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Embraer S.A. (NYSE:ERJ)

2013 Guidance Conference Call

February 5, 2013 8:30 am ET

Executives

Luciano Froes – Director of Investor Relations

Frederico Pinheiro Fleury Curado – President and Chief Executive Officer

Jose Filippo – Chief Financial Officer and Investor Relations Officer

Elaine Funo – Controller.

Analysts

Peter Skibitski – SunTrust Robinson Humphrey, Increase

Noah Poponak – Goldman Sachs

Cai von Rumohr – Cowen & Company

Amit Mehrotra – Deutsche Bank

Turan Quettawala – Scotiabank

Joe Nadol – JPMorgan

Carter Leake – BB&T Capital Markets

Ron Epstein – Merrill Lynch

Operator

Good morning, ladies and gentlemen, and welcome to the audio conference that will review Embraer's outlook, 2013. Thank you for standing by. (Operator Instructions) As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br.

This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.

These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the Company is present. The words "believe," "may," "will," "estimate," "continued," "anticipate," "intend," "expect," and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements.

Participants on today's conference call are Mr. Frederico Curado, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; Mr. Luciano Froes, Director of Investor Relations; and Ms. Elaine Funo, Controller.

I would now like to turn the conference over to Mr. Frederico Curado. Please go ahead, sir.

Luciano Froes

Hi, good morning everyone. This is actually Luciano Froes. I just wanted to welcome everyone to the call and go over very briefly, the program for this morning. So, Fred and Jose Filippo will be going through the information, we have prepared some slides. Jose Filippo will open with a recap of the 2012 disclosed results today primarily delivery and backlog for fourth quarter. Fred will provide an outlook and strategic views for the company and afterwards, of course then we will provide the specific guidance.

And so with that, I'll pass the word to Filippo.

Frederico Pinheiro Fleury Curado

Thank you, Luciano, and good morning everybody. As we mentioned, we are scheduled to release the 2012 numbers on March 22. So at this point, the information available that we have for 2012 is the backlog and the delivery release that we made last mid-January. So we’ll like to start with a recapping of that information.

And in the first stage, we have the deliveries for 2012. In the commercial jets, 106 airplanes in line with the guidance that we gave between 105 and 110, and in the executive jets, 99 aircraft divided by 77 light and 22 large jets also in line with the light, but a little bit above the range that we gave for large jet.

The following page regarding the backlog at the end of 2012, we reached $12.5 billion slightly increased compared to the third quarter numbers, despite the strong deliveries that we had forecasted for the fourth quarter. Basically we already announced that the Aldus order of 20 E-jet and also some numbers related to Sisfron and other sales.

With that, I would like to turn to Fred for his comments on 2013 outlook before we get to the numbers of the guidance.

Frederico Pinheiro Fleury Curado

Good morning, all and for those who haven’t met, happy New Year. Just a few words on the way we see the global economy. We see it continue to grow at relatively modest pace in a symmetric way. The airline traffic system, we see it also that growing and we also see important consolidation moves, especially in the United States. Hopefully, we will see some of that in Europe in the future. And so, we have a relatively positive view about the airline industry.

And in particular, for us we have, we see a window of opportunity for the upgrade of the scope clauses in the United States, which has a potential positive impact for the Embraer 175 sales, 76 seats were being a typical configuration for the new scope clause references. So with that, we do expect to have a higher level of activity in sales this year compared to last year. We did not achieve as you know, a book-to-bill of one last year as we thought we would. We definitely see that happen in 2013.

Very importantly, we are making firm steps towards the second generational of E-jets, the definition of the engine, selection of the Pratt & Whitney engines late December. And yesterday, we announced also the new generation of avionics, we have taken with Honeywell for the second generation of E-Jets with an absolutely state of the art new version of the avionics, whilst keeping the commonality with the existing fleet. So, we believe another major step for the future progress of the program.

On the executive aviation side, the market is still recovering slowly and we continue our trend of gradually getting market share. So of course, we do see a step-up, a step function, as we introduce the Legacy 500 next year and the Legacy 450 in 2015. So we see this organic growth as a continuous and relatively let’s say predictable trend for our business.

In parallel, of course, we keep investing in supporting our customers on infrastructure, spare parts inventory, technical support, experts and of course the whole customer support, customer services network, which of course also brings us some after sales business. The larger the fleet, obviously the larger that business as a total amount.

Our recent surveys both two independent surveys, one from AIN, another one from ProPilot, in which we ranked second and third best in the world. This tells us that we are going in the right direction, and of course we just have to keep improving our performance.

