Embraer's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Embraer S.A. (ERJ)

Embraer SA (NYSE:ERJ)

Q4 2012 Earnings Conference Call

March 13, 2013 09:30 ET

Executives

Frederico Curado - President and Chief Executive Officer

Jose Filippo - Chief Financial Officer and IRO

Elaine Funo - Director, Tax and Accounting

Luciano Froes - Director, Investor Relations

Analysts

Joe Nadal - JPMorgan

Noah Poponak - Goldman Sachs

Peter Skibitski - Drexel Hamilton

Myles Walton - Deutsche Bank

Cai Von Rumohr - Cowen & Company

Ron Epstein - Bank of America/Merrill Lynch

Stephen Trent - Citi

Darryl Genovesi - UBS

Operator

Good morning, ladies and gentlemen and welcome to the Audio Conference Call that will review Embraer’s Fourth Quarter 2012 Results. Thank you standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions to participate will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded and webcasted at ri.embraer.com.er.

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, estimates, continues, anticipates, intends, 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; Ms. Elaine Funo, Director, Tax and Accounting; and Mr. Luciano Froes, Director of Investor Relations.

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

Frederico Curado - President and Chief Executive Officer

Good morning everyone and thank you for joining us in the conference. I will turn over to Filippo for the formal presentation and both of us will be back along with Luciano for Q&A at the end. Thank you. Filippo, please?

Jose Filippo - Chief Financial Officer

Okay, thank you Fred. We are going to start with the highlights of 2012, then go through the numbers, and then open for questions. So, to start on page 3 of the presentation starting on the corporate highlights for the year and we have this operational performance very good that surpassed the 2012 outlook basically within or a little bit above the guidance that we released earlier. It was a very positive result although very close to what we forecast to the guidance. I want to go in more details during the presentation.

And also in terms of people, Embraer was elected for the fourth consecutive quarter as one of the best companies to work in Brazil and also we are elected as the best company in people management. This is a very important award for one of major values of the company regarding our employees and our people. In terms of innovation, we were awarded for the second consecutive year on the FINEP Innovation Award basically because of the development of the Legacy 500 product as well as problems associated to Arpia and Visiona. Regarding accounting and the information released, finance information, we were chosen again as one of the most transparent companies by ANEFAC related to the release of information in the balance sheet and the results.

Moving to page 4 is still continuing the corporate highlights. Embraer was part of the Dow Jones Sustainability Index for the third consecutive year. It confirmed our commitment to sustainability and good practice in this area. We had also the opening of two excellence centers in Évora, Portugal. We started the engineering centers in Belo Horizonte and in Brazil and in Melbourne, Florida. And we had our second unit of the Embraer High School in Botucatu following the first one that we have currently in Sao Jose dos Campos.

Moving to page five, now starting with the business units the first one the commercial jets, we had a delivery in 2012 of 106 E-Jets, 22 of them in the last quarter within the guidance of the range 105 to 110 and that reaching like 908 total deliveries since the starting of this project in 2004. We had seven new operators in 2012 as well as we had 56 new sales in 2012 for the total of 1093 aircraft, now in the – within the 62 airlines in 42 countries.

In page six, continuing the commercial jet performance and highlights for the year. We had – we signed with the Republic Airways with a contract of 47 E-Jets with an option of additional 47. This has an important information of yesterday with the confirmation from the court that was part of the needs for this order. And also we have – we need to disclose of the Aldus Aviation contract of 20 airplanes with an option of additional 15. This was already part of our backlog, but not disclosed. And the Republic deal if confirmed will be part of the backlog that we released in early April for the first quarter. Also we had made the delivery number 900 of the E-Jet was 190 for Kenya Airways. And an important milestone in the new – the second generation of the E-Jet program which was the announcement of the engine and avionic suppliers for this project, this was announced in January and we plan for the year to be announcing the starting of the project as a whole.

We will now move into page seven and with the executive jets the highlights for the year. We had a delivery of 99 executive jets working down by 77 light jets and 22 large jets as we expected and typical seasonality of this business 53 of them were delivered in the last quarter. And we are within the guidance, but it’s important to have a better mix with the higher number of large jet. This Phenom 300 program had an also two important milestones with delivery number 100 and also the first flight of Phenom 300 manufactured in the U.S. in our Melbourne plant. We had also the delivery of the Legacy600 and 650 number 200 in China and in November as we announced before the first flight of the Legacy500 which currently have already two other continuing with this project as we expected and reviewed.

