quarter happened in a more granular way. But we can highlight the good demand in segments such as civil construction, consumer electronics, repainting of automotives and sanitation.

In external market, Industrial Electro-Electronic Equipment has seen a recovery of economic activity around the world after the initial impacts brought by the pandemic, especially for low-voltage motors. It's worth mentioning that this is happening at a slower pace than in Brazil and still below the business volume that we saw in the same period of last year. Volatilities of new orders for long-cycle [ products ] last quarter has impacted the growth of this business in the quarter with reductions in the project levels in some important sectors, such as oil and gas, for example.

In the GTD area, the growth rate was slower than in the past quarters, especially because of the reduction in the volume of projects in terms of generation of energy. It's worth mentioning the continuity of important projects in the T&D area in North America, where synergies and market share, which is relevant in the U.S. and Mexico, continue to make important contributions to this business area of the company.

As for Appliances and Commercial Motors, our sales are still recovering, a process which has started in the past quarter with a highlight for the operations in the U.S. and Mexico, where we have seen continuous increase in our market share. Lastly, for Paints and Varnishes, good performance was driven by an improvement in economic activity in Argentina and a more intense level of sales in Latin America and especially in Mexico with the start-up of our paint manufacturing plant in the country.

On Slide #6, we saw the evolution of our EBITDA in the fourth quarter of 2020, where we saw a growth of 47.2% when related when compared to the same period of last year. EBITDA margin closed the quarter at 20.1%, showing an evolution of 2.5 percentage points when compared to the fourth quarter of 2019. The margin gain came with the rationalization of expenses and costs and improvement in margins of long-cycle operations in Brazil, in addition to better margins in some operations abroad.

Finally, on Slide #7, we saw the evolution of our investments. In the fourth quarter 2020, investments reached the level of BRL 158.4 million, 51% of which were allocated to Brazil and 49% to our units located abroad, thus consolidating a return to investments to normal levels in the company after a moment of suspension due to uncertainties brought about by the pandemic. It's worth mentioning that our production system is based on what we call modular expansion, which allows us to adjust our CapEx according to demand and thus maximizing return on invested capital.

With that, I wrap up my part of the presentation and turn the floor back over to André.

[André Rodrigues, executive]

Thank you. And before we move to the Q&A session, I'd like to reinforce some of our past accomplishments and also comment on our outlook for this year.

As for our accomplishments, we have created late last year, the new sustainability office at WEG, a new governance structure, which aims at centralizing activities related to ESG topics. Those topics have always been taken very seriously at the company. And we believe that it has been incorporated to our culture. But due to a growing demand coming from different stakeholders, we decided to create this new structure to address the topic at a more specific, deliberate way.

Another accomplishment related to ESG was the selection of our actions by the 11th consecutive time to compose the portfolio of sustainability index at ISE of the B3. We have also concluded last year some expansion works in terms of production capacity, including the acquisition of a new manufacturing plant for transformers in Betim in Mina Gerais with the approval with no restriction by the CADE last October and the expansion of our plant of motors in Austria.

We'd like to highlight the results of 2020, which came out at a much higher level than expected even amidst a scenario of great challenges. Our net revenue saw a growth of 30.9% when compared to 2019 and our EBITDA margin reached 18.7% with a growth of 1.9 percentage points when compared to 2019. And our ROIC saw a growth of 25.5%, the highest level in the past years.

As for the perspectives for 2021, we'd like to reinforce that the pandemic still brings about several uncertainties about this scenario in terms of economic recovery worldwide. But even amidst this scenario, we expect to present another year of growth in revenues, albeit not at the same levels we saw last year. Operating margin should continue healthy but with a possible volatility because of the dynamic of business at WEG. And lastly, our CapEx, which as per our proposed budget, reached BRL 1 billion in the year, especially due to the delay in important projects which had been scheduled initially for 2020 and also because of the need of new investments to support the current levels of growth that the company is experiencing.

I now close my presentation. Please, operator, back to you. We can start the Q&A session.

[Operator]

[Operator Instructions] And our first question comes from Mr. Alexandre Falcao, HSBC.

