WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English CORPORATE PARTICIPANTS Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Mr. Luís Fernando Oliveira – Investor Relations Manager Disclamer The statements that may eventually be made during this conference c all relating to WEG’s business perspec tives, projections and operating and financial goals and to WEG’s potential future growth are management beliefs and expectations, as well as information that are currently available. These statements involve risks, uncertainties and the use of assumptions, as they relate to future events and, as such, depend on circumstances that may or may not be present. Investors should understand that the general economic conditions, conditions of the industry and other operating factors may affect WEG’s future performance and lead t o results that may differ materially from those expressed in such future considerations. PRESENTATION Operator: Good morning and welcome to WEG's conference call on its earnings for 1Q13. Conference Ca ll 1Q13 1Q13 Conference Call Page 2 April 25, 2013 Before we go on you would like to clarify that any statements made during this conference call relative to WEG's business outlook, projections and operating and financial goals as well as to WEG's potential future growth are management's beliefs and assumptions and rely on information currently available. These forward -looking statements involve risks, uncertainties and assumptions as they relate to future events and therefore depend on circumstances that may or may not occur. April 25th , 2013 We would like to inform you that this conference is being recorded and that at this point all participants are in listen -only mode. Later on we are going to start the Q&A session when further instructions will be provided. Should you need any help during the conference call please reach the operator by pressing star zero. To attain the quarterly results press release or the presentation that we will be using during this conference please go to WEG's investor relations page at www.weg.net/ir. Investors should understand that general economic conditions, industry conditions and other operating factors may affect WEG's performance in the future and lead to results that may differ materially from those expressed in such forward -looking statements. We would like to remind you that this conference call will be made in Portuguese with simultaneous translation into English. Today with us in Jaraguá do Sul are Laurence Beltrão Gomes, Finance a nd Investor Relations Officer; Wilson Watzko, Controller Officer and Luís Fernando Oliveira, Investor Relations Manager. Please Mr. Gomes you may go on. Page 1 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English Highlights Quarterly Figures Net Operati ng Revenue Quarterly Evolut ion In R$ million Net Operating Revenue Domestic Market External Markets External Marketsi n US$ Gross Operating Profit Gross Margin Net Income Net Margin EBITDA EBITDA Margin EPS Q12013 Q4 2012 1,477,577 772,935 704,642 353,077 463,635 31.4% 172,299 11.7% 248,898 16.8% 0.2777 1,662,258 -11.1% 1,369,762 7.9% 774,533 -0.2% 714,268 8.2% 887,725 -20.6% 655,494 7.5% 431,141 -18.1% 370,825 -4.8% 528,641 -12.3% 391,967 18.3% 31.8% 28.6% 183,157 -5.9% 148,247 16.2% 11.0% 10.8% 289,786 -14.1% 198,251 25.5% 17.4% 14.5% 0.2952 -5.9% 0.2390 16.2% Figures in R$ Thousand % Q1 2012 % Domestic Market External Market 1,613 1,662 48% 50% 47% 52% 50% 53% Q3 Q4 1,529 1,478 1,370 48% Q1 Q2 2012 1Q13 Conference Call Page 3 April 25, 2013 Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Well good morning everyone. It is a pleasure to have you in our conference call on the earnings of 1Q13. We are going to follow a very objective agenda and as always I am going to highlight some important figures of 1Q, which in our assessment was a very positive quarter. I am going to talk about operating growth and financial evolution and then we are going to talk about Ebitda, investments and later on we are going to answer your questions. 52% 52% 1Q13 Conference Call 48% Q1 2013 Page 4 April 25, 2013 On page 4 we bring the comparison of our net operating revenue quarter on quarter along the past quarter. This is what we established in WEG's 2020 plan, which is to reach revenues of 20 billion until the end of this period, and we are taking important steps there. In this quarter despite the lower economic activity in Brazil and in other developed countries we had a very satisfactory growth rate of 8%. In Brazil economic activity and industry activity more particularly are starting to resp ond to production stimuli with the lower interest rates, a more interesting exchange rate and the incentives by the Brasil Maior Plan. So starting on page 3 we have the main figures of the quarter and its comparison to 1Q12. I would like to draw your attention to three points here: the first is our growth in revenues. We are going to go into detail on this but I would like to remind you that 1Q is a period of slower seasonal growth; but we still could grow based on what we had in 2012. The speed of this response, however, could be faster; in the external market the environment is more complex and surroun ded by uncertainties. We are being able to expand our presence going into new markets, introducing new businesses and projects in consolidated markets as well. The second point is our recovery of profitability that can be seen in margins and growth of our net income, Ebitda and net profit. Along 2012 we drew your attention to the recovery of margins and now this is very clear. Finally I would like to remind you that we continue to grow our recovery in margins without proportional increase of Capex and working capital. So the impact on return on capital investment is really relevant. Along the past years we have been able to accomplish additional market share overseas. We expec ted a toughening of competitive conditions which indeed took place; but our expectations for the remainder of the year are still positive because we have strong structural advantages: we really set ourselves apart from the competition because we are faster ; we are closer to clients; they