On page eight, the Legacy450 fabrication was launched this program. Also we had the recognition by important magazines of product support which is very important for executive jets business. And we had the starting production in our plant of Harbin of the Legacy600 and 650. And we expect to have this first delivery in the last quarter of this year 2013. Completed the highlights of the executive jets, we have the expansion of network of service of new – 12 new facilities in 2012. So, we continued the expansion which is an important strategy that we will have for the executive jets business.

With that, we conclude the highlights of executive jets and we turn to page 9 and talk about the defense and security highlights. The growth of 24% in terms of revenues compared to the previous year. We have reached the level of $1 billion of revenue, a little bit above the guidance of the $150 million to $950 million. It has been important milestone for this business as well. We have signed the contract with Brazilian Army for the SISFRON project, first phase. This will be bringing us potential revenue of $400 million in the next three years, and this project has already started.

Also we have the joint venture between Embraer and Telebras, this one created to participate the process – the program of the Brazilian Geostationary Satellite already at this point negotiating the contracts for starting the project. And regarding the KC-390 program, we are ongoing as scheduled. We still planned the first flight for 2014 and first delivered for 2016.

Moving to page 10, continuing the highlights of defense and security, we have the delivery of two out of three aircrafts for the Indian government, also the delivery of Super Tucanos for Indonesian Air Force, Mauritania, and also for the Air Force of Angola. And we just announced the being selected by the U.S. Force for the LAS program, which we are now doing the preparations for starting this operation. We have chosen the site up in Jacksonville. We are now into preparation for starting this program going forward. And final for defense highlights, the contracts – continued the contracts with the Brazilian Air Force aircraft modernization. So, we had the new – signatures of new contracts.

So, with that, we conclude the highlights of the year for businesses and corporate and we start to talk a bit about the numbers. Page 11, we had the deliveries for the year. This was already released before the confirmation of this information that we had the 106 deliveries in commercial jets within our guidance and 99 executive jets major accounted for the last quarter as we expected for this business.

In page 12, the backlog, we already reported that $12.5 billion of backlog for the fourth quarter despite the stronger deliveries that we had in the last quarter. And here we show a breakdown of these three businesses of 46% of this backlog is related to commercial aviation and we see the executive aviation and defense growing in terms of participation respectively 26% and 28% of the backlog.

In page 13, in net revenues, $6.2 billion in total of the year within the range of the guidance that we released. It’s a growth of 6.5% compared to the previous year. In page 14, it’s the breakdown of these revenues through segment and region. In segments, what we see is the reduction of participation of commercial aviation. This is a continuing trend that we expect to see in 2013 and the growth of the defense and the executive aviation in the portfolio. We have 61% for commercial aviation, 21% executive, and 17% defense broken down by business. And when we see the regions in the right side of this chart, we see a well-balanced growth trend highlights for the North American market growth, but an important contribution of Europe, Asia, and Brazil in this portfolio of region.

In page 15, the revenues broken by quarter, so we see the strong revenue in the last quarter of the year basically driven by the executive aviation seasonality. And we amounted to total of $6.2 billion and R$12.2 billion for the full year.

In page 16, SG&A expenses, we kept the same level of 2011 12% by the startup expenses of the Harbin plant, Évora plant, and Melbourne plant that didn’t contribute with sales and will be moving forward this expectation plus the engineering centers as well. Going forward, we expect to see a reduction in these expenses as a percentage of sales.

In page 17, income from operations total of $612 million for the year. This is the highest of the last five years, and we are above the guidance in getting the 9.9% above the 9% to 9.5% that we indicated, but basically because of the positive impact of the dollar effect diluting expenses as well as the positive impact of this stimulus package that growth would account for approximately 1% of this margin. Also it’s good to highlight the comparison with 2011 that was negatively impacted by the American restructuring recognition.

In page 18, if we take the operating income broken by quarter, we see the strong operating leverage in the high revenues on the fourth quarter and compared to the previous year, which was negatively impacted by the American recognition. We had then this $612 million in the year, which is 9.9% operating margin of the full year.

In page 19, regarding EBITDA, we had the strong EBITDA in 2012 above the guidance for the same reasons that we said before basically because of the operating income margin and the results, we came to $191 million of EBITDA, with a margin of 14.4% for the full year. In page 20, when we broke through quarters, we see the reflecting here, the seasonality of the fourth quarter, the higher margin, and the higher amounts of EBITDA within the quarters of the year.

Page 21, then come to the final information of net income, total of $348 million in the year. Although the strong results in the operational area, we had negative impact of the income tax calculation due to the non-cash items affected by the exchange rate, the real-dollar in Brazil. But even though we have this total of $348 million with the margin of 5.6% in the last quarter – sorry in the year.