And finally moving to defense, I mean, again, we are continuously deploying and succeeding in establishing ourselves as a major defense player in the country in Brazil, not only on the airplanes and air, let’s say airborne segments and systems, but also in other defense areas and the recent award of Sisfron, the monitoring system for the Brazilian borders, I think is a very good example of that.

Having said that, the KC-390 is indeed a pillar in our defense business and we are moving on time, so 2013 will be a very important year for the program. So we are going to be aggregating more engineers, therefore more revenues just reminding, of course, this is the development contract. And between 2013 and 2014, we do except to have, let's say, the contract for the actual delivery of aircraft for the Brazilian Air Force and, from that, hopefully, the execution of the several LOIs we have in the world. So, it's a major driver of our growth in the defense market.

And, finally, before I turn back to Filippo, so he can just confirm the numbers we devoted last night on the guidance for 2013, let me stress that our discipline continues to be absolutely present in our day-to-day activities, both in operations and also in the financial management. So, our P3E, our excellence program, remains absolutely on track.

We have our metrics, we have our goals and the company continues to perform in those guidelines. And, of course, having a strong balance sheet and a sound and solid financial management has been with us for a long time and that isn’t changing.

So, with that, I'll turn back to Filippo and after that we are going to open for Q&A. Thank you.

Jose Filippo

Thank you, Fred. Now, next page we have the consolidated numbers for the outlook in terms of the guidance. So, we are releasing, then, the net revenues range of between $5.9 billion to $6.4 billion consolidated. The EBIT between $530 million to $610 million and then a margin from 9% to 9.5%, and EBITDA of $770 million to $900 million with a margin of 13% to14%.

Next page we have a little more details on this and basically comparing with the available information which is the guidance that we had for previous year. We see net revenues in the range a little bit above the range that we had last year, and we could see in the right high side of the sheet the breakdown within the business. We have here a change what we had in the guidance of last year.

So we are forecasting that we have dilution in the participation of commercial aviation in the total (inaudible) of the revenues. So, although the commercial aviation is still more than half of the business, we turning to 52% compared to 63% in the guidance set for the previous year; 25% for executive aviation rose from 20% and 21% in defense and security from 15% in the guidance for 2012.

We used this when we get to the next page, where we have the details. But still keeping this page, going forward on the EBIT, the range of $532 million to $610 million, an increase from the $520 million and $590 million of last year. Basically, we are considering on the net sales keeping the margin, despite potential dilution of the commercial aviation. We see that we can have positive impact on the full year of the dollar rate against the real for the cost and also the maintenance of several of the items of the stimulus package that we have been experiencing last year.

In terms of the EBITDA, the range $770 to $900 above last year guidance, $720 to $840. And the margin, we are increasing from the guidance that we had before to 30% to 40%, because the slightly change in the depreciation method of calculation. This is a technical effect, so increasing from 12.5% to 13.5% to 13% to 14%.

In next page, breaking down based on the each business unit, and number of deliveries we have here for commercial jet, the deliveries between 90 and 95 jet, it’s compared to the 106 actual figures released for 2012, a reduction. Net revenues 3.2 to 3.35 for the year. Continuing, in executive jet, the deliveries increased from 2012, we are forecasting 18 to 19 light jets, and 35 to 30 large jets, again, from the actual numbers of 77 and 22 each light and large respectively for last year.

Net revenues for this business unit between $1.4 billion and $1.6 billion, basically guided by a better mix, if you take large jet vis-à-vis light jets. In the defense and security, net revenues forecast for 2013 between $1.25 million to $1.35 million showing the sustainable growth, basically supported by the (inaudible) development, and also the program of modernization of the fighter jet. Just to balance the number, the other revenues is $50 million to $100 million, basically associated to non-core revenues for example the agri business plane and others.

In next page, talking about investment, total forecast for 2013 of $580 million, which is below the guidance for 2012 was $650 million. It's a reduction compared to last year. It reflects our focus and our commitment to cash management, of course, keeping the assurance for the key project funding.

The breakdown of this investment we can see through research a $100 million, basically pretty comparative in innovation programs. The developments $300 million, the major part associated to the G2 and the E-jet flows programs as well as the Legacy 150 and 500. CapEx, we are keeping in $180 million associated to the continued automation and productivity program. So this all accounted for $580 million in this year.