[Alexandre Falcao, analyst]

My question has to do with the CapEx item and also about capacity. We see a very strong growth. You have mentioned in the past, the paint plant was at full capacity last year. I'd like to understand, given that improvement in the scenario, do you expect some kind of restriction in terms of capacity? That's the first question.

And the second question is about the price of commodities, copper specifically, whenever we see those moving very fast. Now copper has been moving around. They tend to have pressure on margins. You tend to take a little longer to adjust price when you have a fast increase in the input prices. Can we expect that for the first 2 quarters of 2021?

[André Rodrigues, executive]

Thank you for your questions. I'll address about the question about investments and then I'll give it over to Salgueiro, who will touch upon copper and other commodities. Well, first off, we have announced that we need to increase our CapEx for this year at around BRL 1 billion, twice as much as we had been doing for the past years. Of course, last year, we already planned on having a slightly higher volume. But the pandemic hit and we had to delay some of our investments. Part of those investments take to an increase or lead to an increase in capacity. I can cite the new unit for transformers in Missouri, which will increase our capacity in terms of transformers. The increase in capacity for transformers in the U.S. will lead us to invest more in Mexico in boilers to meet that new capacity, new capacity increases, which are in the pipeline for China.

In terms of automation, investments in modernizations, development of new products, the transformer plant in Betim also has increased our production capacity for transformers. We had no way of expanding. We would need another increase or a new investment. And that plant came about at a very timely moment. It's not only a matter of investing. We need to train personnel. We need to provide technical capacity and technical skills, that doesn't happen overnight, as you know. We have the plant in India, of course, which also increased our capacity. So those are all new investments and also in line with our idea of penetrating in other countries.

In addition, we can also highlight the decision we made to increase our production capacity of commercial motors. Because we understand that there is room for us to grow on that front and because of the high demand we've seen in the past quarters, in the past months rather, which led us to seek other alternative investments that also have to do with modernizing and automating existing plants, always seeking higher productivity levels, of course. And so within that BRL 1 billion, we understand that 38% will be allocated in Brazil and 62% will be allocated outside of Brazil. So as for the paint plant, we also made a decision to invest in Mexico, starting in a greenfield project, to also reach the Mexican market and also the American market, especially for paint.

[André Salgueiro, executive]

This is Salgueiro speaking. Thank you for your question. I'll comment on the copper issue, specifically. Copper is an important metal within our cost structure. As you know, for copper, we have that hedging mechanism. We look forward 12 months and then we scale back with our hedge to have some kind of price predictability. We know the price is going up. We cannot control that, of course. But we do have those hedging mechanisms, as I said, so that we can mitigate those impacts on the company.

The hedging mechanics is important because it provides us with that potential predictability on prices and allows us to make the necessary adjustments and pass that on whenever necessary. So as a rule, that's what happens. So trying to give you the short answer, we might have some isolated impacts, but the tendency is to pass that on in the mid- to the long run. So here in Brazil, we would adjust prices. And last year, we had an increase, not only in copper but also in other raw materials, especially because of the foreign exchange variations. So we had 2 price readjustments throughout the year. In some business, we had 3 price readjustments. So we're able to do that.

As for the external international market, that's not as easy to do. We tend to wait a bit until the main market players start showing their intention. So the adjustments are not as constant abroad as they are in Brazil. But oftentimes, the foreign exchange variation offset the impact. So briefly, that's how we approach it. Also relevant to mention is that the copper prices and metal prices going up mean that higher -- we have higher demand so that important segments, such as mining, are important for WEG. And we might have the chance of selling to other areas. So the commodity prices going up is something that's interesting to us.

[Operator]

Our next question comes from Mr. Lucas Marquiori from BTG.

[Lucas Marquiori, analyst]

I have two questions from my end. Number one, about the short-cycle products, I'd like to have an idea about how much better are margins for short-cycle products with all the adjustments you made in terms of efficiency, productivity that you conducted throughout the pandemic. We always had in mind that short-cycle products would have lower margins than long-cycle products. And as -- so we expected some kind of accommodation in the margin and that did happen in the third and fourth quarters. So I'd like to understand whether short-cycle products have changed margin levels to see what we can expect going forward.