In page 22, we see this net income broken by quarter and we see the strong results that we had in the last quarter of this year. The comparison with 2011 is not good, because 2011 we had that impact of the American recognition. Page 23, we have the payout of 26% for the 2012. We expect to see this remaining going forward and accounted for ($1.2) per ADR.

Next page, page 24, talking about inventories, we had a good reduction in the end of the year and quarter reduction. This is reflecting the focus on cash management and especially related to inventory management. And there is also a lot of initiatives associated with the P3E program that is being now reflecting into better results. We expect to see the same trend going forward.

On page 25, regarding free cash flow we had strong operating cash generation in 2012 negative free cash flow of $81 million in the year basically because of a lot of investments in R&D and CapEx and some extraordinary items especially with the payment of American debt to end the year. But it’s important to recall that we had in the end of the year an increase in accounts receivable of – that accounted for $160 million which we didn’t expect to see, so this was postponed and actually this occurred in the first quarter of this year. So, this impacted the position in the end of the year, most of the negative here is associated to debt. We had operating cash generation. However, the investments and some CapEx expenditures compensated and we had the accounting for $81 million negative here.

On page 26, total investments, we are below the guidance where it has had that in the third quarter. This was more related to the optimization of the development schedule and also because of the dollar and this in respect impacted positively, especially the payroll taxes. The total of $539 million compared to the $650 million that we said or we indicated in the guidance.

Last page 27, this profile of the debt we had a good debt position and the positive net cash basically what had in the year was an improvement in terms of the average terms of the debt. We had 5.8 years of average terms of the debt compared to the 4.8 year in the previous year, basically because the issue of new bond in June of 2012 for a 10 year term. We are ready to face the needs of investment which is debt profile and also the cash position.

With that, we will close the information of the results. Let me now turn back to Fred for the questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joe Nadal of JPMorgan. Please go ahead.

Joe Nadal - JPMorgan

Thanks. Good morning.

Jose Filippo

Good morning.

Joe Nadal - JPMorgan

You guys mentioned that SG&A is going to be coming down as a percentage of sales, could you spend – speak a little bit more about that anymore color you can give on maybe how much and is that percentage of sales from 2012 overall or Q4 from what basis?

Jose Filippo

Now this is – our expectation should have a reduction overall. We had this year there was a lot of startup costs that we had in 2012 and we don’t expect to see as the savings back going forward. So, that expectation we have in terms of the G&A expenses and also we have the in terms of selling expenses associated to level of activity that we had at the end of the year. What we expect is basically because of the not having the impact of some startup costs that we had in 2012 that’s the expectation we have for reduction going forward.

Joe Nadal - JPMorgan

Can you quantify any of that specifically?

Jose Filippo

Something about 10% to 11% that we expect to see in the future.

Joe Nadal - JPMorgan

I am sorry is it down – okay at the general level level?

Jose Filippo

From 12% to – 10% to 11%.

Joe Nadal - JPMorgan

Perfect, okay, that’s great. And then Fred, can you give us an update on what you are seeing in the market for E-Jets these days? And any update you can give us obviously we talk all the time about the U.S. campaigns, but anymore color you can give on what might be imminent or how you are thinking about it?

Frederico Curado

Yes, Joe sure. Yesterday, we have the confirmation from the court on the republic deal. We still are within the one-week stay period. So, we have to wait another week to have, let’s say, final undeniable confirmation of that deal. It looks like very, very likely to happen, but that’s an important one. There is a couple of other campaigns going on, large ones in the United States, which may mature relatively soon let’s say months, within the next two months. Outside the United States, some activity in Latin America, some auction activity that we are dealing with importantly Brazil in particular, there is a – it is under discussion right now, a stimulus package for regionalization in Brazil. So, the government has opened public consultations with the airlines and the idea is to recover the capital average of the Brazilian regional aviation network, which just to give you a glimpse of what it was and what it is now, 25 years ago, we had like 250 to 300 airports in service in Brazil, now it’s down to 150. So, we have that concentration rather than a decentralization of traffic. And the government wants to stimulate that, similar things happened in China. So, structurally, that’s potentially good news for people producing regional aircraft, including ourselves, but it just one thing which is going on right now.

Asia remains strong although much of the strength is still on the, let’s say, larger aircraft, larger narrow body aircraft. So, we hope that to extend call it maturation or saturation, if you will of those larger aircraft. We will resume, let’s say, a better balance throughout the fleets, which are increasing number of regional jets, which today it’s a little bit into shallow, the shape of those large orders for the heavy metal. So, overall, I may know why we have this, let’s say, optimistic view on the U.S. and certainly balancing out the reduction activity elsewhere. But I mean that’s good, because in the past we have for the last several years a lot of activity outside United States and also no activity in the United States about time that there is a resumption of that activity. So, mid to long-term, I remain very optimistic about our prospects.

