Embraer's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Embraer S.A. (ERJ)

Embraer-Empresa Brasileira de Aeronáutica S.A. (NYSE:ERJ)

Q1 2013, Earnings Call

April 30, 2013 9:30 am ET

Executives

Frederico Pinheiro Fleury Curado – President & Chief Executive Officer

Jose Antonio de Almeida Filippo – EVP, CFO and IRO

Analysts

Noah Poponak – Goldman Sachs

Joe Nadolb –JPMorgan

Peter Skibitski – Drexel Hamilton

Cai von Rumohr – Cowen & Co. LLC

Ronald Epstein – Bank of America Merrill Lynch

Stephen Trent – Citigroup

Amit Mehrotra – Deutsche Bank Securities, Inc.

Darryl Genovesi – UBS

Peter J. Skibitski – Drexel Hamilton

Cai Von Rumohr – Cowen & Company

Stephen Trent – Citigroup Global Markets Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer’s First Quarter 2013 Results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instruction to participate will be given at that time. (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, continue, anticipate, intend, expect, and similar words are intended to identify forward-looking statements.

Embraer undertakes no obligation 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 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 Pinheiro Fleury Curado

Good morning, everyone. I'll just turn this to Filippo so he can make the formal presentation, and both of us Luciano will back at the end for Q&A. Thank you.

Jose Antonio de Almeida Filippo

Thank you, Fred. We're going to go through the presentation of the first quarter of 2013 results. Starting on page 3, with the highlights of the business starting with the commercial Jet business. We had the delivery of 17 E-Jet in the first quarter of this year, which let us to reach the total of 925 aircrafts since the entering to serve we had a confirmation of the Republic deal. Last time, we mentioned about the need for confirmation, approval from the Court in the U.S. that happened in the end of March, so now it’s already included in the first quarter backlog just announced.

Important as well the new contracts with important customs for parts service management and logistics solutions, with Republic, Azul and TRIP, and the continuing of the program for the new generation of the E-Jet, as communicated, we continue to announce main suppliers for the project at this stage we have most of the main suppliers already selected, it’s finalize the highlights in the Commercial Aviation, the announcement of the contract of the sale for two E-190 for Austral Lineas Aereas. It is also included in the backlog of the first quarter in the end of March.

Moving to page 4, regarding Executive Jets highlights, the delivery of 12 jets in the first quarter – reflecting typical seasonality but it's important that we have the good mix where we have the participation of large jets, four large jets in deliveries of this quarter.

Regarding Phenom 300 capabilities, its important confirmation of this aircraft to highlight with the record of three speed for the light weight class that happened recently. Also an important recognition of quality and value proposition of the models Legacy 450 and Legacy 650 was honored by luxury press of Hurun Report from China. The problem of the Legacy 500 has an important milestone, which was the third prototype flight that happened recently and we still keep the projections for expecting to deliver by the first half of 2014. Including the highlights for active jets, we have the information of the sale of one Lineage 1,000 in China.

Next page, on Page 5, regarding Defense and Security, the KC-390 program, another important milestone was reached with the conclusion of the Critical Design Review. And we have the expectation of the first flight for the second half of 2014 on track our expectation. Two important announcements of commercial activity, sales for Guatemala and Senegal, of aircraft, Super Tucanos, and also surveillance and protection system. Regarding the LAS program, we are moving forward with the activities and we had the opening ceremony of Jacksonville facility, where those airplanes will be manufactured. Concluding the Defense and Security highlights, another support contract for Brazilian Air Force for existing Super Tucano fleet.

That will conclude the highlights, and we start on page 6, information of aircraft deliveries. In the chart in the left, Commercial Jets, we had 17 deliveries in the first quarter. We missed a few aircrafts in the first quarter, but expect to have this delivered in the second quarter, this is following a typical pattern, we expect to improve this in the second quarter.

If we go to the chart on the right side, the Executive Jets, we had 12 deliveries in the first quarter as well the seasonality impact. We had – we face some customer financing delays that will be resolved soon. So we expect to have a stronger second quarter in terms of delivery. And to conclude the deliveries, we're just confirming and keeping our guidance for 2013, which is shown in the table in the bottom of this page.

Moving to next page, page 7, the backlog, we had amount of $13.3 billion for the end of the first quarter, an increase from the fourth quarter of last year, primarily because of the Republic deal in the Commercial Aviation as well as some contracts in the Defense business.

Page 8, the same information of revenues. By segment, we’ll have the total in the top left chart, the total of $1.086 million of revenues in the first quarter, slightly below the first quarter of last year, primarily as a result of aircraft deliveries in the Commercial Aviation. This was partially offset if we see each chart or each business, partially offset by the growth in the Defense and the Executive Aviation business. So we accounted for a total of $1.086 million in the first quarter of this year.

Next page, Page 9, is the consolidation of the revenues in dollars and Brazilian Reais. We had then this amount of $1.086 million in the first quarter and we are keeping our guidance figures for the year in the range of $5.9 billion to $6.4 billion for the full-year of 2013.