Second question, at the end of the presentation, you comment about perspectives for 2021. And you do talk about a slowdown in growth in revenue. So what kind of slowdown drivers do you see going forward? This is expected to be an era of intense consumption of commodities. And as we see the short-cycle improving, we should also expect higher numbers. So why do you see a slowdown in revenues? I know there is foreign exchange issues as well. But I'd like to understand the dynamics a little better that allow -- that led you to think of a slowdown in the short term.

[André Salgueiro, executive]

Thank you for your question, Salgueiro speaking. I'll address the margin for the short cycle and then I'll comment on our perspectives for 2021. As for our margins, we did show a slide where we showed the margin dynamics for our short-cycle products vis-à-vis long-cycle products. And we tried to make clear that the margin variations for short-cycle products is slow -- has a slow or a low variation, irrespective of the cycle, irrespective of the demand for that cycle.

So having said that, we did have some improvements when you look at the consolidated numbers in terms of margins for short cycle, but they are not as relevant as the improvements that we see for long-cycle operations and also on some other operations abroad. But that's happening because of efficiency issues, right? No, that's the first thing to highlight. In addition, we had an impact coming from raw materials that went up. As we said, last year, we have an impact coming from the foreign exchange variations and we passed that on. There might be some mismatch in the in the short run. But as a whole, that is offset in the mid-run. So short-cycle margins in Brazil have improved but within a level which is not that considerable.

As for the external market, we can really say that short-cycle margins have been improving. But that will emerge in the mid- to the long run because we want to bring those margins abroad closer to the ones we have here. It's interesting to remind you that our manufacturing execution program is used to increase our efficiency levels and lead to productivity gains. That's a continuous, ongoing work that we concentrate on every year. And in the mid- to the long run, we see we can reap the results.

[André Rodrigues, executive]

I'll address your first question. That's a complex panorama of growth for next year, not only for short cycle but for long cycle as well. The company is complex, as you know, when we have different dynamics according to the different markets, different industries that we serve. So based on what we can see looking forward early in the year, still feeling the effects from the COVID-19 and the difficulty in recovering short-cycle product results. After the recovery saw in the third quarter in 2020, which was more intense in Brazil, all of that makes it difficult to predict if we look to sustain that level of growth. So that's why we were very prudent and said we do have an expectation of continued growth but maybe not at the same level. It will be difficult to maintain that 31% level of growth that we saw last year because we had an impact of the devaluation along the way.

We also report volatility levels, as you saw, in terms of long-cycle orders. But again, even in light of that scenario in the internal market, we expect to continue to grow because we understand that there is a possibility of seeing the Brazilian economy improving. And that's key for the development of our more mature businesses. If that comes to be, we will have the necessary conditions to improve our short-cycle projects by renewing our plants and so on. And then after that, we'll be able to create a more favorable, more sustainable scenario for new plants, thus meeting higher demand for long-cycle products. Some industries, such as agriculture, infrastructure have been showing positive signs for this year, in 2021. We also continue to deliver T&D products coming from the past year's auctions. The solar generation business will not have the same growth we saw in the past 2 years, very strong growth. But it will still continue to be an opportunity business for WEG. And we do believe in that business we're going to be working to explore that further.

It's also worth mentioning the start-up delivery of the new turbines of 4.2 gigawatts, placing WEG back in that market. And we cannot forget the continuous development of new products and new segments as well, example, digital businesses, which will create additional growth opportunities. But of course, we'll also be monitoring very closely the pandemic situation and the improvement of the Brazilian economy. Variations on that scenario might affect those expectations. As for the external market, we have started the year in a different manner than we had last year. What is new? The vaccination processes are being deployed across some countries, not everywhere, but across some countries. But that, of course, brings about an expectation of economic recovery. And we have been saying that the expectation for 2021 is to resume the same revenue levels we had in 2019. Even amidst all those uncertainties, we do believe that, number one, T&D operations performance in North America, where we have a leading position, and we are now starting new segments, such as renewables and industrials, and with this good -- and the good portfolio of orders in Mexico will help us out on that respect.