Last page, the summary, so in the short term, what we see in the short term in terms of outlook, still the resilient organic growth, the business is just prepared for that as we showed previously, and really prepared for facing this challenge that they have going forward. Of course, continuous focus on diversification, efficiency, customer satisfaction I think Fred elaborated a lot about that in the beginning.

This is the combination that we have in terms of both management being oriented. So, we continue to focus on those pillars. And, also the financial soundness and discipline. We have structures of controllership dedicated to each business units to make sure that we have the accountability and the information that will lead the leaders of each business units to be performing as expected.

And when we see the mid and long term outlook, it’s also the sustainable revenue growth based on the product mix. We have the executive jets of 500 and 450, the KC-390, and also the second generation of the E-jets as we mentioned before. And, of course, keeping, constantly, our focus on increasing operating leverage and efficiency.

With that, we finish this presentation and we open for question. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Peter Skibitski. Please go ahead.

Peter Skibitski – SunTrust Robinson Humphrey, Increase

Good morning. Frederico, I was wondering if you could talk about the surge in large-cabin business jet deliveries in the fourth quarter and why it looks like you think that will continue in 2013. Do you feel like the market is coming back strongly in the medium business jet niche?

Frederico Pinheiro Fleury Curado

Thank you, I think the surge, you're right, the surge was much more driven by, let's say, a combination of renegotiation of contracts in which during the year, we have to reconfigure some aircraft, so it is not something that we ideally plan for, so ideally we should have a much more, let's say, stable flow of deliveries throughout the year. But progressively last year that made a very important point. So we see the growth on the business jets as still relatively modest.

So we are gradually increasing market share, because we really believe we have differentiated products. So as we‘re relatively new in this business ten years. So as we of course get more awareness in the market, we tend to increase our market share, obviously the introduction of new products such as the Legacy 500 and 450 in 2014 and 2015 respectively, will give us a step function, because we’re not in that market segments, at all today, so from the Phenom 300 all the way up to the Legacy 100, we have nothing in between. So, anything we add to that space is going to be incremental to our revenues. I hope, I have answered your question.

Peter Skibitski – SunTrust Robinson Humphrey, Inc.

Yes, yes. And then, the first delivery out of China for the 650, is that not until the fourth quarter?

Frederico Pinheiro Fleury Curado

That’s correct, by the year end.

Peter Skibitski – SunTrust Robinson Humphrey, Inc.

Okay. Okay. Let me ask one more and I'll get back in queue. Could you talk about the MOU with Agusta on the helicopters? Maybe if you could just let us know if you expect that to be a meaningful revenue contributor in 2013?

Frederico Pinheiro Fleury Curado

No, not in 2013, the MOU will lead to, I mean, hopefully, we’ll lead to the creation of a joint venture company, which we anticipate to happen within the next few months, and its focus is more for, towards the Brazil and Latin American markets and initially more towards larger aircraft, larger helicopters for oil and gas. There is a very high potential demand for those helicopters in Brazil and in the region and also preferred for the military, so, 2013 will be a year of, let’s say as newly not business start-up company, so, there will not be any material effect on Embraer this year. And probably not even in 2014. It is an important strategic move, if we succeed, and may be a little bit more middle term that may add up to have a, let's say, an auxiliary revenue for us.

Peter Skibitski – SunTrust Robinson Humphrey, Inc.

Understood. Understood. Thank you. I'll get back in queue.

Frederico Pinheiro Fleury Curado

Okay.

Operator

Our next question comes from Noah Poponak. Please go ahead.

Noah Poponak – Goldman Sachs

Hey, good morning everybody.

Frederico Pinheiro Fleury Curado

Hello.

Noah Poponak – Goldman Sachs

A question on margins, I guess it's a little surprising to see a flat year-over-year operating margin target, just because I think it's the case that you have a full year of the stimulus benefit impact in 2013, whereas you didn't have a full year in 2012. I'm assuming there's a little currency help. Maybe you can just quantify those two items, so we're all clear there? But if both of those are true, it would imply there's margin pressure in the underlying core business. So, if that is true, can you help us with where that's happening and why?

Frederico Pinheiro Fleury Curado

I think you’ve basically answered your question. When we do have tailwinds on, first, the efficiency, number two, the currency, which may, the real has evaluated the last 10 days, so, hopefully, it will be a tailwind, not a headwind as we had until some time ago, and the fiscal stimulus, which is in place, you're right.