Moving forward next page, Page 10, talking about expenses, information in reais and in dollars, we had a total of $161 million SG&A expenses for the first quarter. It’s a reduction compared to the last quarter of last year, and also compared to the first quarter of 2012, and we see Commercial Aviation stable, in terms of selling expenses with a reduction in G&A. And the main drivers is really the focus that we we’ve been putting into cost reduction and controls, coupled with the dollar impact, and also the stimulus packaging, which been reducing some of the expense.

Next page, page 11, income from operations. We had the total in the left, total income of $40 million for the first quarter of this year, with a 3.6% operating margin. Although, we had a typical weak quarter, we had some important considerations to impacting those figures, which is a lower revenues and gross margin combined with some two non-recurring items, which basically, provisions made for labor disputes, and accounting from implementation of retroactive selling adjustments, the (inaudible) that we have in 2012. So these two adjustments combined to the lower gross margin, retuning to a lower margin for this quarter.

Also important to remind that if you compare to the first quarter of 2012, we had to consider that in 2012, we had important liquidation damage revenues here that impacted positively the expenses and the operation income in last year. So that also impacted the comparison from both quarters. And regarding the guidance, we’re keeping our projections with the range of $530 million to $610 million with a margin of 9% to 9.5% for 2013.

Next page, page 12, in terms of EBITDA. We have a total of a $100 million of EBITDA for the first quarter, margin of 9.2% and this is basically the reflection of all the mentioned – of the already mentioned impacts in operating margin. That is reflected here. For the EBITDA, we’re still also keeping on track on the guidance for 2013 with the range of $707 million to $800 million for the EBITDA for the year with the margin in the range of 13% to 14%.

Next page, page 13, net income total of $30 million in the short in the last for the quarter with the gross margin of 2.8%, and we didn’t have the major effects of exchange rate for this quarter, so it's basically the consequence of the margins that we mentioned the effects that we mentioned before total of $30 million at 2.8% net margin for this quarter.

Page 14, talking about inventory, we had the total amount in the end of the quarter of $2.5 million in line with our expectations, we had a two point increase from year end figures and we’ve see there we are slightly below the first quarter of last year, we’re still on track so, we’re confident that we have a good control and monitoring of inventory, which is key important for us in terms of the results.

Next page, Page 15, free cash flow, we had a weak first quarter negative of $205 million, some consideration basically operating activities is associated to some mix deliveries would cause some increase in inventory and some payments related to guarantees of American Airlines restructuring, a total of $66 million. And regarding the intangible increase, mostly associated to development of the Legacy 550 and Legacy 500, and in terms of CapEx $50 million inline expectations. We expect to see improvements in the next quarter, but still negative with the recovery in the second half. It’s good to remind that for the full year we expect positive cash generation of double-digit for this year.

Next page, page 16, in terms of the investments, the breakdown, as we see here we’re on track and in line with our projections. Year-to-date $124 million, broken by $21 million in research, $61 million in development and $45 in CapEx. For the full year, we’re keeping our guidance of $580 million for 2013.

The last page, in terms of our capital structure, we see we have – in the last we have a debt with comfortable profile. We have increased our long-term portion, and we had a strong cash position of over $2.5 billion position. So this is the profile of our debt. And with that, we finished the presentation and then we’ll open for questions, thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Noah Poponak of Goldman Sachs. Please go ahead.

Noah Poponak – Goldman Sachs

Hi. Good morning, everybody.

Unidentified Company Representative

Good morning, Noah.

Noah Poponak – Goldman Sachs

Just wanted to follow-up on the reiteration of the margin guidance, I know that the past several years have had a fairly back-end loaded EBIT and EBITDA contribution, but now to get to the range for the full-year, it looks severely back-end loaded. I just wondered first as a clarification is the reiteration including the one-time items in the quarter meaning you’re getting there despite those one-time items? And then secondarily, can you just may be talk about the degree to which this quarter’s margin was what you thought it was going to be when you first put out that guidance? And just the level of comfort you have in reiterating the full-year target? Thanks a lot.

Unidentified Company Representative

Okay, Noah, so trying to combine the two questions, yeah, we should feel comfortable with our predictions, with our guidance. Yes, we had a little bit lower margins than we expected for two reasons; one, we missed a few deliveries, a handful of deliveries of commercial aircraft, and [this difficult also] in the executive jet business. So that (inaudible) enough to contribute to dilute our fixed costs and we have this non-recurring event or events as a little information. We will have a back loaded year. We will have probably higher loads in the back of the year than we had last year. Last year we had a more a calibrated flow throughout the year. But again the numbers are too short, still makes us believe that we’re on track for delivering those results.

Noah Poponak - Goldman Sachs

Are you expecting to get into the ranges even after the negative recurring items you took this quarter?