We also have an opportunity to grow through access to new markets, gaining market share, as we have already mentioned before, in new geographies, where we can also operate. China is doing really well. We have a very positive expectation. We have increased capacity over there recently. And we now have an opportunity to develop not only electric motors but also automation solutions. Our low-voltage motor units in India also see growth opportunities and also segments, such as water and sanitation, which brought about good alternatives last year. And we should be keeping a close eye on mining. Mining, last year, started to recover. So when we combine all of that, WEG does believe that the company might grow this year but not at the same level as we grew last year.

[Technical Difficulty]

We seem to be having a technical glitch in communication. I'm trying to reach the operator, just standby for a second, please. Everyone, we are now in contact with the operator to resume our connection, just standby for a second, please.

[Operator]

Our next question comes from Mr. Cardoso from Crédit Suisse.

[Regis Cardoso, analyst]

Congratulations on the results. Two topics I'd like to address. Number one, about sustainability of the current return levels. That's something we have in mind and about the renewable business growth. As for sustainability, I understand that 2020 saw this exchange rate variations, which affected and benefited the U.S. dollar-backed revenues and some, of course, domestic products because of the passing-on of those foreign exchange variations.

Does that make sense? Would we expect the ROIC to drop in the coming years? And if you have an expectation of seeing that drop but stay at the levels that you had in 2019. Along with the return on invested capital question, could we see a longer hiatus for the long-cycle products because of the pandemic? It seems to be a more mitigated risk by now or if there was an isolated effect on the operating side, again because of the foreign exchange. So that's the first question about how to sustain that level of ROIC.

Number two, about your solar businesses, especially in the U.S., if you could give us more color on how much that accounts for today, accounts for your total result. It seems to be experiencing a growth level, which is above the average. So if you could give us some more color on the growth of that business line specifically and if you expect that to continue to grow at the same pace going forward.

[André Rodrigues, executive]

Thank you for your questions. We'll try to address, and let's see if we can address all your points. Start with the question about the return on invested capital, so the question would be what are the factors that drove that performance in 2020 and if those drivers are sustainable? Well, 2020 saw a combination of a growth in revenues and an expansion in margins. That, of course, drove the growth we've seen for the past quarters. We also have to highlight the investment strategy around new investments with attractive returns, that was also important, and a lower need for working capital and also a drop in investments in fixed assets for the past 12 months. So the combination of all of that led to that final numbers, along with a good management of working capital and the CapEx level kept at the same level, all of that helped our margins. The margins was better than we expected earlier in the year.

Now 2021 came, and the question is can we sustain that level of 25.9%? I think that will be difficult. We're not likely to maintain that level in 2021. Not so much because of the results themselves because we always work to deliver attractive margins, of course. But because of the fact that we need to increase investments. To support growth, we start new business areas. So we expect returns to drop when compared to 2020. But we are in a position to remain at a very attractive level anyway. From the point of view of the -- of what we have done in terms of improving results, in terms of recovering external market conditions, that all will help maintain good levels of return. Also, in 2021, several of the gains we had last year, such as reductions in work shape, reduction in travel expenses, that, of course, had a positive impact and will have had an impact going forward, thus reducing ROIC.

As we mentioned, also, there could be a gap in the long-cycle portfolio. Now we have been updating you all on the following. For the long cycle, we need to have a good split at WEG. And I'll take the opportunity posed by your question and say that because we are involved in several different businesses, business with very specific characteristics, how does that dynamic play out across different business to address your point? When we talk about wind generation projects, we have a long backlog, which might be of 2, 3 or even 4 years for that product category. When we go to T&D businesses, that timeline might range from 1 to 3 years, depending on the contracts. The hydro generation business works around 1 to 2 years. Solar plants usually have lower timelines, less than a year. And industrial projects have timelines of 6 months to a year, so -- and provided the gains we saw this year, we closed last year and started '21 with good revenue expectations.

The comparison basis also needs should be taken into account once we were in the moment where we had high demand for long-cycle products. In Brazil, we talked about pulp and paper, mining, oil and gas in the foreign market. And as for electronic and electric equipment for the industry, we can still feel some volatility. As we have reported in the call for the previous quarter, the current portfolio sits slightly below the expectations. As we mentioned, every -- since the beginning of the crisis, it's only natural that happens in a scenario like this. And we started seeing those signs by the third quarter of 2020. Some relevant sectors, such as oil and gas, mining, sanitation, they decreased their investment paces because of the pandemic, of course.

