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Embraer SA (NYSE:ERJ)

Q1 2011 Earnings Call

May 3, 2011 9:30 am ET

Executives

Frederico Curado - President and CEO

Cynthia Benedetto - CFO

André Gaia - Head of Interviewer

Rodrigo Rosa - Controller.

Analysts

Nicolai Sebrell - Morgan Stanley

Noah Poponak - Goldman Sachs

Joe Nadol - JPMorgan

Caio Dias - Santander

Operator

Good morning ladies and gentlemen and welcome to the audio conference call that will review Embraer’s 1st Quarter 2011 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 instructions to participate will be given at that time. (Operator instructions) As a reminder, this conference is being recorded and webcasted at www.embraer.com.

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 believes, may, will, estimates, continues, anticipates, intends, expects 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; Ms Cynthia Benedetto, Chief Financial Officer; Mr. André Gaia, Head of IR; and Mr. Rodrigo Rosa, the controller.

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

Frederico Curado

Good morning, thank you for attending our conference. So briefly just some highlights as far as commercial activity, I think we have important success in this quarter. The Alitalia agreement for sure was an important contract for us. The follow-on orders also from Trip in Brazil. The fact that they have 175 and now it has risen to 190 is also relevant. It shows a benefit of commonality. Some new territories such as Dniproavia in Ukraine for 10 190s. So, this is also a positive as far as broadening our customer base.

In China, we had couple of successes. We had CDB Leasing for 20 aircraft. Those airplanes will be from China Southern and also another 10 plus 5 firm fly options for Hebei Airlines, a new customer of Embraer in China.

Follow on orders for converts of options from KLM, so that’s again, I think, is very important endorsement for the product line.

As far as executive jets, I think some important structural results, certification of the Legacy 650 in the U.S. It was already certified as you may remember in Brazil, in Europe. So, that’s a complete certification effort for this new module. We got an award for the Phenom 300 from Flying Magazine. That was delivered at the same date of our opening ceremony of our new facility in Melbourne, Florida. So, the factory is already being refurbished with tooling and equipment and we maintain our schedule to have our first deliveries before year-end.

Furthermore, we also kept expanding our customer support network, not only in the United States, but also in China, Middle East, Africa, in India and Australia. And the final comments, I think a very important one, the execution of a Memorandum of Understanding, with AVIC our current partner [NRB] to extend the partnership beyond the 145 and adapt the tooling, adapt the factory to produce the Legacy 600 and 650 in China, which will represent the first business jet we have produced in the country. I think this has opened an important perspective for Embraer in that market in China.

In the defense and security area, also I think a few important results, a couple of contracts, modernization of 43 AMXs and also the modernization of the 11 addition F5 that the air force acquired earlier, I think last year or couple of years ago. And I think more importantly a couple of acquisitions that we performed in Brazil, OrbiSat Company, specializing in radars and also ATEC, which is a very high level engineering company for C4I, which fundamentally both will expand the portfolio of technology and progress the Embraer offer to the Brazilian armed forces but also potentially for exports. And not a final agreement yet but Memorandum of Understanding also with [Aero] Electronic Systems which is an avionics subsidiary of Elbit from Israel. So the idea is to develop a framework agreement eventually to produce or jointly produce for the Brazilian market.

Well turning to our financial results. We had revenues of roughly over $1 billion in the quarter. We had an exceptional contribution from services on this quarter and as you may have seen that has contributed to also to an exceptional profitability. But any way, 60% of our revenues came from commercial jets, 10% from business jets, 12% from defenses and 17% from services.

As we presented during our last presentation, last month when we discussed the 2010 results, we are keeping the break or divulging the breakdown of those services because you know three parts of that composition of service, they actually come as a result of the three main business of Embraer, commercial, [business] and defense.

So we report in our 20-F, those numbers are consolidated, that we kept them open, so the analysts could follow and keep their models updated. As far as deliveries, we delivered 20 commercial jets, two business jets and eight business jets, being two large ones and six small ones, so 28 jets in total in the quarter.

We feel comfortable about our guidance as far as deliveries in 2011 of 102 commercial jets and 18 Legacies and Lineages and about a 100 Phenoms.

Our backlog, as a result of those sales for the first time in many quarters went slightly up. So that solidifies the trend of stabilization that we have been witnessing in the last few quarters. I think that's an important element for future results. And as previously mentioned, with the exception of contribution of services and within that exceptionality we also had exceptional elements of margin in services.

So as a result of our product mix and service mix, we had a very robust gross margin which I anticipate and say that we do not expect to have that same level of gross margin throughout the rest of the year, but anyhow it was a very important result to produce strong operating and net margins in the quarter.