Unidentified Company Representative

Yeah. They did, and of course, we’ll expect but they are not – when you consider the whole year, if they’re not that material, and we always have some – also some positive surprises that may offset that. So I think it’s still premature, would be too premature to tell on that decision on those numbers

Noah Poponak - Goldman Sachs

Okay, great. And then, I just wanted to ask one other thing on the light cabin business jet market broadly, we all saw what Cessna announced a couple of weeks ago. You mentioned fewer cancellation penalties, at least, which is somewhat positive, I guess, in the quarter. Can you maybe just touch on what you're seeing broadly in terms of demand trends, and how you're seeing – and how what you're seeing compares to what Cessna said a couple of weeks ago? Thanks.

Unidentified Company Representative

We do not astute this as jet markets, these are biggest segment of the Executive Jet market. We have in our [maybe in minor aircraft] deliver guidance, we have higher loans of Phenom 300, which are [7 real] lower quantities of Phenom 100 which is the hardest part of the market. We don’t have a 100% of aircraft sold but we have probably between 2% in three quarters of those airplane sold. Two factories, one in Brazil, one in other state. So again, it’s not a walk in the park, but we firmly believe it’s doable, so we just taken to our delivery targets as well. So maybe driven by the Phenom 300, which is really outselling everybody in the segment, it’s just a very popular aircraft.

Noah Poponak – Goldman Sachs

Okay. Thanks a lot.

Unidentified Company Representative

Thank you.

Operator

Our next question comes from Joe Nadol with JPMorgan. Please go ahead.

Joe Nadolb –JPMorgan

Thanks, good morning.

Unidentified Company Representative

Good morning.

Joe Nadolb –JPMorgan

So, let’s dig into the gross margin, specifically. If we adjust for the settlements, your gross margin was still down a little bit. And it’s been my sense, certainly, that the Republic and now the united orders are probably going to be dilutive when they start, and they haven’t start to delivering yet. So – and then, of course, you have the big payroll tax item, which has been a big help. So could you give a little bit better sense as to how the all those items combined, when you look forward from, say, the 22.7 extra settlement this quarter, as we look sequentially forward, do you expect dilution? Can we hold it flat? What do you expect?

Unidentified Company Representative

We expect to have of course compensation because we had a weak quarter. For example, in terms of the impact compared to last year and support lower gross margin revenues we had a 2.5% reduction in operating margin. The provisions were 0.9% impact. So we see that in terms of the expenses, it should one-time. We don’t expect to see that’s going forward. And for the gross margin, we see a maintenance of that amount. So we are still work on our projection flows to the number that you mentioned for the full year, which were, of course, with higher delivery amounts going forward.

Joe Nadolb –JPMorgan

Okay. Can you quantify what the benefit in the quarter was from the payroll tax?

José Antonio de Almeida Filippo

The total was the payroll tax of about $18 million.

Joe Nadolb –JPMorgan

Okay. And then on the cash flow, I think you mentioned that this was, I didn’t quite catch it, but that and that number was a payment on some of the guarantees, was that – could you just repeat that?

José Antonio de Almeida Filippo

Yeah, that’s not a continuing factor of the margin, because already they had a provision for that. There is more…

Joe Nadolb –JPMorgan

Yeah, I’m sort of changing the conversion to cash flow now?

José Antonio de Almeida Filippo

Yeah, the cash flow. This was – did you get the number correctly, it’s about $60 impact.

Joe Nadolb –JPMorgan

$60 million, okay. And you mentioned that I think you mentioned that free cash flow would be negative in Q2, but better and then positive in the second half and positive for the full-year overall, am I getting that right?

José Antonio de Almeida Filippo

Correct, that’s what we mentioned. We expect to see with global, but still negative in the short-term. Here two-digit positive cash flow.

Joe Nadolb –JPMorgan

Two-digit, okay. Okay, and then just finally, Fred congratulations on the order from United. Just wondering you get this question every quarter, probably just throughout there if you could give us your latest and greatest on the outlook for commercial aircraft to demand outlook particularly focusing on the U.S. carrier’s of course?

Frederico Pinheiro Fleury Curado

Thank you, José, thank you with a nice one. Well, let me try to give a helicopter view where we are. So to-date we’ve been saying that we estimated that some 300 to 400 aircraft over the next, let’s say year and a half to two years of orders to be delivered over the next, may be three, four, five years. So, if those numbers are correct, so far we have probably about a third of those orders already committed. If I recall correctly, 40 aircraft for Delta, 47 for Republic and now 30 for United, so this is roughly 120. So, let’s say a third. And those three orders, they have the same number of option that potential to that, so there’s another 120 options out there, which of course may or may not be confirmed, so if we take up, let’s see a just overall balance, we see that 110 aircraft are done, and maybe it’s some 200s or 250 or so to be contracted and this will be, the sources of those new orders will come from number one, the existing option, number two, the direct procurement from American Airlines for American Eagle, which is still out there to be decided and of course some region Airlines which have not yet done anything in those new category of aircraft, so I think we are so far we are doing good, but service to have some room ahead of us in the battles, some important battles is to be fought and to be won.

Joe Nadolb –JPMorgan

Do you anticipate that some of these battles will happen by the Paris Air Show?