On the other hand, and now I touch upon what you mentioned, when you say that we have tried to mitigate those risks, in terms of GTD, we have another portfolio, which is quite healthy, which was put together throughout the past quarters with deliveries programmed or scheduled for 2021, 2023. And as I also mentioned, the wind generation projects, which are also in our portfolio of orders, that will contribute to the revenues of the year. So when we combine all that, even with that high level of volatility in some sectors, especially in Industrial Electro-Electronic Equipment for long cycle, where people are still working on that portfolio, as I said, for industrial segments, if we manage to gain some orders until May, we could feasibly deliver that this year. We have no evidence that we'll see some drop in long cycle as we saw in 2020 or compared rather with the 2020 now that we have wind products back in our portfolio for 2021. So with the visibility we have today, we have no concern around that for 2021, concerning long cycle to be sure.

[André Salgueiro, executive]

Regis, this is Salgueiro. As to your second question, you asked about solar but with the focus on WTU in the U.S. That's an operation which is focused on renewables. Unfortunately, we cannot disclose those numbers. We cannot give you the information around how much the company has grown on that front. But what we can safely state is that, that is one of the companies which is growing way above the average growth. It is leading this strong growth in GTD for the company for the past years, especially in the international market in North America, the U.S. and Mexico, specifically.

So it's doing really well. Since the acquisition in 2017, revenues more than doubled. So again, it's doing really well. So that's why we continue to maintain our investment plans. We're expanding capacity. We're building a third plant to make room to address that renewables market, which is also doing really well. And also to start in the market for generators for the industrial market, where we're not -- we do not have a footprint in the U.S. yet. So it's a very promising business. Especially with this new administration taking office, the new administration has a higher, more intense focus on renewables than the previous administration.

[Operator]

Next question comes from Mr. Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

Congratulations on the results. André, my question follows up on your final comment about the U.S. The U.S. now resuming your -- the bearish agreement, we should see an acceleration in renewables. Do you think WEG will have to make a greater effort to capture a higher market share in North America? And also about the wind energy, we have the regulatory framework being discussed in Congress for wind energy generation. Do you expect any change in technology in the framework for you to really enter that market?

[André Salgueiro, executive]

Thank you for your questions. I'll start with the U.S. bit of the question and then André will address the second question. Just to be sure, today's position in the U.S. is centralizing T&D transformers and substations, where WEG leads the market in the U.S. So we have been selling solutions both for wind generation and as also for solar generation. And those are businesses which have seen considerable growth in the past years. The new administration has a very positive stance in terms of continuing to invest. Their resumption of the Paris Agreement is a sign of that.

But the U.S. have been investing in renewables considerably for the last years. Last time I looked, last year for wind, they added 20 gigs of energy. That's a very strong, robust number. So the country had been investing already. And the trend is that it will continue to do so. And we are well positioned. As I said, we have a very good footprint. And we are investing to increase our capacity to continue to meet the demands from that segment, both in the U.S. and in Mexico, where we also have a very good penetration and have had opportunities to make some sales.

[André Rodrigues, executive]

Victor, this is Rodrigues speaking now. Just to update you on the wind question and the change in technology that you mentioned in your question, 2021. For 2021, we have a contract with Aliança Energia, as you know, which will bring revenue in 2021, most of it, and then in 2022 as well. We have been also saying that we are making efforts to develop this new machine for 4.2 million gigawatts, which were now selling out.

We have signed 2 other contracts recently, which now leads us to have a portfolio for 2022 in wind, advancing a little bit over to 2023. And we should have an important investment cycle coming forward in wind investments. If that materializes, it will reflect in our order portfolio. So we're now going to work to capture those opportunities in that segment.

In terms of the technological change, WEG is quite well updated through our permanent magnet turbine. We are developing products based on that technology, of course, a new piece of machinery with almost twice as much power when compared to what we had. Of course, it requires new investments across all components, especially in the automation bit. And that's where we are focusing on right now. And we'll continue to use that same technology of permanent magnet in the U.S.