Now, headwinds we have, of course, losing a little bit of operational leverage in our main business and there is some pricing pressure that you can see there, and twofold. I mean, the mix of 175s will be larger than what it used to be vis-a-vis the 190, 195. And mostly particularly, I mean, the top line is just a smaller number, but, as of course, we're dealing with large contracts such as the one that we know, we have succeeded with Republic American, I think it's not hard to imagine that those tend to have tighter margin. So, that's more or less where we are.

Some relief, also of course, as we shift if we sell a little bit more higher numbers of large executive jets, that should help as well. So, everything in a weighted and balanced, that’s the picture that we see is a relatively flat margins, not because as we potentially can increase revenues a little bit. So we can actually generate a little bit of more profit, but as far as margins at this stage, we think that’s the best outlook we may have is the stable margin at a very high-single digit.

Noah Poponak – Goldman Sachs

Okay, that's helpful. Can you specifically quantify the stimulus benefit impact in '13, and maybe tell us where it finished '12? And then also, what the FX rate is that's baked into the guidance?

Jose Filippo

Yes. Noah it’s Filippo. Regarding 2012, we are finalizing the numbers. For 2013, what we’ve been releasing and since we plan about $100 million in the stimulus package as a whole, with several items on it.

Noah Poponak – Goldman Sachs

And FX?

Frederico Pinheiro Fleury Curado

And FX is basically the same that we had last year.

Noah Poponak – Goldman Sachs

Okay. And then just one other…

Frederico Pinheiro Fleury Curado

We’re assuming the two real, two real per dollar. That's where we're assuming.

Noah Poponak – Goldman Sachs

Got it.

Frederico Pinheiro Fleury Curado

Because we started the year with the trend a little bit higher than that, but I think that today we can consider that we could work with the two. That’s what we used for the projection in the back.

Noah Poponak – Goldman Sachs

Got it. And just one other, one other item for me on commercial aviation, a little bit more in the medium term or maybe even long-term, you mentioned the order opportunities still in front of you, expecting book-to-bill above 1 this year. But you are taking down production in '13 versus '12. So, I guess I'm wondering, do you think it's more likely the orders you see this year allow you to keep production kind of flattish, or maybe growing a little bit, 2014-2015? Or are there scenarios where you just had to take the rate down this year because of the weakness in orders last year, so there are some open spots, but that you could have large enough order activity here to actually take rates up significantly beyond 2013? I know it's looking a little further ahead, but I just want to understand how you're thinking about that dynamic.

Frederico Pinheiro Fleury Curado

Noah, I think it’s a fair question. We, I don’t see any significant increase or decrease, we certainly do not expect to reduce it further. So I think let’s say a barricade of that, no the base case will be like a flattish production throughout the next few years and to yes of course, second generation in service. But, yes, there is upside potential. I mean depending on how much market share we grab from these campaigns in the United States hence how much of let’s say of the worldwide economy re bounce and we see some more demand coming back to the 190, 195 which indirectly has been affected by literally the weather floods of the 737, the A320 into the markets. So although there is no direct competition there, there aren’t that many passengers to be flown, that many finances to be, to finance sales. So that affects the whole industry and indirectly has affected a little bit ours of 195 segments.

So if that goes away and we grabbing, Noah maybe a more optimistic market share. I think we may end up raving if you will our – we were raising back to exist it to previous levels of our production rate. We do not see a scenario now that we would further decrease the rate.

Noah Poponak – Goldman Sachs

Got it. Very helpful. Thanks for taking my questions.

Frederico Pinheiro Fleury Curado

You bet.

Operator

Our next question comes from the Cai Von Rumohr. Please go ahead.

Cai von Rumohr – Cowen & Company

Yes, thank you very much, gentlemen. So, could you give us some color in terms of the percent that you expect the 170, 175 to be of deliveries in 2013 versus 2012? And give some color in terms of how many open slots at your projected rate of 90 to 95 you still have for 2013?

Frederico Pinheiro Fleury Curado

Luciano help me here. I will answer the second part, Cai. This is Fred, and Luciano will help me on the, on our rough estimates of the breakdown. We almost sold also, we are comfortable with the existing of course, upon confirmation of the Republic deal by the court.

Luciano Froes

So, hi Cai Luciano here, so actual figures for and this is all detailed, too, in our earnings and our backlog release, but you can see for E-175, we delivered approximately 20 in 2012, and that number should pickup to about 25 in 2013, all right and also slight increase in E170 as well from 1 to 4. All right.

Cai von Rumohr – Cowen & Company

Okay, very good. And then you had this deal with Republic where you're, and my understanding is power by the hour, you're buying the spares, and then you'll sell them. Could you walk us through that? I mean, was that kind of a quid pro quo for this order? What are the terms, and what sort of a P&L impact will that have on 2013?