Unidentified Company Representative

Maybe Joe, so I don’t know, a lot of series out there but you know it’s not under our control, so we do that under customers and how they rub there, probably get out there acted together.

Joe Nadolb –JPMorgan

Okay. thank you.

Unidentified Company Representative

Thank you.

Operator

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

Peter Skibitski – Drexel Hamilton

Good morning. Couple more questions on margin rate, I want to focus on administrative and selling. Administrative costs was very low this quarter on an absolute basis. I am wondering if that absolute level of $50 million unchanged is kind of your expectation for the rest of the year or should we expect that to ramp, and selling expenses were roughly flat on an absolutely basis year-over-year. I’m wondering if those it should ramp to rest of the year as well as sales or if may or those will decline at all?

Unidentified Company Representative

Yes, it would project we had this number in the first quarter in terms of G&A and we expect to see the same trend going forward it’s not expectations. But it is could we remind that in the last quarter, we had some pre-op expenses that we’re comfortable we changed, but does not mature just for fair comparison, but we still keep that we have this level going forward, which is a reduction. In terms of the selling expenses, it should be flat throughout the year as well.

Peter Skibitski – Drexel Hamilton

Excellent, excellent. Okay, thank you. And then I guess Frederico on the United win, I was just wondering if you could help us out in terms of how we should think about our RJ rates in 2014 given the win and then maybe you could help us with timing, will these all deliver in 2014 or maybe split over 2014 and 2015?

Frederico Pinheiro Fleury Curado

Yes, they start in 2014. I don’t have the exact breakdown, but it’s 2014 and 2015.

Peter Skibitski – Drexel Hamilton

So as far as rates and maybe taking the benefit of your question, and which probably, with that order, we pretty are assured that the current level of production for our company in the next year as far as the commercial debts. And so, we of course we are pursuing some new orders. So there is a possibility that, we of course, get a few more orders. We can come back to the 2011, 2012 production levels, which is something 10% to 15% above where we are this year. So it’s looking good and 2014 therefore is looking good and 2015 also starting to look good as we get those new orders.

Peter Skibitski – Drexel Hamilton

Very helpful, very helpful, and then if I could again, the U.S. Air Force last contract, that’s obviously been a lot of drama getting that through, and it seems like you’re doing actually doing work on last now. and I wanted to ask you, I think it’s 20 aircraft, do you expect to deliver all 20 in 2014. and so I’m guessing your overall Super Tucano deliveries will be very high in 2014?

Frederico Pinheiro Fleury Curado

Their content is also spread in two years. so we will start 2014, I think we’re starting to delivering aircraft in the second half of 2014, which would be a quite challenge, because just like 15 or 15 months away from now and we are in deed doing a lot of work already in that program. So it’s got to be ‘14, probably more lower than in ‘15s and ‘14s. I have again the precise numbers, but we said it will be little bit more aircraft in ‘15s and ‘14s to get...

Peter Skibitski – Drexel Hamilton

Okay, thank you very much.

Frederico Pinheiro Fleury Curado

Thank you.

Operator

Our next question comes from (inaudible) of Deutsche Bank. Please go ahead.

Unidentified Analyst

Hi, at morning yesterday, I guess maybe Frederico, I know you talked about a production rate just in the last question. Can you give us a sense of what percent of the 2014 and 2015 production is sold on the E-Jets?

Frederico Pinheiro Fleury Curado

Well, if we take, let’s say that the currency are 2013 current levels, we have pretty much done for 2014, I would say probably around maybe two-thirds or so for 2015. But of course, we have the ability to ramp up production a little bit up. Again back to the 2011, 2012 levels between 100 and 110 aircrafts, so some 10% to 15% above where we are. So if we kept the production stable next year compared to this year, we would be pretty much sold out at this stage.

Turan Quettawala – Scotiabank

That's great, thank you. And I guess you need, what, 12 months or so just to ramp up production. Is that fair, in terms of the time…

Frederico Pinheiro Fleury Curado

Yeah, that’s a fair assumption, yes. There is a limit, so this low is also important. But lead time (inaudible).

Turan Quettawala – Scotiabank

Okay, great. And I just had one more question. I know that the RJs have been the biggest area of opportunity here in the last few months in terms of orders. But I'm just wondering about some of the larger planes. Maybe you can talk a little bit about what's happening in emerging markets with the E-Jets. And also, just as the CS100 becomes more of a reality, are you seeing that come up as a competitor in any of your campaigns?

Frederico Pinheiro Fleury Curado

Well, the activity on the 100, 105 segments continues in Latin America, we have some activity, we just announced those two extra aircraft for Australia and Argentina, so China is also there is some activity going on there, Africa and Middle East. So there is not huge size orders, but smaller, some option confirmation, some smaller campaigns. So it’s kind of, I think, in the average of that segmented market. The CS100, we see, of course as far as size, it’s an aircraft about the same size as our EMBRAER 195. Those are very different aircraft as far as performance. So the CS300 is an aircraft, which is much heavier than the EMBRAER 195, has longer range than the EMBRAER 195. So we still believe that in the merits of our EMBRAER 195, we still believe that the EMBRAER 195 is really optimized or a EMBRAER 195 optimized for mission and as far as range we pullover something like 98% of the average missions in the world. So we don’t see the real benefit of this extra range in the CS 100, but again when it’s out there, it’s going to be another aircraft fighting for customers. So of course we respect that.