recognize our brands; we can invest in commercial capacity, engineering and mass customization. Page 2 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English Business Areas Revenue breakdo wn 5% Costs of Goods Sold 8% 9% 17% 33% 7% 7% 7% 13% 9% 11% 23% 20% 24% 30% 52% Materials 64% Materials 64% 1Q13 61% 57% 62% 1Q12 Other Costs 9% Labor 23% Depreciation 4% 46% Labor 23% 1Q09 Industrial Equipment 1Q13 Conference Call 1Q10 1Q11 GTD 1Q12 Domestic Use Page 5 Other Costs 8% Depreciation 5% 1Q13 Paints & Varnishes April 25, 2013 On page 5 if you please go to this page we have our revenue breakdown based on the main business areas. Here you see equipment, industrial equipment with very good performance benefiting from the pickup in growth in the domestic market. However, this is still concentrated in short -cycle products; what we call engineered products in long cycles we are still not being able to convert our investment into orders. In the GTD area we can still see the continuity of a positive trend in the process and the products of transmission and distribution, although we are just starting to see better results. The g eneration businesses are still slow. As for domestic motors we have an improvement of conditions although in the white line products we still have distortions in the benefit of incentives for the consumption for imported products. Finally in paints and var nishes we have had a very strong performance. Now I am going to turn the call over to Luís Fernando to continue the presentation. 1Q13 Conference Call April 25, 2013 Page 6 Mr. Luís Fernando Oliveira – Investor Relations Manager Well good day everyone. We are going to page 6 of our presentation with the breakdown of our production costs and the comparison to 1Q12. We highlight an increase of 2.8 p.p. in our gross margin reaching 31.4%. It is important to observe that the gain of m argin was achieved in all costs components since we really did not change our breakdown in the cost of goods sold. The main factors for that were a relative stability and materials prices; the effects of a devaluation of 13% in export revenues; the lower cost of transformation gains with products, engineering and processes with gains in material consumption and labor; reduction in payroll taxes which led to a substantial decrease of prices in 1Q13 and the price dynamics and the mix of products that are mor e favorable. Main impac ts on EBITDA Q1 2013 Net Operating Revenues Consolidated Net Income for the Period Net Margin (+) Incometaxes & Contributions (+/ -) Financial income (expenses) (+) Depreciation & Amortization EBITDA EBITDAMargin Q42012 1.477,6 173,1 11,7% 48,3 (24,7) 52,1 248,9 16,8% 1.662,3 184,8 11,1% 53,7 (2,7) 54,0 289,8 17,4% % Q12012 % -11,1% 1.369,8 7,9% -6,4% 151,3 11,0% 43,3 (45,9) 49,6 198,3 14,5% 14,4% -9,9% 826,4% -3,4% -14,1% 11,7% -46,3% 5,2% 25,5% Figuresi n R$t housands 1Q13 Conference Call Page 7 April 25, 2013 Page 3 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English Going to page 7 we have our calculation of Ebitda. We see the expansion of gross margin was basically all reflected on the Ebitda margin that reached 16.8%; admin expenses were slightly higher with more increase in sales expenses and with that we had 25.5% growth in our Ebitda reaching 248.9 million with the margin that we already mentioned of 16.8. What is important to remind you here is that we are adopting the methodology of CVM's instruction 527. This is dif ferent from what we used before, which goes into Ebitda margins between 0.5 to 1 p.p. lower than what we had. Using the previous methodology the Ebitda margin would not have been 16.8 but rather 17.4%, 0.8 p.p. higher. Working Capital In % of Net Revenue 50,0% 40,0% Workin g Capital 30,0% Clients Inventories 20,0% 10,0% Capex Program In R$ million Outside B razil Brazil 73.7 58.7 55.5 5.0 3.7 5.1 53.7 51.9 45.4 Q1 Q2 50.4 Q3 2012 1Q13 Conference Call 56.8 9.3 6.0 64.5 Q4 50.8 Q1 2013 Page 9 April 25, 2013 So it is capacity to grow with low investment as we can see in slide 9, which shows organic growth and expansion of capacity along the quarters. Although we are with most plants in natural levels of capacity we still have facilities that can expand use without major additional investment, but rather with some additional resources. Lower intensity in the use of capital has an important role in the re turn of capital investment that is going up faster than our operating margins. With that I turn the call back to Mr. Gomes for his final considerations. Suppli ers Advances 0,0% 1Q06 1Q07 1Q13 Conference Call 1Q08 1Q09 1Q10 Page 8 1Q11 1Q12 Contacts 1Q13 April 25, 2013 On page 8 we see the evolution of our working capital as a percentage of net revenue along the years. This is a point that we have also been highlighting along the past quarters with a clear trend of relative reduction of working capital as of mid-2011. So we are keeping a high growth of revenue without a proportion of high investments. §Laurence BeltrãoG omes Finance and Investor Relations Officer laurence@weg.net § Luís FernandoM . Oliveira Investor Relations Manager +55 (47) 3276-6973 luisfernando@weg.net twitter.com/weg_ir 1Q13 Conference Call Page 10 April 25, 2013 Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Well, before opening for the Q&A I would like to reinforce some aspects of the results showing that we are on the path to meet our expectations as set by the WEG 2020 plan. We have clear opportunities for growth both in Page 4 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English organic growth and also by means of transactions that can bring us new products, markets and technologies. We still are seeking for competitiveness in any condition. Results are encouraging but we still have more to do to improve our productivity, such as r educing and rationalizing costs and expenses. With that I will close our presentation and open then for the Q&A session. Please operator you may go on. Q&A Session Operator Well ladies and gentlemen we will now start t he Q&A session. We would like to remind you once again that this conference call is being made in Portuguese with simultaneous translation into English. If you want to ask a question just press star one and if you want to remove your question from the queu e you have to press star two. Mr. Luís Fernando Oliveira – Investor Relations Manager We have a question that we collected on the web by Sérgio Martins: what is the product of WEG that is being most successful in the market? Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Well, WEG has a very broad portfolio of products by means of five business units; but in the foreign market I would say that industrial, electro electronic equipment, industrial engines this is very strong. Really the WEG brand gained reputation and is known in the international market by means of its industrial, electric engines and motors and we have been investing a lot in innovation. We have been pioneering in the development of specific applications and products for some market niches and therefore I would say that perhaps the product that most stands out today is our W22 Line Super Premium with the highest level of energy efficiency alread y ranked in IE4 that is the minimum standard of electric efficiency. So this is an important product, because as we are having this trend of a higher demand for industrial efficiency and increase in production activity, energy efficiency that will have an impact on the reduction of cost, so all that leads to us having this very important project for these companies that want to have energy efficiency in their production processes. Operator Our next question comes from Renata Faber from Itaú BBA. Ms. Renata Faber – Itaú BBA Hello, and good morning Laurence and Luís. I have two questions: the first with regards to the growth of revenues, if along the year we can expect an acceleration of revenues. And the second question well, looking at the working capital especially if we take a look at receivables and inventory levels in the foreign market there was a steep drop in the end of the quarter. I would like to know if that was because of t he revenues of the foreign markets which were lower or was it a policy to reduce working capital that reduced or translated, sorry, in a lower increase of revenues or if this reduction in the working capital is connected to a reduction in revenues or not. Thank you. Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Well thank you very much, Renata, for your question. It is too early to tell the growth for the whole of the year; but we have clear signs of improvement in the domestic market. In the foreign market we expected a reduction in the pace of growth due to low activities in the foreign market and also more peers' competition. WEG grew a lot and gained market Page 5 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English share in the foreign market and so w hat is important is that in this quarter the market did not grow but we did not lose market share, and we are so very confident that we are going to pick up growth rates or better; we are going to have a growth rate that is more, or closer to the domestic market. I think that this will go more hand in hand, growth rates in the foreign market and in the domestic market. So we do believe and we do have some signs - especially from the domestic market - that lead us to think that we may be able to recover grow th rates. liquidity. We would like to have an update from you. It seems that liquidity is very strong, if you have any guideline or any policy different to reduce debt balance and liquidity, what you are thinking about in this field? Are you going to work with lower liquidity? If carry costs can increase a little? So I would like to know your strategy for this year. Thank you very much. In the foreign market expectations for the US, for instance, are reasonably good. The US is an important market. It was a weak quarter this quarter; but we do expect also to pick up sales in the States. Well, we are implementing some actions to improve the duration of our debt but with regards to net debt, well, that will also depend on the program and process of acquisitions, this is going to be important. We have already released our Capex numbers for 2013 but that is going to be important from now on to really complete possible processes of company acquisition. As you all know WEG has constantly analyzed and prospected companies in Brazil and overseas, companies that can bring technology, products, to complement WEG's current portfolio and also mar ket share for WEG overseas and in Brazil. Ms. Renata Faber – Itaú BBA Thank you very much. Operator Excuse me. If you want to ask the question just press star one. Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer We still have part of the answer to Renata about working capital. Well, Renata, we did take some actions to optimize inventory levels especially in our subsidiaries and branches overseas and also we took some actions in Brazil together with suppliers and clients to try to reduce the need for working capital. So this is a process that is still ongoing; but yes, the company is taking actions with this regard. Operator Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer So this is key and I would say that it is hard to give you a forecast because these processes are complex and they may take time to be completed. Mr. Fernando Mattos – Merrill Lynch Thank you very much. Operator Once again if you want to ask a question just press star one. We now close our Q&A session. I would like again to turn the floor to Mr. Gomes for his final considerations. Once again, if you want to ask the question press star one. Our next question comes from Mr. Mattos from Merrill Lynch. Mr. Laurence Beltrão Gomes – Finance and Investor Relations Officer Well thank you very much for joining us today and have a very nice day. Mr. Fernando Mattos – Merrill Lynch Well good morning, thank you very much for your presentation. My question has to do with Operator Page 6 WEG S.A. 1st Quarter 2013 Earnings Results Conference Call April 25, 2013 – 11:00 a.m. (Brasilia time) Transcript of the simultaneous translation from Portuguese into English WEG's conference call is now closed. We thank you very much for joining us and have a nice day. Thank you. Page 7