Luciano Froes

Well, Cai, it's, I think there is a typical order. I mean, it's a large one, delivers are concentrated in 2013 and 2014 and we do have some deliveries for 2015 under that order. There are options, as well, which hopefully, can be exercised. The trigger, of course, will be as far as the court, under, which American is in Chapter 11 approves the deal. And we are ready to rule from that. Tighter margins yes, but as you can verify in the guidance, we don’t see that having major negative impact to – was in the balance the company will be even as far as margin take into [growth on]. So, let’s say it’s upon confirmation is a great order for us. I think it's a big first step and good one, I might say, of introducing the 175 on a larger scale in the United States market.

Cai von Rumohr – Cowen & Company

Terrific. Actually, the question was, I believe you put out a release that you have a power by the hour arrangement with Republic where you will purchase some of their spares and then sell them back to them. So, the question was, is that arrangement part of the Republic order, and what financial impact will that power by the hour arrangement have on 2013?

Luciano Froes

I am sorry, Cai. I misunderstood your question. This was not an integral part of the deal, no. It was, let's say, something connected to it’s potentially, we like to have power by the hour programs with airlines. So, there will be some buy-back now, which have an immaterial, no material effect to our balance sheet or cash. And with potential nice revenue flows for the several years to come. So, it was level like a second deal, attached to the first, but second new deal in our perspective.

Cai von Rumohr – Cowen Group

Excellent. Thank you very much.

Frederico Pinheiro Fleury Curado

Thank you.

Operator

Our next question comes from Amit Mehrotra. Please go ahead.

Amit Mehrotra – Deutsche Bank

Yes, hi, thanks. It’s Amit Mehrotra here from Deutsche Bank, calling in for Myles. First question is on the commercial aviation business. Can you just update us on sales campaigns outside of the U.S. carriers, and potential timing of those? And just following up on the last question, could you provide us on the sold-out position for 2014?

Frederico Pinheiro Fleury Curado

Well, campaigns, we have several campaigns for a small number of aircraft some option discussions, but the meaningful of course, the meaningful campaigns they are in the United States, so we have also some activity with leading company. So I can’t really talk specifics about campaigns as you know. Just a second on the…

Jose Filippo

On the outlook for us 2014, I mean, probably we are in a very growth estimates probably something between two thirds and three quarters of our – lets say just same level of production already committed. So we’re feeling relatively comfortable as I responded to Noah that to again as a minimum, keep this new, I mean, this new production rate as between 1995 aircraft we relatively comfortable about that.

Amit Mehrotra – Deutsche Bank

Okay, thanks. That's helpful. Just one follow-up on defense. Can you bucket the major drivers of the 30% growth? Is that all incremental KC-390, Sisfron? And can you provide some more detail on the major drivers there? Thanks.

Frederico Pinheiro Fleury Curado

The combination of KC-390 one of the main drivers about there is Sisfron, there is potential also, that we expect to have the execution of the contract for the Brazilian satellite. So there are several drivers maybe the KC-390 is a most important, but not the only one to have at least two or three others.

Amit Mehrotra – Deutsche Bank

Okay. All right. Thank you very much.

Frederico Pinheiro Fleury Curado

Thank you.

Operator

Our next question comes from Turan Quettawala. Please go ahead.

Turan Quettawala – Scotiabank

Good morning. I guess just my first question, Fred, just a clarification. Did you just say that two-thirds to three-fourths of 2014 production is sold? Did I hear that right?

Frederico Pinheiro Fleury Curado

Yeah, that’s correct.

Turan Quettawala – Scotiabank

Okay, thank you. And I guess just my question on the defense business; just could you chat a little bit about how the KC-390 program is going. I think you mentioned recently that the plane should reach design freeze by June of this year. So, should we be thinking about 2014, maybe, as a good timeframe for some more orders?

Frederico Pinheiro Fleury Curado

The airplane is scheduled to fly before the end of next year so, 2014. And we are - I mean, I mean, we are really engaged with air force now at Brazilian air force. Now, probably towards the second half above to know that the next contract, which would be the procurement of 28 units that they have already indicated in their LOI with us. So that, of course, is not fully under our control, so we may have this contract signed before this year. We may have it signed maybe first quarter of next year – first half of the next year, I am sorry. And that is an important milestone for us, because from that, we will have, let's say, frozen configuration and frozen let’s say contractual configuration. And from there we can start of course, pursuing the execution of the other LOIs we have and other customers, as well.