Joe Nadal - JPMorgan

Okay, very good. And then just one more finally for you on the business jet side of things, any change or you are still seeing a tough market. And then specifically on the Legacy 500, what’s the latest on timing and how the development process is going?

Frederico Curado

Yeah, no significant change in the markets, we continue our history of gradually gaining market share, let’s say, in the tough markets, so no big change there. The Legacy 500 that we have in our two prototypes in flying, not sure about the third. Yeah, the third we are flying, but just confirming that third will fly soon. Campaigns were actually better than we expected. It’s the airplane is shown to be more mature in our previous development. So, we are – here is two we will have all certainty that by the first half of next year, we will be entering to service sometime in the first half of next year. So, looking good, and now of course, we are kind of resuming the sales efforts on that particular model as well as in the 450 as well, which will come one year later. So, program is looking good, airplane is looking good, and we are now starting to ramp up our efforts in the sales for that particular model.

Joe Nadal - JPMorgan

Okay, good to hear. Thanks.

Frederico Curado

Thank you.

Operator

Our next question comes from Noah Poponak of Goldman Sachs. Please go ahead.

Noah Poponak - Goldman Sachs

Hi. Good morning everybody.

Frederico Curado

Hello Noah.

Noah Poponak - Goldman Sachs

Fred it might be helpful actually to just give us the run down of what is actually left in the U.S. that you are still campaigning on from a – in terms of E-Jets and I know it’s you don’t want to do too much detail because of the competitive nature, but any detail you would provide on each one in terms of where you see yourselves stacking up versus the competition given anything specific about that customer?

Frederico Curado

No, that’s a tough one. It’s a tough one I mean not many players out there and as you know with the consolidation we have reduced the number of players. So, I don’t know what else I can tell you other than there are discussions ongoing discussions. And I mean we are confident. We confident that we are going to take a significant share of those opportunities which again along this year and the next several months we will, we expect to have confirmation. But I am afraid and I cannot talk about names or quantities or anything like that without really reaching the confidentiality wins that we have.

Noah Poponak - Goldman Sachs

Have you guys put together an estimate of the total number of aircraft do you think those U.S. campaigns add up to even if it’s a relatively wide range?

Frederico Curado

Yeah, we did, we actually I think we have spoken about that in some previous instances I think Paulo mentioned something between 400 and 600 aircraft total over the next several years. So, I think that number is probably still a good estimate, good outlook. And let’s keep in mind there is a large 50-seater fleet in service, which will eventually be substituted by larger newer aircraft. So, number sounds about right, but that’s what I think – that’s our outlook.

Noah Poponak - Goldman Sachs

Okay. And then on the Brazil specific thing, you were just talking about can you just elaborate on that a little bit more. I mean is that how new is that, how long has that been going on is it something that could drive activity sooner than later or is it really a much longer term things that will take a fairly long time to play out?

Frederico Curado

It is relatively new I mean just before Christmas, right before Christmas government announced their desire to incentivize regional aviation in other words flight commercial flight into cities which had no service today and to foster economical development. This in January and February has been open for portfolio of debate and but the idea is to combination of tax reductions on those airports. The investment in infrastructure for let’s say call the regional airports and maybe even some sort of support to the airlines in some sort informed for them to sin a such a way then to fly to cities which have no service today. So, I think the instruments will be put in place relatively in the short-term I think right or not, but certainly not a matter of years, matter of months probably. How long that’s going to create the chain reaction positive chain reaction to drag traffic up and then drive demand for new aircraft obviously if there is a delay there, but the implementation of the plan it’s greeting the way the government was playing this thing like set of other instruments they are trying to boost Brazilian economy I think it’s going to be implemented relatively soon.

Noah Poponak - Goldman Sachs

That’s really interesting, okay. Thanks a lot.

Frederico Curado

Thank you.

Operator

Our next question comes from Peter Skibitski of Drexel Hamilton. Please go ahead.

Peter Skibitski - Drexel Hamilton

Good morning guys. Nice quarter.

Frederico Curado

Thank you. Good morning.

Peter Skibitski - Drexel Hamilton

Just a couple of questions on the quarter itself I might have missed this I couldn’t see the slides, but could you tell us why research expenses came in so far below guidance and then maybe also the same question regarding development spending?