Unidentified Analyst

Okay, great. Thank you very much.

Jose Antonio de Almeida Filippo

Thank you.

Operator

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

Cai von Rumohr – Cowen & Co. LLC

Yes. Thank you, Fred, and congratulations on the united order.

Jose Antonio de Almeida Filippo

Thank you, Cai.

Cai von Rumohr – Cowen & Co. LLC

Is the united pricing comparable to the republic order?

Unidentified Company Representative

Of course, I cannot tell precisely, but I would say in the order of magnitude all of those campaigns, I think they have similar price level, but of course I cannot compare, I means, comments or compare prices between the two airlines.

Jose Antonio de Almeida Filippo

Okay. And you mentioned of the order potential in the U.S., the options you have from republic and the united. What is the lead time on those options, i.e., do they have to give you at least 12 months' notice? And given that, as I believe both current orders go or at least, the Republic, what goes through, what the middle of 2014 or a little farther, what's the earliest you could get those options? I mean, because it doesn't look like that they would get more in the current timeframe, it would just extend the deliveries or would it? Could you get those options sooner?

Unidentified Company Representative

Cai, the Republic deliveries, they actually stretch out to 2015, so we have 2013, we started in the second half 2014 and some remaining aircraft in 2015 and there option will start in the continuation of the last firm orders, so it’s a – it’s more backlog into 2015 and 2016, as a continues flow of order, so the order that we – the option that we have you know maybe not a 100% precise here, but (inaudible) more heavier loaded from 2015, 2016 on, so there is not much room, there is some, but not much room for options in 2014.

Cai von Rumohr – Cowen & Co. LLC

Got it. And then, the Legacy, my sense is, that's slipped a little bit, and while its entry in service in the first half of 2014, is it more likely to be closer to midyear than the beginning of the year?

Unidentified Company Representative

I think that’s a fair assumption. We always sustain first half. Of course, we realize it, so relatively broad range and we have been talking about the entry into service. So we’re doing a lot of work to assure that once we’re getting to do the (inaudible) service and ti’s really the and it's mature. So we're investing a lot of efforts and resources in the flight test campaign and maturity campaign. Also we have both in the ground and in flight. So, we may have a certification earlier in the year and elect to enter into the service a little bit later. So we’re giving ourselves this six months – six months, let’ say flexibility. But I would agree with your comment that is more likely to have, airplanes been delivered to customers, more towards that it meets the main part of the year.

Cai Von Rumohr – Cowen & Company

Got it. Thank you. And then, yeah, the Gen-2 really looks, I think, more impressive. At this point – you have the new engines than it might have 12 or 18 months ago. Presumably, this also costs somewhat more money. Can you give us any kind of color, if you launch it as, and presumably you will, at the midyear, what – A), what a rough range of what the development might run, and kind of the profile of when that spending will start to hit your P&L, start to hit your cash flow?

Frederico Curado

Cai, of course, I would ask you for a few more months to talk about volume. Profile, if we do launch let say this year, which of course is our intention too, we’re working towards that. This starts to get really more loaded in – let’s say in the 316 and it’s a ramp-up of 2015 but it is of course, there will be an – 2015 and 2016, so next year, in 2014, you will see the start of the ramp up. So as we certify the Legacy 500 and 450, then we start really moving our engineered resources in the higher quantities to the second generation. So as far as investment company, we probably should see something to flattish, but for the program itself, it really starts to pick up in sizable resources probably in 2015.

Cai von Rumohr – Cowen & Co. LLC

Terrific, thank you very much.

Unidentified Company Representative

Thank you.

Operator

Our next question comes from Ronald Epstein of Bank of America Merrill Lynch. Please go ahead.

Ronald Epstein – Bank of America Merrill Lynch

Thanks good morning, Fred.

Frederico Pinheiro Fleury Curado

Good morning, Ron.

Ronald Epstein – Bank of America Merrill Lynch

Following up on Cai’s question on the second generation E-Jet. How in the preliminary customer conversations you’ve had so far. I mean how they are received and vis-à-vis let’s say the TS-100. I mean what’s your feedback?