So this $1 billion represented 24.3% of gross margin which you see in a couple of slides turned into 8.9% EBIT margin. But now before that, I talk about SG&A for a bit fundamentally we are keeping those expenses relatively stable. As you know we have a tremendous headwind in those accounts due to the depreciation of the real vis-à-vis the dollar and the way to of course to offset that is continuous work and efforts and productivity and our [D3 program], our excellence program.

So roughly in line with expected and as a result of that strong margin and the predicted SG&A, we have a higher than expected, internally expected income from operations, so $94 million in EBIT, which represents almost 8.9% margin. We, despite of that we keep our forecast, our guidance for the year which calls for a 7.5% margin or $420 million of operating profit because as I just said we do not expect that this 24% gross margin is sustainable throughout the year.

As far as EBITDA, direct results of this positive results, it reached a 14.8%, same comment adjusted about EBIT, we at this stage, we are maintaining our outlook for 2011 at $610 million or 11% margin for the year.

Net income was almost at 10%, almost a double-digit margin and that has two elements, one is the strong quarter and the other one of course is some tax credits due to the appreciation of real which has a negative impact to our non-monetized assets inventory mainly and which generates a tax credit with no cash effect.

So this is part of our – this is an structural issue of our operations as you know, in some quarters we have benefit, in some quarters we have reduction of our results due to this volatility. But anyhow if there is no cash implication and we just have to keep in mind that this result came from a more recurring or extraordinary tax credit due to the appreciation of the Real.

We had an increase in our inventories. That came from fundamentally some deliveries which we expected to have achieved and we did not. Some were work-in-process as well. Having said all that, we keep comfortable that by year-end we should see numbers comparable to the numbers we ended the last fiscal years; in other words, something around 2.1 billion to 2.2 billion by the end of 2011. So this we see as a transitory increase in our inventories which should be diluted over the remaining part of the year.

So our free cash flow was negative on this quarter. As we will see in just short while, we had as predicted a stronger CapEx disbursement in this quarter. And that of course has contributed to this negative value, which we also are comfortable and we’re going to over the year we will reverse and come two or three positive throughout the year.

Our indebtedness remains pretty much under control with a good term with maturity and at this stage is about $1.5 billion and we have free cash of $2 billion with us so that results in net cash of about $0.5 billion, which obviously a part of that is our inventory accounts as we may conclude.

So with that we’ll open for questions for Q&A and we will be glad to answer your questions. Thank you.

Question-and-Answer Session

Operator

Excuse me, ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Our first question comes from Mr. Nicolai Sebrell with Morgan Stanley.

Nicolai Sebrell - Morgan Stanley

Hi Frederico and the team. Good morning. A few questions, first on Executive Jets and the second one on the margin, which I am sure there are a lot of questions, and I will be first.

But, on the Executive Jets obviously the first quarter deliveries and the reduction in guidance, you know relative to deliveries last year, for this year a little bit disappointing. Could you comment a little bit more on either relationship of the number of deliveries you expect this year relative to the backlog that you have.

I mean you have, if I am not mistaken over 500 aircraft in the backlog, which brings up the question, how real is that backlog or may be in better terms, do you have serial deferral customers or customers that have deliveries that they don't want for several years. And is that way the backlog seems large relative to the number of deliveries, at least my view.

On the margin, I understand that this margin is not repeatable, but in order to reach like 7.5% margin for the year that means that we are going to see some pretty below single-digit margins in following quarters. Is there upside risk to the guidance or is that simply that you know following quarters might be a little weak? And that’s it.

Frederico Curado

Okay, Nick. Well on the business jets a couple of comments; the lower ends of the business jet market is too slow. So we do not see a strong activity there differently from the higher end. So that even is structural issue it is due there and that was the fundamental reason why we have reduced aeronaut, a reduction in 2011 vis-à-vis 2010 last month.

We also had a few issues in our sender line, so we have the combination of a few customers that did postponed – a few commercial issues with our evolving customers; we did have a few cancellations, those indemnisation or those [benches] they are embedded in our non-operational – our other operational income.

And the question about the backlog, I think it’s a fair question. But, it is hard to give you a very firm answer; once, you know we actually do not know if whether or not we have a postponement into typically 18 months or 12 months before the [visit], that’s when of course we would have to start making more sizeable down payments. So it's to say, it’s pretty solid or to say its not solid at this stage would be a premature statement anyway but definitely the amount of cancellations and the request for deferrals is much, much lower than it was due to the financial crisis. But it is still a fact.