So, the development is going on time, CDI is going to happen this year, first flight less than 24 months from now. We will have our first metal cut very soon as a matter of weeks and so, typically on time commercially everything shows us that before and between the end of this year and next year most probably next year. We should have let’s say the initial serialization contract, which will give us a 28 aircraft backlog that the potential backlog again as per the LOI would have with the air force, from that on commercial effort to sell the airplane.

Turan Quettawala – Scotiabank

So, next year, there could be some orders I guess, on that front, from other countries apart from Brazil?

Frederico Pinheiro Fleury Curado

Next year, (inaudible) 14 years.

Turan Quettawala – Scotiabank

Okay.

Frederico Pinheiro Fleury Curado

So, let’s say maybe more optimistic view yes, it is possible.

Turan Quettawala – Scotiabank

Okay, great. And just one last question. What is the probability of maybe the stimulus package here being extended both 2014? Is there any chatter about that or what's going on with the Brazilian government there? Thank you.

Frederico Pinheiro Fleury Curado

That’s a good question it is a very hard one to answer. Not necessarily this stimulus package in my perspective is no more than the let’s say correction of distortion that Brazil have in it’s cost structure. So, I would strongly – I will strongly fight and for the perpetuation of those things, but did not actually stimulus they are again, they are offsetting handicaps that we have in the Brazil cost structure. Our labor is extremely expensive, all the fees attached to the payroll.

So this is totally the view of the industry in Brazil and if this prevails, we may have this thing of course, we knew then hopefully perpetuates it. Can we assure that? No, we cannot assure that, this is something of course, politics involved and the budget of the Federal Government et cetera. So, at least part of that we hope that’s going to stay. You know the other – there are some more other elements which are more like specifics, which we may or may not be renewed, but at least this deviation on the payroll taxes and (inaudible) these issues Brazil wants to be a comparative play.

Turan Quettawala – Scotiabank

Okay, great. Thank you very much.

Operator

Our next question comes from Joe Nadol, please go ahead.

Joe Nadol – JPMorgan

Thanks. Good morning. I was wondering if you could give a little bit more color on the cash flow outlook. We have all of your investment guidance, but is there any – are there any major things we should be thinking about in terms of working capital, and also investment in either the spare parts pool, has been the case in previous years, or aircraft financing?

Jose Filippo

Joe, actually we keeping that focus, as I mentioned before on a priority on cash flow. I think that, regarding the pool, of course this is important that we have this full support in the business, but we try to ways that this will not be burden the operation. So I don’t think we have major changes in that, because this is tie to be using – very tied to the operation.

Regarding the project, especially when we see some development, of course, we try to use the working capital has been driver for the management. So we don’t plan to increase working capital, so if we need to do any type of supplier, terms we will be offsetting potentially purchases. So I think that – so not be a problem. We still keep in terms of customer financing, our policy of not increasing exposure and balance sheet. So we still think that we have means of providing sources in financial institutions. So with that those we don’t see a problem on that. And you saw to finalize the compact, we are also capping this in $188 million, which again prioritizing the productivity and the programs support for this.

Joe Nadol – JPMorgan

Do you expect to be free cash flow positive in 2013?

Jose Filippo

Yes, that’s what we are working.

Joe Nadol – JPMorgan

Okay. So if I just take your EBITDA and subtract your investments, there's no other major items in there?

Frederico Pinheiro Fleury Curado

No, no, no, there is nothing left. We are working with the positive cash generation this year.

Joe Nadol – JPMorgan

Okay. And then on the income statement this year, we have your EBIT margin, and understand – I heard a lot about your commentary spread on some of the pluses and some of the minuses for margins. If we just narrow it down a little bit, and look at gross margin and SG&A, last year, during the year, we haven't seen Q4 yet, but during the earlier part of the year, anyway, SG&A was something you guys were really making an effort to try to contain. Can you update us on the progress there and what the opportunities are or the upward pressure on SG&A, specifically?

Frederico Pinheiro Fleury Curado

Yes. We haven’t released the fourth quarter numbers yet, but we believe that’s going to not confirm our push back to that rising cost. It is something which I can’t recite the numbers by heart here, Luciano, but it looks pretty flat in 2013, so it’s not increasing, so that the payroll increases that we still have in Brazil automatic increase in payroll, vary, but the very old fashioned instrument. But we are going to compensate, we have the productivity, so I do not foresee increase in that G&A for 2014, so that’s going to be the real better ratio over hopefully a little bit higher revenue.