Unidentified Company Representative

Ron let me talk about Embraer. I don’t have any feedback on the TS 100. I can tell you tell that there is I mean real interest in the aircrafts. We have to keep in mind that this is not a new aircraft per se. This is a let’s say that it will be a significant improvement over an existing aircrafts, which has 60 plus customers in 40 plus countries. So there is about 11,000 or so aircrafts, so the customer base is there. So we’re starting from a solid start I mean that’s from a solid base. So now that we’re really talking to more the days with the airlines in recent companies about that the new aircrafts. I’m encouraged to be frank about the prospects of those new second generation airplanes. And it will be I think a very important let’s say change in the history of regional aviation, because if you look back at the history of regional aircraft, what we see is segments going up and down, products coming up and disappearing. And I think we will set a new reference now by really extending the life of on existing kind of product. So the E-Jets family, we see as a family which has a very long and very potential longevity. So beyond the current generation for the second generation, and perpetrating our presence in that market segment. So, I’m really encouraged and really trying hard to put together the business plan, which it sounds as far as return on investments markets responded in good.

Ronald Epstein – Bank of America Merrill Lynch

Great. And then, again following-up on another question that Cai asked. In terms of investment despaired, I think at one point, I think you said it might be in the range of $1.5 billion. Is that still right?

Unidentified Company Representative

Sorry, I never say that one.

Ronald Epstein – Bank of America Merrill Lynch

Okay, okay.

Unidentified Company Representative

Maybe somebody else, somebody did here in Embraer, but I really ask you to wait for few more months. And if you had the number and of course would disclose to formally and there will be something more solid, but I think that’s where we are.

Ronald Epstein – Bank of America Merrill Lynch

Okay, great, fair enough. And then just maybe switching to the Defense business for a minute, Fred, can you see your 390 program – we haven’t talked much about that on the call yet. And how is that going, how’s the development going? And are you seeing any other customer interest outside of the existing customers that you already have for it, or potential customers you have for it?

Unidentified Company Representative

Until we entered to flight, I think (inaudible) really important to run for let’s say for the starts of a commercial campaign for the aircraft. First, of course, the flight of the aircraft, which is scheduled for the end of next year. And very importantly also is the execution of contract with the Brazilian Air Force for the delivery of the airplanes, but what you have so far is just a development contract. So once we have a contract to deliver x number of airplanes to Brazilian Air Force with current price and the current configuration of this thing settle down, we then from that reference we can start selling the aircraft for other customers starting, of course, with those who have a participation of the program. And the first flight also I think is the key element, so we’re able to show the aircraft. So I would anticipate some, let’s say, more commercial activity more towards like end of next year into 2015, let’s say, stronger base in our marketing efforts in the aircraft.

Ronald Epstein – Bank of America Merrill Lynch

Okay, great. And then maybe just one last question, an operational question, where is (inaudible) in terms of final assembly cycle on 170 or 190, how many days did they take now?

Unidentified Company Representative

Maybe José can help me. I think it’s seven and eight days. But let us just cross check this one, I think we have information here. Yeah, so, my memory (inaudible) seven days is our cycle time for final assembly in our E-Jets Hangar.

Ronald Epstein – Bank of America Merrill Lynch

Okay, great, thank you very much.

Unidentified Company Representative

Thank you.

Operator

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

Stephen Trent – Citigroup

Hi good morning everybody and thanks for taking my questions.

Frederico Pinheiro Fleury Curado

Good morning Steve.

Stephen Trent – Citigroup

Good morning Freddy. Just curious, I was wondering if you could give us little bit of color on what was going on with this labor (inaudible) where there was – you’re already paying an settlement.

José Antonio de Almeida Filippo

Yes, I can do this. Actually this is not a settlement. This is just a provision that we made and we will have to go to the (inaudible) prior to privatization there was some labour reduction prepared in the comment for the privatization and some of the things entering some challenging grosses and we’re working on this and do efficient to make a provision is based on the opinion on the legal other supporters on this that where that will be good that we should do, so is that the provision not a settlement is still discussing and there is some still waiting for that, it’s not a final setup.

Stephen Trent – Citigroup

Okay, great. And just two other quick questions if I may and congrats on the United order. I’m curious when I actually take the valuation firm value at list price that guys mentioned and divide by the number of planes and I do the same exact thing what the republic order I actually get kind of a moderately lower implied list price with United than I do on with public. Is this just simple rounding or are you making an effort to adjust left?

Frederico Pinheiro Fleury Curado

Steve, my sincere answer to your question is I don’t know, I have checked of course as everybody else in the industry, we just inform what is you aircraft time least prices so I don’t know I didn’t even notice that. So thank you for the input we’ve got an issue we’ll get back to you.

Stephen Trent – Citigroup

Not a problem, Freddie, not a problem. And just one last thing, as you look at potential, ongoing potential order flow from the U.S. market and you have guys like American and United, that is, they’re getting larger planes, are also getting rid of their 50-seaters. While American, it’s clear what’s occurring, how do you see United Airlines or customers like United progressing in terms of getting rid of their 50-seaters, and the guarantees that you have on those aircraft?