Jose Filippo

Yeah. Okay, Peter. The spending was basically that we had optimization of the schedule of the investment, but also the impact of the exchange rate affected us positively. The expense, basically, we had a dilution under the expenses in local currency as well as some stimulus package impact in the payroll taxes. So, this reduced part of the expenses expect and then it explains the reduction in terms of the guidance.

Peter Skibitski - Drexel Hamilton

I understand, I understand. You are still expecting a $100 million in research expense for next year?

Jose Filippo

Yeah, that’s the guidance that we released recently.

Frederico Curado

Yeah.

Peter Skibitski - Drexel Hamilton

Got it. Okay.

Jose Filippo

$100 million for research and about $300 million for development.

Peter Skibitski - Drexel Hamilton

I understood, I understood. And then I guess only Filippo, typically your labor wage growth is fairly high due to I think inflation, could you tell us on what you are expecting the labor wage growth to be in 2013?

Jose Filippo

Yeah. What we have before, we have been experiencing because of the specifically situation of the market, higher adjustments in salary, because of some negotiations. Going forward we don’t expect to seeing the same level. Recently, we announced about a 6%, which is basically inflation for the adjustment for this year. So, we don’t expect to see like adjustments above inflation in terms of the salary, that’s what we see for the future.

Peter Skibitski - Drexel Hamilton

Okay.

Jose Filippo

And but in the positive side of that, we still have now the full impact of the stimulus package, especially the payroll burden that there was we started to have this impact in the third quarter of last year for 2013, we expect to see in the full year.

Peter Skibitski - Drexel Hamilton

I understood, okay. And then I guess well, let me ask you one more question on margin, it’s if you look back at 2012, you had a couple excellent margin quarters, a couple of lower quarters that kind of corresponded with your volume level. And I am wondering maybe to Frederico, as you look out not necessarily at 2013, but maybe ‘14, ‘15, when your volume levels potentially could be much higher. Is there sort of a target, an overall target operating margin rate that you have kind of tucked away that you think you can have?

Frederico Curado

Well, we certainly do. I mean, internally, of course, we are cautious about releasing guidance beyond our the actual year, but this company is very sensitive to volume as it just outlines, I mean with higher volumes, we will tend to have margins up for sure. So, thinking about the double-digit EBIT margin is not something, which is out of question. On the negative side, in the next few years, we have always to remind that although we may have rising values, the mix of products may not be that favorable in the sense that we are going to have the E-Jets family. A lot of demands coming from the United States regionals, and this means two things, that one is it’s a smaller aircraft, so it’s high – the lower tag price aircraft, the 175, now 190 or 195, and clearly with large volumes, we tend to have pressures on margins as well. So, balancing out, it’s I think will be premature today to be very bullish on our step up as far as margins, but the effect of volume in our operation was very significant, the higher volume this company will be and is actually when we have it much more efficient than we are. So, those are the two major forces, volume on one side positively and some pressure on the top line on the other side due to mix and large orders in the relatively lower margins to those large quantities.

Peter Skibitski - Drexel Hamilton

I appreciate the color. That’s great. If I could just think of one last question, could you remind us what your services revenue, is it expected to be in 2013 across the company?

Frederico Curado

Yeah. So, as you know we are trying to be more and more to consider that part of each of the business, let’s say, if it lies through the three main areas, the three business areas is about how much?

Jose Filippo

$800 million.

Frederico Curado

About $850 million.

Peter Skibitski - Drexel Hamilton

Wonderful. Thanks very much guys.

Frederico Curado

Thank you.

Operator

Our next question comes from Myles Walton of Deutsche Bank. Please go ahead.

Myles Walton - Deutsche Bank

Thanks. Good morning guys.

Frederico Curado

Good morning, Myles.

Myles Walton - Deutsche Bank

I was hoping to go back to the margin discussion for just a second. If I took 2012 was 9.9%, correct it for, to talk was, I think it’s about 10.5%, 10.6% on a clean basis in 2012. Filippo, I think you said year-on-year you will get a 100 basis points of help from SG&A, I would calculate that the stimulus would add probably another 100 to 150 basis points. So, and yet the guidance is 9% to 9.5%. And I know Fred, you mentioned the pricing and the mix dynamic, but we are really talking about pricing and mix being 250 to 300 basis point headwind to EBIT margins in ‘13 or is it just really conservative?