So that combined with issues we had in our production line, which we had already overcome that's resulted in the lower than expected deliveries in the quarter for business jets, so we remain firm at this stage about the deliveries for the year, the 18 plus 100 for the year. Also of course with the certification of the Legacy 650 that will enable us to start delivering jet airplanes or US customers.

As far as margins Nick if I am not wrong in my math here, during the end part of the year we are expecting something around 7% margin to get or 7.5% weighted average. So its not very low single digits, I don't see a risk to our guidance. I just think it’s a bit too premature to assume that from the good results of the first quarter we should increase our expectations for margins throughout the year, the 7% throughout the year and as you know for sure the effects keep putting pressure on our cost. We are below 160 now. I think its two of the most rational and best estimates we can provide.

Nicolai Sebrell - Morgan Stanley

Yes, I guess I was talking about the seasonality in the numbers. In some quarters you drop lower than others and but I understand what you are saying, one quarter does not make a year, but following on that and the margins, how much service revenue, what with the source of the service revenue if you can generalize I mean for the increase in the quarter and how much do you expect to see again may be in future years? I mean this is the type of thing that repeats periodically just so we can better understand how to model that in the future?

Frederico Curado

I’m going to ask André to give the statement.

André Gaia

Hi Nick, we got $100 million in commercial, $40 million in defense and almost $80 million in executive aviation. Those numbers can be a little higher than what we expected than average from a per quarter basis but I believe that the guidance of course is a service that we provide continues to be the same numbers. So next quarter tends to be on a relatively basis may be smaller but certainly service is an important margin contributor to the company and of course we are working to continue to improve this as a source of revenues and the margin.

Operator

Your next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs

I’m going try the margin question as well. To me they look potentially may be more sustainable than we’re discussing here and I guess your quoting the services mix but if I look back to the fourth quarter the services mix, I think was one of the lower numbers its ever been and the unit volume in the current quarter it is fairly low obviously very, very low and you’re basically running the no volume to the factory is kind of lower than what’s going in the regional jet side. And again, last quarter, we were close to 10%. It was a pretty low services mix. When you had us down for a your Investor Day, you guys spent a lot of time talking about the many different cost and efficiency initiatives you layered in during the downturn. You had two quarters of year-over-year volume growth with 30% cost incrementals, which is kind of what you see coming out of a downturn when you've done what you guys did with cost.

So, I just wonder how much that kind of incremental margin trajectory is actually sustainable given everything you did during the downturn. And then maybe it even makes sense to talk beyond '11 and into '12 when you probably have a lot more confidence into better volume. Is a double-digit operating margin reachable with much better volume in '12 given everything you did on the cost side or is that starting to stretch and are there any other kind of offsets to look for going forward that I am missing?

Frederico Curado

Well, of course, I must refrain from a prompt for any -- from quantifying anything but qualitatively your rationale is very sound. We, I mean, the company has really streamlined its operation. It keeps doing so. As we get more volume and hopefully this maybe through, the next years to come. We do not anticipate the need to significantly increase our fixed costs. So, there is a natural dilution there. And as we of course, as we work on productivity -- also the variable costs should be favored by that. Are we going to from 7.5% achievable this year? Can we go to double-digit margin? That’s something which of course, I mean, we have to quantify down the road but the trends is upwards. I would agree with you.

If you think our gross margins of last several quarters, it is between 20% and 21% if I am not mistaken. And, so significant part of that is it stays on U.S. dollars, so there is stable element also. We did not see much of a downside risk but the other part which is exposed to the Real, our currency, there is a lot effort to keep it there. So, if you look at our 20% to 21% averages last several quarters and this jumped to 24. I mean we have to look at everything with caution and not to project based on that. So, at this stage again, we are not trying to be over conservative. Just trying to be professional from the sense that this is the best estimate to have at this stage.

Noah Poponak - Goldman, Sachs

Okay. That makes sense and is helpful. On the regional jet side, the order activity has been very strong for a few quarters in a row, you have got I think 60 units announced through four months into the year. Do you have an internal projection for what the total annual order activity might look like just given the many campaigns that you still have ongoing?

Frederico Curado

Well, we are targeting to achieve at least a one-to-one book to bill ratio. So that will be north of a 100 aircraft. Of course, let's say the specific targets that my (inaudible) has agreed with me is more than that obviously. But we expect at least to achieve a good backlog, hopefully increases a little bit.

Noah Poponak - Goldman Sachs

Okay. And then I’ll try one more which is on the Boeing call last week, there seem to be some contradictory comments from the company relative to what they have said in the past. They started talking about meeting to protect a less capacity in the narrow body market and they talked about before where they seem to be alluding to stepping up, they were talking as low a 145 being the most important part of the market.