Unidentified Company Representative

I think the way that bankruptcies seems to be over in all majors with other exception have gone through consolidation and gone to bankruptcy all the aircraft that had to returned on the bankruptcies had been returned for the industry, I’m talking about. So I – and let’s keep in mind that the bulk of the existing 50-seaters fleet was delivered between late 1990s first half of the 2000 so if you take a typical 12to 15 financing it’s you know we can see a gradual dilution, a substitution of those old aircraft by the new by the new 787, 5-seaters being contracted right now. So we believe there will be let’s say a organized way out of those aircraft, whoever, is holding those accuracies we will see secondary marks in our [De Nova] Latin America, Eastern hero up, so a lot has been done digested already by the industry with the bankruptcies of the last five, six, eight years.

Stephen Trent – Citigroup

Okay, I appreciate that, Fred, let me leave it that, thanks for the time.

Frederico Pinheiro Fleury Curado

Thank you.

Operator

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

Amit Mehrotra – Deutsche Bank Securities, Inc.

Thanks, good morning. It’s Amit Mehrotra here for Myles, just wanted to ask one quick question on the services revenue, can you just provide us what the services level was in the quarter?

Luciano Froes

Hi, Amit, this is Luciano, services was around $195 million for total considering all the business units.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Okay, okay. Thanks, and then just one follow-up on the EBIT margin in the quarter. Even if after adjusting for the non-recurring items and the stimulus, they were still below the full-year target. So I’m just wondering in addition to MiG, is there also some big step up in stimulus benefit sequentially that drives the improvement? Can you just walk us through that a little bit?

Frederico Pinheiro Fleury Curado

Okay, Amit, so yes, in line with what we mentioned previously, the stimulus should add up to about $100 million for the year. Of course, you have to generate the revenues to starting seeing that little primarily in the cards, right as we deliver more aircraft, we should see a step up in the stimulus benefits and that of course, in addition to the operating leverage and growth and revenues et cetera to meet the guidance, it should bring us more at par with the figures that we’ve indicated.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Okay, thanks. And just one last on the defense business, the KC-390, can you just give us what the revenue contribution was in the quarter on that business and maybe what we should expect as your total revenue this year and maybe what’s scope of that business could be over the next couple of years? Thanks

Frederico Pinheiro Fleury Curado

Yeah. We don’t particularly breakdown revenues per contract. I would say that the revenues in Brazil taking all the contracts in Brazil and the KC-390 is the main contract that we have in Brazil it’s firmly transitioning from some let’s say 52% to 70% of our total revenue. So if you consider something in that ballpark about 60%, 70% of revenues to Brazilian markets and KC-390 being and let’s say the major contract there throughout the year, yeah for the year, remains for the year some $450 million for the year so that’s our expectation.

Amit Mehrotra – Deutsche Bank Securities, Inc.

Okay, great. Thanks so much.

Operator

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

Darryl Genovesi – UBS

Good morning guys.

Unidentified Company Representative

Good morning.

Darryl Genovesi – UBS

So can you just comment on what you’re seeing on business jet pricing particularly at the high-end and I know you said the Phenom 100 are soft, but when I just look at your growth rate on a unit basis for last couple of quarters relative to last year. It would seem to me that you should be seeing kind of high 20-ish percent kind of growth there and what you’re actually seeing in sort of mid-teens growth. So I’m just wondering if you’re really seeing that big of a pricing as particularly at the top end?

Unidentified Company Representative

Yeah, well, we’re not seeing, certainly we’re not seeing a bump up in prices but you’re not seeing let’s say a stronger fresher than we had before. I think it has at least flatten out and some more discipline in the production rates. And also in a certain way we kind of welcome, what Filippo mentioned about maybe reducing their predictions. So, that discipline we just certainly bring better margin to everybody. But I like we must say that’s in the whole business where you’re seeing a material website as far as price and we are just about where we were, that’s not enough getting worse I believe, I think, if it moving, it’s moving a little bit up, but not moving the New Year.

Darryl Genovesi – UBS

Okay. And then I guess just the other question I had, just in terms of the similar, can you just give some color on sort of how you expect that to sort of play out when is it go away and is it sort of cliff, or does it sort of kind of step down a little other times away the way sort of yield up last year, assuming that’s not extended?

Frederico Pinheiro Fleury Curado

Yeah, we expect, we head in the first quarter of $18 million, we didn’t see the impact, so we keep that what we indicated for the year about $100 million.

Darryl Genovesi – UBS

Right. I guess I was asking more about 14?

José Antonio de Almeida Filippo

The 14, where still some of this – the payroll impact is for two years. That was still keeping the mid revenue, but we don’t have that anything that’s been formal for that.

Darryl Genovesi – UBS

So with that, I mean with that 62 kind of the second quarter of 2014, because I think you started to see the benefit initially in kind of the second quarter of 2012?

Frederico Pinheiro Fleury Curado

Well, I actually describe to say that this benefits, which actually is a tax, is a change in tax at least, it’s valid at least until the end of 2014, so 2013 and 2013 is what we will see in 2013.

Darryl Genovesi – UBS

Okay.

Frederico Pinheiro Fleury Curado

Beyond 2014, that’s where we do not have any clarification yet.

Unidentified Company Representative

Okay, thank you.