Joe Nadol – JPMorgan

Okay. And then, finally, in the investment category, when you launch, formally launch this program, the accounting changes. I'm talking about the commercial, the re-engining program, the accounting changes. So, what accounts or how much do you have – what did you assumed in your investment guidance for that, particularly for research, because I believe it comes out research, goes into development, but you're still at $100 million research?

Frederico Pinheiro Fleury Curado

Specific for the G2 you mean?

Joe Nadol – JPMorgan

Yes. If you launch that earlier in the year, it's a big difference from later in the year?

Frederico Pinheiro Fleury Curado

Yeah, it is the small part of the $100 million, the large part of that is actually regard technological development, which is our big technological roadmap, which takes I don’t know maybe two to three quarters of this total investments and as soon as we launch the program Joe, G2 which we plan to launch this year. As soon as we launch it, of course all the expenses from that point on it will be incurred as development.

Joe Nadol – JPMorgan

Right.

Frederico Pinheiro Fleury Curado

There is a key to the insight. So part of the, I mean the larger part of the G2 of the second generation E-jet, which probably under the development item rather than research.

Joe Nadol – JPMorgan

Okay. And then very finally here, just on the recent deals that you've announced with Pratt and with Honeywell, I presume there's probably some commercial terms there that help you in your development price on the plane. So, I don't know what you're comfortable speaking about, but can you give us any sense on how the total development cost for that aircraft is shaping up and what the profile of any supplier contributions might look like?

Frederico Pinheiro Fleury Curado

Well, let me say I am very comfortable about it and even bullish about competitiveness of the second generation of E-jets. I think we are seeing a response from our supply chain both at exit and new players trying to get into our program, which confirms our positive projection about the program, so there is a lot of interest, supply chain to be in the program and that just tells us we are on the right track for that. So we between back to what Filippo said about financial discipline and trying to keep the positive cash flow, we have those like major guidelines with us and flow of program contributions we have done probably, on a pro rata basis to our own expense. So, I do not anticipate any spike in the next few years, anticipate I think more of a move through trends, obviously growing a little bit up as we did and to the second generation E-jet, that too depend also of course what we do beyond the Legacy 500 and 450.

So we are looking to relatively stable company, we just grow organically and the investment profile Joe, we will be very consistent to that growth. So you should not see anything abnormal in our behavior, in that balancing our cash by keeping free cash flow on the positive side.

Joe Nadol – JPMorgan

Okay, thank you.

Operator

(Operator Instructions) Our next question comes from Carter Leake. Please go ahead.

Carter Leake – BB&T Capital Markets

Thanks for taking my question. On the American deal, will you be replacing the CRJ 700s over time? It just seems that the 47 firm seems to synch up with the number of CRJ 700s that American has.

Frederico Pinheiro Fleury Curado

I am not the best person to talk to you about that. That should be American, my guess, again I am not speaking for American at all, is that no, I mean there are more immediate concerns, it’s probably on the incrementing capacity and remember that they are turning back 39 135. So that will be my guess. I guess it will be in that, this is just my perception. We did never disclose towards exactly how they are going to deploy the airplane, and I don’t know anything about the situation of any other fleet.

Carter Leake – BB&T Capital Markets

Okay. Moving to the Republic deal, are there any contingencies on that deal, for example, a merger of AMR and US Airways, that could impact either the deal itself or timing?

Frederico Pinheiro Fleury Curado

The only contingency is that the approval by the court, which we expect to happen in February. There is no other contingency in that deal.

Carter Leake – BB&T Capital Markets

And then, if you can discuss it, are you taking back any trades from Republic on this deal?

Frederico Pinheiro Fleury Curado

No, we are not.

Carter Leake – BB&T Capital Markets

No trade-ins?

Frederico Pinheiro Fleury Curado

No.

Carter Leake – BB&T Capital Markets

And then, maybe just discuss the choice of the GTF in supplanting GE on your E-jet platform and how that might impact sort of lessor interest in the aircraft, namely someone like GCAS?

Frederico Pinheiro Fleury Curado

It’s a possibility of course, GCAS, if you look at their portfolio, they have several airplanes with somebody else’s engine and including by the way, 145 is with Rolls engines in our case. So I think GCAS is the very, very – they are trying to enter the favor liquid assets. The E-jets definitely have been the liquid asset in that segment of the market. So, it's the only airplane in that segment, 120 of which have liquidity and have attractive interest of several leading companies. So, we would expect GE to keep interested in our family. You're probably right not having a DA engine hanging on the wings maybe diminishes that interest a little bit, but in the end I think they play market. So we would have several source and we definitely expect that because we’ve continued to be one of them.