Jose Filippo

It may happen, Myles, though I think at this stage, it would be premature to take a more optimistic view. I mean, 175 it’s a smaller aircraft. So, we really have a reduction in revenues. And on top of that, we are going to have also pressures on margins, specific margins. So, it will depend a lot on how we perform in the next few campaigns of course, but don’t let us also look at the other businesses, because more and more commercial jets are not the only gifts of Embraer. Next year, it’s going to be something around between 50% and 55%. So, we have to look at the other jets as well. So, the executive jets, it’s still a very hard market out there. So, we are gaining market share yes, we are gaining some, having some advantage in volume yes, but there is a pricing pressure there for sure at least on the segments, where we are from the Legacy 650 downwards, it’s a tough market. So, we are not seeing the hands-on margins that we would like to see, but of course, we are balancing out margins versus market share versus volume and trying to optimize these contradictory forces. In the past as well, we are not in 2013 we are not projecting a very high margin due to combination of things to take the project that we have in development and so forth. So, the typical higher margins in defense as we increase our volume, as we diversify our base, we also have some margin. So, we feel comfortable within the guidelines that we have given. And obviously if we feel, let’s say, by mid year that this becomes conservative, we really invited as we did last year. But at this stage, I would not move the needle where we are.

Myles Walton - Deutsche Bank

Okay, okay. And then the other question I had was one on cash flow for ‘13. What is the targeted free cash flow at this point given kind of the push how there is receivables you talked about as well as whatever cash outflow there is from the American and our stock settlements?

Frederico Curado

We expect a positive, probably double-digit positive cash flow, I mean, yeah, free cash flow next year. Filippo?

Jose Filippo

Yeah, I think that maybe sort of a good opportunity to clarify the 2012 calculation as we have a good operating cash generation. But there is a lot of investments in projects that were not generating cash. And also with that, we have this payment of the less concentrated to American at $51 million. We expected to have this diluted within the terms of the contract with BNDES that was the agreement. But unfortunately, as the court didn’t approve fully, we had to meet the schedule as regionally to have the concentration in September and March. So that affected last year.

We expected after this third quarter of 2012 to have a positive in the end, a small part of some positive cash. We missed that because of some accounts receivable that we didn’t expect. That was just like a slip to 2013. And going forward, what we expect is really like control on the expenses, especially in the CapEx investments, but also expenses and focus on cash generation through the working capital inventories and the accounts payable. So, we are really working on the targets to have a positive this year of 2013, which we almost, I think we had a good position last year if you assume all the events that we faced. But for 2013, I think we could – we would be able to perform. We don’t give a guidance of a specific product, but we are working on the positive generation for this year.

Myles Walton - Deutsche Bank

Okay. Alright, thanks guys.

Frederico Curado

Thank you.

Operator

Our next question comes from Cai Von Rumohr of Cowen & Company. Please go ahead.

Cai Von Rumohr - Cowen & Company

Yes, thank you very much and good results. So, you mentioned the decline in SG&A and you kind of mentioned some specifics for G&A, selling expense was up 60 basis points last year, how much of the decline from 12.3% to 10% or 11% whichever it is should come from selling expense and why?

Frederico Curado

Just a second, Cai, we are…

Jose Filippo

I gather the detail here.

Frederico Curado

Yeah. Well, Cai while they look for the numbers, we are certainly targeting now the fixed costs on the A side obviously is fixed cost, G&A, on the S side, barges proportional to sales and barges fixed, so that part is being targeted as in our efficiency, in our excellence program along with G&A. On the variable parts, just a second.

Luciano Froes

Yes, hi Cai, this is Luciano. Just elaborating a little bit on the selling expenses, so in the 2012, we had a few activities related to some of the aircraft that we took in on trade as it relates not specifically to trade but the American Airlines’ restructuring process and so of course the maintenance related to those activities and expenses, where we are marketing them, categorized under our selling expenses. So, we expect that, that should not necessarily reoccur in 2013. So, that will also contribute to that reduction coming in at about 10% to 11% of total SG&A for 2013 revenues.

Cai Von Rumohr - Cowen & Company

So, the bigger decline is really going to come in selling, percentage wise?

Jose Filippo

Yeah, the combination of two, the selling what I have this production, because of the expenses that Luciano just mentioned and the G&A for the maintenance of certain level diluting would benefit the full impact of the stimulus package in this year in terms of the cost of the payroll.

Cai Von Rumohr - Cowen & Company

Great. And you mentioned the variable and fixed part of selling, approximately what part of selling would you say is fixed, because obviously the variable sometimes if that’s higher that’s good reason?

Frederico Curado

Yes, I think it was around 80% fixed and 20% variable is that right?

Jose Filippo

Yes.

Cai Von Rumohr - Cowen & Company

Okay, that’s terrific. And then could you quantify roughly how big was the tax stimulus benefit in 2012 and how much you expect in your guidance for 2013?