And Fred, on your last earnings call, you sort of specifically talked about waiting to see what Boeing’s move is, feeling like they might move a little higher and potentially vacate that space for you. What did you think of McNerney’s comments? Do you think they just still don’t know what to do? Do you think they are trying to confuse the competition, may be just give us your latest thoughts on what’s likely to play out in that part of market?

Frederico Curado

Well it’s tough for me to comment on Jim McNerney. I certainly do not believe he would say anything to confuse the competition. I think they control their own destiny. Of that 145, well, it is true that we need to wait and see what the Boeing does before making our decision.

It is also true that we have fundamentally, a couple of strategies, one, depending on the comparative landscape, we need to try to stretch out the E-Jets to get a little bit more size on our brand and then our strategy would be to develop a brand new aircraft probably a fiberglass aircraft, if we perceive a more vacant space in that area.

It’s very difficult for us at this stage, I have actually no clear reading about where Boeing is going to position their family. Obviously we follow that very closely, so there have been declarations that they could consider something larger also to potentially heed the replacement niche of the [market] segment for the 757 in the recent (inaudible) round.

That was not important and they should go as low as 145. But the question is where will it be optimized, where are they going to position the center aircraft. If they position the center aircraft at the 145 seats, probably they will have the smallest variants which it’s an important presence in that market.

If they move, let's say the center of the new family upwards, I think he mentioned from 145 to 185 or something like that. So if they move upwards depending on what is the smallest variant of that family, that may represent let's say more space than we have today in the marketplace.

So it’s very difficult for me to comment on somebody else's moves, but I reiterate my comments which are whenever we see Boeing fix in this final important piece in this complex puzzle, we will then grow and address our decision, what's our next move in the commercial jet market.

Operator

You next question comes from Mr. Joe Nadol with JPMorgan.

Joe Nadol - JPMorgan

Fred, my first question is just on defense. You’ve made a number of acquisitions there as you noted and clearly the strategy is taking shape here. I’m just wondering if you can provide a bit of a sense on first of all, what areas might be targeted for acquisitions, but then secondly more importantly, how much capital this could involve over the next one to two to three years?

Frederico Curado

Acquisitions for us Joe are not an objective themselves, obviously there are strategies for us not only our presence in Brazil, but also to increase our portfolio. Those two companies that we have succeeded, in OrbitSat, small company with a very advanced technology in radar, with a strong presence in the Brazilian Army. I’m talking about ground equipments, not airborne equipments.

We acquired around 65% of the company, so obviously we have control of the company and we retained in our shareholders agreement, the intellectual capacity existing in the company. So I think it’s a small business Joe, so far we have invested, this will pop up in our next quarter, something like $40 million in terms of investments, in those two acquisitions.

So those numbers are not exactly very much material to Embraer, but I think it’s really enhancing our suite of technologies and also in the case of OrbitSat, given us let’s say a more direct access to a customer that we did not have a direct relationship with the Brazilian Army.

On the ATEC side, they are an important supplier for the Brazilian Air Force, which as a customer, we know well. And they are particularly important as far (inaudible) as our technology. So, they have been very active many years ago in the (inaudible) project.

In some specific technology, they actually are beyond where we are. So, there is a good complementarity between disciplines with Embraer and ATEC. In that case, it’s 50-50 and so of course, we have obviously a shareholder agreement, a very constructive relationship with existing shareholders. So, we have obviously a position in the board, so, we are in the process of integrating the company.

By integrating I want to clarify which is integrating. We have no intention to absorb those companies into Embraer. So those companies will remain standalone companies and we will integrate our efforts in the sense that we optimize the combined commercial and technical strengths of each one. Future acquisitions will depend fundamentally on the analysis of one, the investment case itself and the other what is the real synergy with Embraer.

Those two word from day one, were our main objects or main targets. There were another companies in Brazil which were acquired by other players, which were not exactly a focus of us, more in the ammunition field, which we're not particularly looking at. But for what we want to do which is sophisticated [super-axis] and also on the radar technology, we were fortunate and not unfortunate, we have did a great job in managing to fix it in those couple of acquisitions.

Joe Nadol – JPMorgan

Okay. Let me move over to a couple of numbers questions; the 8.4 million of other income in the quarter, is that something you view as in the past sort of it gets up, some quarters down, some quarters, but essentially not sustainable? Or is there something that changed about the way with your new segments in your acquisitions, is there something that will be recurring in that line?