Carter Leake – BB&T

And then last one, just on Embraer E-190 opportunities, as you look out, I think you said two-thirds of 2014 is firm. Can you speak to the 190, the opportunities that you see in the near term on that aircraft?

Frederico Pinheiro Fleury Curado

Not really anything specific. We have large option book on the 190 and 195. The last two years we have not seen any high degree of confirmation, high level of confirmation, of those options, but there are there. And we have also some new kind of advance, some new frontiers. And as we have new resource, they can deliver this year so we have China taking delivery this year, we have CI taking a delivery this year. So many different customers. The capillarity of the E-jet and the customer base is expanding. So this will always opens up opportunities not on large, like the JF 30 aircraft due but those are driven five. So it’s pretty much spread across the globe of course in a less activity in Europe, but there is no activity in Latin America, Asia and Africa again specifically referring to the 190, 195, 175 (inaudible).

Carter Leake – BB&T

Great. Thank you.

Operator

Our next question comes from Ron Epstein. Please go ahead.

Ron Epstein – Merrill Lynch

Hey, good morning guys.

Frederico Pinheiro Fleury Curado

Good morning, Ron.

Ron Epstein – Merrill Lynch

Just maybe a follow-up question on two points. One, the second generation E-jets, what feedback have you got from your customers through (inaudible)? What do they want to see in a second generation E-jet? And then, I guess, a second question, again, would be back to the GTF question. It was my sense that a couple of years ago that Embraer was very comfortable with the GE engine and maybe not so sold on the GTF technology. What did the Company see with the GTF engine, then, that really made you, made the Company comfortable going with that technology over the more traditional GE engine?

Jose Filippo

Okay, Ron. So to your first question, I think the customers, what they really want is a lower cost per seat mile and lower cost per fleet and this is kind of the most important driver of any airline decision and obviously when you get down to more details, they would like to have that and of course the commonality with the existing aircraft in a way various move they are almost no training cost to switch from one cockpit to another, some improvements which are – improvements either in style, having comfort, some details. So as we engage in an exercise of rate designing of the 191, I mean the E-jet and the family, of course many ideas popping up, but definitely it is the real wing in air dynamic cleaning and the new engines which would give us a significant reduction in (inaudible).

And of course also I should mention maintenance cost. They also expect to have a reduction in maintenance cost for the aircraft, the engines and the aircraft. So this is like the major, major driver for the airlines and as a connection to that point, (inaudible).

Frederico Pinheiro Fleury Curado

Yeah. We were always not skeptical. We were always sort of cautious about GTF. This technology has even though it has been around for decades and not many good examples we have of that to remember the old days of the old air routes, the A146 is that engines a GTF and that they had many, many problems. It later became much better, but the initial days were not so brilliant. So to putting that technology into a large scale of course was a big bet Pratt. And what we have done in the last two or three years is being very, very close to their development.

So we follow the results that Embraer had in that slight campaign that they had on the 340, and we’ve been to their factory many, many times that I can do it my self looking at the gear box and it’s a very, very simple design, simple in the sense that, obviously its around 1,000s and 10,000s of (inaudible) that the engine has already endured both in ground tests and flight tests. I should also say that having Airbus adopting to GTF as one of their option, it does help the case in the sense that there is a broader community that will be flying this engine, although it's not the same engine but the architecture is fundamentally the same, a little bit scaled-down engine to what the A220 will neutralize.

So you know technically we are comfortable and for us Embraer in light of the opportunities we have, the packages that we have from all three manufactures rose GE, Pratt (inaudible) the overall combined conditions of the technical commercial customer support efficiency, maintenance cost, the whole package for us really made us decide for the Pratt engine. And we are happy with the partnership with the company that we know for a long, long time more on the Canadian side than in American side, but it’s a – we are excited about this new engine.

Ron Epstein – Merrill Lynch

Great, thank you.

Operator

I’d now like to turn the conference over to management for any closing remarks.

Frederico Pinheiro Fleury Curado

Thank you again for being with us this morning. It's been an hour and we will be back in 25 of March with not only the conference but also with the Embraer Day here in Brazil, so I invite you all to come. It'd be a pleasure to host you here. Thank you very much. Have a good day.

Operator

That does conclude Embraer’s audio conference for today. Thank you very much for your participation. Have a good day.

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