Frederico Curado

Okay. So, yes, Cai for 2012, the effects of the stimulus package was roughly 1% of total revenues. Right, so for 2013, we expect the same figure that we have been saying at around $100 million.

Cai Von Rumohr - Cowen & Company

Okay, excellent. Okay, great. Thanks so much.

Operator

Our next question comes from Ron Epstein of Bank of America/Merrill Lynch. Your line is open. Please go ahead.

Ron Epstein - Bank of America/Merrill Lynch

Hey, good morning. Maybe few questions, no one has talked about yet. How is the development of the KC-390 going, where are we on that program, how is it going to start with that?

Jose Filippo

Okay. Going well, it was actually in that program that we had this, an expected accounts receivable, which as not paid last year and that’s going to paid, actually is being paid as we speak. So, it’s going to be in this quarter, but the physical part of the program is moving well. We have a big CDR coming in weeks, I mean, the engine looking great. So, the changes are perhaps has really increased the traction on the engine side after they took over the roles on the IAE. So, technically, we are simulating and making everything which is new in the program. We are way in advance trying to have a mature system by tasking by rig and by do other things. So, although, we had a big technical challenge in the program so far so good, and first flight scheduled for end of next year, that is still the plan and that’s to the schedule. And I think if we have our cash flow coming as it has king of in the last three years and relatively on time, I see no reason why we should not be on time. So, very optimistic about the program, I think that’s it, all the main contractors are already selected and CDR going on right now and stop these things before mid year.

Ron Epstein - Bank of America/Merrill Lynch

Okay great. And then how are the programs going for the next generation E-Jet I mean where does that stand and when I mean what kind of time calendar should we expect I guess an official launch of potentially of stretched 195?

Frederico Curado

We are – my major concern was to make sure we have a GCAS engine and we may have that down late last year. So, the airplane will be blockbuster, I mean lot of the airplanes the same airplane – the new airplanes we will be blockbusters, we are very convinced of that. And now Avionics already selected significant step up in this new Honeywell Avionics suites really nice avionic package. We may change some other suppliers in the next two months as well, so as you know we are building most of the systems of the aircraft, if not for not only for improvement also for costs reduction continued to be of course increase our competitiveness. So, we are still targeting somewhere by mid year official launch and hopefully working some launch customer activities to ideally I would like to launch this aircraft to this new version, I mean not new aircraft this new version of the aircraft with some launch customers. So, I will say mid year that would – that for let’s say the formalization of the launch of the G2 and between now and then we will have on one side the selection of the remaining major systems of the airplane and on other side an increasing level of activity on the sales side.

Ron Epstein - Bank of America/Merrill Lynch

Great, perfect.

Frederico Curado

Thanks. And it’s needless to say 2018 is still our entrance of service date.

Ron Epstein - Bank of America/Merrill Lynch

Actually is there any chance it could happen earlier or no?

Frederico Curado

I think it’s hard, because I think its unlikely because we are talking about a two new wings and major difference in the installation of the airplanes probably changes in the landing gear as well, less co- generation, so at this stage I would not cover anything earlier than 2018. It’s a very just schedule its not there is not too much lack in there, just it’s a major, it’s not a re-engine it’s a major reinvent of the airplane.

Ron Epstein - Bank of America/Merrill Lynch

Okay, great. Thank you very much.

Frederico Curado

Thank you.

Operator

Our next question comes from Stephen Trent of Citi. Please go ahead.

Stephen Trent - Citi

Hi good morning everybody and thanks for taking my questions.

Frederico Curado

Thank you, Steve.

Stephen Trent - Citi

Hi, good morning. Two questions if I may for you Fred. The first is when I think about getting back to the selling expense when I think about the potential E-Jet opportunity in the U.S. market. Do you see any possibility of an up-tick in selling expense versus some of the lower selling expense that you may have received as in some cases some of the aircraft sales of Venezuela and China were government to government activity as opposed you guys putting a bunch of marketing and advertising dollars and how are you thinking about that?

Frederico Curado

No Steve, actually it’s probably the other way around. We are talking about very let’s say knowledgeable customers, very small number a very well structured company know what they want. Advertising is almost non-existing there for that purpose. So, it’s really down to pricing pressure and then actually say our sales expenses for those made, so two airlines large orders they know us for we have been in the market forever. So, relatively straight forward campaign, so no major – it’s less than for example breaking ground on this new rip. For example Middle East or Africa we have actually invested a lot in marketing and presales campaigns, it’s worth telling chose and try and things. So, I should kind of one way or the around as I have spoke before margin is a challenge.