[Operator]

[Operator Instructions] Our next question comes from Mr. Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

Two quick questions. First, if you could comment on the revenue performance in Europe. It was the international market that saw the highest drop for you. Is that a one-off situation or not? And also during the start of the presentation, you did mention the new bids that would contribute to revenues in 2021. You did mentioned the 4.0 Industry. I know we do not also -- or do not always give expectations.

But if you could share your initiatives that were generating results, just to give us some color in terms of deliveries, what we can expect? You know that you have a partnership with Randon, what you can expect coming from there. Again, about the 4.0 Industry, what kind of growth have you been seeing in the companies you have acquired? What kind of cross-selling opportunities do you see going forward?

[André Salgueiro, executive]

This is Salgueiro. Thank you for your question. As for sales in Europe, it's important to highlight that the fourth quarter of last year -- sorry, fourth quarter 2019 has been a very strong quarter, where we started off by recognizing some important projects, the refinery project in Oman, which were factored into Europe sales. That level of revenue for projects came on strong for the first 3 quarters of 2020. For the third quarter, we started seeing a slowdown in terms of the long-cycle deliveries. We saw some new orders coming in but did not lead to an increase in revenues.

But in the fourth quarter, we saw a stronger reduction, which affected the revenues from long-cycle products or projects, both for oil and gas, also for water and sanitation. It's worth reminding that some O&Ms, which were important and that we're servicing those markets, and even the engineering companies, they are located in Europe in countries such as Spain, Italy, Germany and the United Kingdom, so the drop in those projects that, of course, comes in the beginning of the pandemic back in March, that has an impact down the road. And that has affected demand for long-cycle products. So that the main factor, the main driver was a drop in long-cycle product deliveries.

Combined with that, we also had late in the year, in some important countries, Germany being the most eloquent, we had higher restrictions put in place because of the COVID situation. They didn't get to the point of having a lockdown, but they had restrictions put in place and that affected demand for short-cycle equipment. So we had a combination of long-cycle products, which were coming at a lower level since the third quarter, along with higher restrictions, especially closer to the end of the year. And that, of course, eventually impacted some specific countries in terms of short cycle. If we remove that impact, as I said, short-cycle products have been resuming their pace gradually. We have not reached pre-pandemic levels. So there is room for us to improve, but we do expect to see that happen throughout 2021.

As for your second question, Motta, about the electric mobility, we have this partnership in place. And the e-delivery, which is a product, which was developed along with WEG, we expect to deliver the first trucks by Volkswagen in the second quarter of 2021. So that's what we have in terms of concrete information. And other partnerships we are developing, we are not authorized by the client to announce yet. But we do have the recharging station business. We are able to replicate projects of public partnerships in some places in Brazil. And we're also trying to meet private demand. We have developed new recharging stations. And that's a business that will create good opportunities for the company in the future.

As for the digital business, where are we now? Digital business within the company should be seen as a journey. So after the acquisitions, we are already on that journey on a step-by-step. We're combining the technology we have acquired. The example I gave in the past call of 3 products. We have WEG Smart Machine, Energy Management and other management tools emerge from those partnerships from that combination of different technologies. So again, it is a journey. And it is also a journey that should be complementary to solutions, which we already have in place at WEG. They are adjacent solutions to the existing portfolio. Also important to say is that at the first stages of that journey, we have a low comparison basis. So we see considerable growth on a month-by-month basis through those combinations I just mentioned but with a very low margin, yes.

But we do see a very promising outlook. For example, the Open Lab, V2COM was one of the companies that we acquired, when we acquired V2COM late in 2019, we knew why we were acquiring V2COM is because they had the technology in hand to develop 5G products. We also announced the agreement of a technical cooperation, which we signed in November with the Brazilian Agency of Industrial Development and the National Agency of Telecommunications, ANATEL, to test 5G technology across private networks for industrial uses. We conducted those tests in one of the most automated plants that we had -- that we have. If you were present at our WEG Day last year, you had a chance to take this tour at our plant with robots, automation, the highest automation level, as I said, that we have in the shop floor that's located in the Jaraguá do Sul region.