Operator

Our next question comes from (inaudible) of [PIAA], please go ahead.

Unidentified Analyst

Hi, regarding the delays in your deliveries this quarter, you had mentioned it was due to some financing issue that at your customers. Can you please just confirm that those issues have been resolved and then the deliveries are either that already delivered in the second quarter or is that (inaudible) deliver?

Unidentified Company Representative

Pretty much. And those are of course there are points, issues or either have been delivered, will be delivering in this quarter, if not all, but the majority of the aircraft, so we should see a step up in deliveries in both commercial and executive jets in second quarter.

Unidentified Analyst

Okay, thank you.

Operator

Our next question is a follow up from Pete Skibitski of Drexel Hamilton, please go ahead.

Peter J. Skibitski – Drexel Hamilton

Yeah, Frederico are you still on track to deliver the first legacy 650 from China in the fourth quarter? And I was just wondering if you could expect the economics of those 650 the meaningfully differ from the Brazil delivered 650s?

Frederico Pinheiro Fleury Curado

Yes we are -- we are on track. And actually the matter of fact, there was there just last week and the aircraft is already in the single line. It really depends on the rate of production. So if we stay in the lower range of three or four aircraft a year, probably going to have, probably a little bit less margin than what we have here in Brazil. If we go up to a higher range of six to nine to ten aircraft a year, I’ll say very comparable. This is based on our history of the 145 in Harbin.

Peter J. Skibitski – Drexel Hamilton

Got it, very helpful, I appreciate that. And then last one, can you talk about the delivery ramp on the legacy 500? I think you touched on this earlier, but I stepped off on the call. It sounds like you're on track to deliver the 500, I guess, in the middle of 2014. I'm wondering, should we think about, kind of single digit deliveries next year, or is there opportunity for more than that? I was looking for some color.

Frederico Pinheiro Fleury Curado

Yeah, well I’ll give you very faint color, I cannot, of course make much more precise comments on that yet. But probably I’ll say, a low double digits, I mean, beyond 10 aircraft I think is probably – we would be looking at least – low double digits 10 plus to all whatever on 2014, and ramping up according to our backlog. So it won't be just single digit. It will be more.

Peter Skibitski – Drexel Hamilton

Okay, great. Thanks very much.

Operator

Our next question is a follow-up from Cai Von Rumohr of Cowen & Company. Please go ahead.

Cai Von Rumohr – Cowen & Company

Yes. You had an abnormally low tax rate in the first quarter. I know this is a difficult question, but could you give us a range on the tax rate for the year, barring any major FX fluctuations?

Frederico Curado

What we have is that, we didn’t have any major effects of exchange rate in the first quarter, so we don’t expect to see (Inaudible) so far. But as you know this is something that impact the way you calculate because of, have the dollar as our function of currency and tax rate is calculated based on the reais figures. So we don’t – nobody you have to considered maybe the standard of 25% as the income tax that we used for projection. It could be used 25% will be enough now.

Cai Von Rumohr – Cowen & Company

We never really get the 25%, I mean it’s a range of 15% to 20%. I mean give me a realistic range.. If assume obviously that the effect is relatively stable from here on now.

Jose Antonio de Almeida Filippo

Yeah. That’s the number that we should consider. There’s some treatment sometimes that you go to the current income tax and the deferred income tax, but they all tend to put together in the 25% if you take the full year.

Frederico Pinheiro Fleury Curado

Right. We did have years where we had extremely high tax ratio, [totally] our distribution on cash. So it’s, I mean, I appreciate – let’s say your difficulty is same as ours. We have the same trouble here giving projections to our sales, to our Board. It’s just this two different systems; one accounting and one to calculate tax based on Reals. It makes virtually impossible for us to make a prediction. So I think try to give the best guess that we have, but it may really be all over the place depending on the how the various effects develops.

Cai Von Rumohr – Cowen & Company

Thank you very much.

Operator

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

Stephen Trent – Citigroup Global Markets Inc.

Hello. Thanks, guys, and sorry about the follow-up. I was wondering if you could tell us approximately what FX or something you’re using for 2013.

Frederico Pinheiro Fleury Curado

Welcome back Steve. I think it’s 2 Reals?

Jose Antonio de Almeida Filippo

Yeah, 2 Reals per dollar for the full year or going flat for the year.

Stephen Trent – Citigroup Global Markets Inc.

Great, thanks. And I also didn’t hear your response for the first quarter. What was the level of service revenue you mentioned?

Frederico Pinheiro Fleury Curado

$195 approximately.

Jose Antonio de Almeida Filippo

$200 million.

Stephen Trent – Citigroup Global Markets Inc.

$200 million, perfect. Thanks very much.

Unidentified Company Representative

Thank you.

Operator

This concludes today’s question-and-answer session. I would like to invite Mr. Frederico Curado to proceed with his closing statement. Please go ahead, sir.

Frederico Pinheiro Fleury Curado

Just to thank you all for the participation, look forward to talking to you in next quarter. Take care. Bye, bye. Have a nice week.

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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