Stephen Trent - Citi

Great color, great color. And then just one more question also related to the U.S. market what do you think about not only the potentially good campaigns here as well as looking at the defense side. How are you thinking about the evolution of the budget debate in Washington with respect to defense spending with respect to some spending on aviation possibly putting pressure on the FAA’s budget here and do you see – are you thinking about any potential impact there on the defense or commercial business line.

Frederico Curado

Well, as you probably know we just conquered this LAS program Super Tucano along with Visiona. And we understand this contract is well shooted from any sequestration or any budget reduction because this is an Afghanistan let’s say exit plan part of that integral plan. So, we believe this program is well protected budget wise and obviously the main strategic, the main value of this program for us is more of the strategic side even more than the natural value of the contract.

So, our ability to expand our activities towards DoD its we never had any opportunity now we believe we do by having this door open on LAS. Our prevalence of so sales model are still let’s say immaterial to the DoD budget that we kind of see ourselves there is a need for those niche applications sort of the Super Tucano counter insurgency aircraft we are fundamentally the only show in town for that. We may have some new businesses which are again immaterial for the huge DoD budget. And finally FAA and some implications for commercial aviation I know a little bit of a concern about the business jet side more than commercialization because of the some of the speeches that we have heard from the President of United States talking about taxes and then in his talk about business jets which have a strong reaction Gama as you know and BAA as well. So, that maybe we don’t know we don’t have much more information than what it’s in the press. But I am more concerned on that side than on the commercial side which I think is a public service and it would not be very wise to change a game which is finally producing positive results I mean the U.S. airline system is definitely on their right track in our opinion.

Stephen Trent - Citi

Okay, (Foreign Language)

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Stephen Trent - Citi

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Operator

Our next question comes from Darryl Genovesi of UBS. Please go ahead.

Darryl Genovesi - UBS

Good morning. Just looking your commercial services business I mean 2012 looks like grew about 4% and I’m just comparing that to the flight hours on Embraer aircraft over the past year which is more or like 9% or 12%, but just wondering is there some reason why the services growth to kind of lag what’s going on with growth in flying hours. I guess any color there would be appreciated?

Frederico Curado

Jose will be handling that.

Jose Filippo

Darryl, so as we – as Fred mentioned we expect roughly again even though we are trying to really focus more on a business unit consolidated figures. The services revenue overall should be around $800 million to $850 million, so that still representing growth from a base of around $740 million that we had this year in 2012 I mean so we can keep it for a nice rate.

Darryl Genovesi - UBS

I mean I was just looking at 0.12 where I was just looking at the commercial aviation services number that you reported the 424 versus 409 in 2011, so that was just comparison, I am assuming?

Jose Filippo

Yeah, I mean there, it’s specifically related to the overall services that we see in line with the fleet utilization vis-à-vis, of course, some of the maintenance that maybe performed in house by a lot of these operators that have their own operations or our spare parts programs and so forth. So, that’s the general trend there.

Frederico Curado

Yeah, we just add that in the last couple of months, we have signed two, I think it was two important deals in that regard there one with Azul and one with Republic, which spend extend our services out to our expenses, the portfolio of service, the full program for spare parts and then the term as well like 10 years out or something like that, I don’t remember exactly by heart. So, we should see an increasing participation of that. I would not know how to quantify that to you, but I would imagine to grow at least the growth rate of the business units as a whole if not more.

Darryl Genovesi - UBS

Okay, thank you.

Operator

And we have no further questions at this time. I would like to turn the conference back over to Mr. Frederico Curado for any closing remarks.

Frederico Curado - President and Chief Executive Officer

Okay, just thank you very much for the participation and look forward to talking to you. Yeah, we do have an announcement, Luciano please, about our Embraer Day.

Luciano Froes - Director, Investor Relations

Thank you, Fred. So we wanted to also take the opportunity to update everyone given the very recent communication and ongoing dialogue that we have had with the market considering of course the release of the guidance in early February as well as today’s call, and a lot of the richness in the market updates and so forth. We thought it will be best to postpone the Embraer Day that’s previously scheduled to take place on the 25th of March as it would be a little bit redundant in terms of the information that we will be discussing. So, with that said, we will get back to you at a later date in terms of when we will hold that event. However, important to note, for those that would still like to see the facilities we will be doing that on the 26th, but the event on 25th we will be postponing. So, more details on that to follow, but we also want to take the opportunity of the call to give you that update and the rationale behind it. Thank you.

Frederico Curado - President and Chief Executive Officer

Thank you.

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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