And with that, we will be able to assess the performance of this environment, this production environment with all those devices and antennas in place and connected via 5G. As we move from that experiment, [indiscernible] is to offer the Brazilian market productivity solutions based on 5G technology as soon as possible. And of course, that makes sense from an economic and technical point of view. From our end, so what we are developing is in line with the expectations, but a substantial increase in revenue will come in time.

[Operator]

Our next question comes from Mr. Rogério Araújo from UBS.

[Rogério Araújo, analyst]

Congrats on the results. Two questions. Is there any segment where you work that is seeing disruption from suppliers, either now or in 2020? And what are the -- where are the main bottlenecks that you see now that you could be selling more if you had more capacity now? If you could list the units where you have a higher pressure in terms of supplier disruption.

And also, I'd like to understand your long-cycle order portfolio. Salgueiro mentioned that you like this environment, where commodities are priced at a high level. I'd like to understand 2 things. I would imagine because of the COVID portfolio is not as strong, but at the same time, you have an environment where this will turn your way. So what would be the timeline that you expect to have new orders coming into your portfolio? How can you expect the behavior of your portfolio? Do we see high points, low points? What's the timing for that?

[André Rodrigues, executive]

Rogério, as for your first question, throughout 2020, we faced many challenges with the supply chain across different businesses. And as the pandemic evolved, we faced different situations. When the pandemic first hit, our main concern was solar panels. We expected to have a good year in solar. We did not want to see that chain being disrupted. We were ready for that. And so we did not feel the impact because we were kind of pessimistic before, we sort of anticipated bad things that didn't happen. So we were ready for a worst scenario. We were ready to seek alternative solutions to protect ourselves in terms of imported components, so some bearings were developed here in Brazil as an alternative and that worked really well. And when things started to resume some normal levels, we now face new challenges earlier in the year and as of late last year.

Up until now, we did not see any disruption, to answer your question. But as you can see on the news, all the international transits was involved, China vessels and freight prices are high. We see a lack of certain components, certain raw materials in the market, for example, electronic components coming from China. The automotive industry has been talking about delays in production because of a lack in those made in China components. Again, we increased our inventory early in the year for those components. And today, we are not facing a disruption. We do have some delay in deliveries. But we have built the necessary inventory for us to operate without compromising delivery time. In March, back in March, we reinforced our inventory so that we wouldn't suffer impacts earlier this year. Also in terms of paints, the petrochemical industry also suffered to some extent because of that because of the lack of some raw materials for that industry. But at no time did we have a major issue. We have managed to adjust to this new reality so far without compromising deliveries and also being able to meet new orders.

[André Salgueiro, executive]

Rogério, this is Salgueiro. As for your question about the long-cycle portfolio, it's difficult to give an exact answer because we're going through a very atypical situation. We have been experiencing a good long-cycle process. And as André mentioned, in terms of GTD, we do have a relatively healthy portfolio. Our main concern sits on the industrial front. Industry had been recovering and then the pandemic hit. And in the post-pandemic process, of course, people are holding off on their investment decisions. But there were projects on the verge of materializing. So we can only imagine that as the economy recovers, that will happen relatively fast. As André mentioned, an industrial project usually has a lead time of 6 to 8 months between the order, all the way down to delivery. So we are not seeing that happening now, no new orders.

Our commercial team has reported to us that there was a recent increase in the level of quoting. That's a first evidence of a recovery. Quoting comes right before ordering, of course, and right before production. So we do have a good expectation that this will happen throughout the year. But it's nothing that has already reflected in our numbers so far. As a reminder, the mining industry has not suffered that much. We still have mining projects in place even throughout the crisis. But we do have other segments, such as pulp and paper, oil and gas, water and sanitation, where we did feel some impact. But they might resume activity throughout '21. That's our expectation.

[Operator]

We now close the Q&A session. I'd like to turn the conference over to Mr. André Rodrigues for his final remarks. Please, Mr. Rodrigues, you may carry on.

[André Rodrigues, executive]

Hello, once again, thank you very much for participating in our audio conference. I wish you all a nice week, a nice day and see you next time for our next conference call to discuss our results. Bye-bye.

[Operator]

WEG's audio conference is now over. Thank you all for participating, and have a nice day, everyone.

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