Frederico Curado

Well, at least part of that is due to cancellations which certainly we hope are not there in the next quarter. But if you want to add, Cynthia or Andre another…

Andre Gaia

Yeah. I mean, I think the trend Joe except for the cancellation as Fred said we hope not there next quarter. I think we may have some volatility in this number since there are provisions adjustments there. There are about any types of fees and that we charge and charging there too. So there are – there’s kind of a day-to-day business and those accounts does change quarterly. So…

Joe Nadol - JPMorgan

Okay.

Andre Gaia

Okay.

Joe Nadol - JPMorgan

Is the joint venture in coming there?

Andre Gaia

No.

Joe Nadol - JPMorgan

Okay. And then just finally getting back to the services gross margin and this is my last question; it seems like there is two issues going on here, one is that services was a bigger part of the mix than usual and the second is that services gross margins themselves were higher than normal, is it possible to either to give us some number that illustrates how much of it was mix and how much of it was just services being abnormally high in and up itself?

Andre Gaia

I don’t have this break down here Joe, but I’ll say that probably this is kind of half and half.

Joe Nadol - JPMorgan

Okay.

Frederico Curado

But we can provide some more may be precisely later on. We just don’t have it here now.

Operator

Your next question comes from Mr. Caio Dias with Santander.

Caio Dias - Santander

Good morning everyone. My first question is related to the exposure to the FX, because according to our estimates here of course the operating level we do see a mismatch between our revenues and costs of around 15% to 18%. But given your strategy to protect our borrow line which is based on keeping some cash in Brazil have most 50% of your gross cash position. Then eliminating Brazilian reais, according to our estimates the exposure is much less than 10%.

So the question is; first of all I will like to guys to confirm if you currently don’t have any hedge position? And second, if this sensitivity I have just mentioned of less than 10% of the depreciation of the reais will go through your borrow line is accurate or if I am too optimistic. This is my first set of questions let’s put this way.

And my second question is a follow up on the Boeing’s strategic impact or Boeing’s strategy over your own strategy when defining whether to go for a new family of jet. If Boeing does decides to increase the size of its smallest jets in their new family, opening space for you guys to maybe operating a new, or launching a new model, a larger model.

Is it possible to further extend the E-Jet 195 and avoid creating a whole new family and just re-enginning the current aircraft in order to operating a larger size of aircraft you believe its mandatory to launch a whole new family and develop a new family of jets? That's my question.

Frederico Curado

Okay. So I'll ask Cynthia to answer the first and I'll address the second.

Cynthia Benedetto

Hello Caio. Your estimations making an analysis on a net exposure basis considering the cushion of the cash and the revenue generation is fully correct. Of course, this may vary depending on the actual FX rate, but it’s not far from what you should expect.

I mean since we established, on FX we have no financial hedge other than trying to expand our natural hedging efforts. And these efforts are not only maintaining the balance sheet (inaudible), but also they drove on defense business with more sales to the Brazilian government’s different areas, but they are reais related sales. This is also creating some leverage in some section for the company. So all in, your 10% net exposure is not far from what we are seeing on a quarter-to-quarter basis.

And for FX, we don't have any financial hedge hired or contracted or in place; apart from the natural hedging strategy.

Frederico Curado

Okay. On the Boeing question, it’s both strategies are technically viable and with defense our lets say our alternative, our option, we’ll defend in a large basis on exactly where we should have positioned the other products in the markets.

So if just by re-enginning the 195, we don’t get the necessary performance of to stretch it a little bit, so it is doable. We would need to re-wing the aircraft and re-engine which would be or which is in our consideration anyway. So to be very objective, it is possible, yes, to augment the capacity of the 190 – 195 by a new – develop a new version of the aircraft which will contemplate a new wing and a new power plant. And obviously as we do so, we’ll do other improvement as well.

Or if you want to stretch it further, then that we have the threshold when a larger aircraft becomes a more viable solution. Whatever we do, have to be absolutely unbeatable as far as operating cost, maintenance cost and performance, so it depends fundamentally on how much bigger we believe there is an opportunity out there to penetrate into this segment.

Caio Dias - Santander

Okay, very clear. Thank you very much and congratulations for the quarter.

Frederico Curado

Thank you, Caio.

Operator

(Operator Instructions) Our next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs

I wanted to ask you to elaborate on what's going on with business jets in China. We were just there and met with few of your folks who had some very interesting things to say about how quickly that is developing. And you just made the announcement on the 650. How do you think about that competitive landscape? Gulfstream has the most to share there now. Bombardier is obviously making inroads with manufacturers there. You've done what you've done. What are the next steps? Do you need more JVing, more partnering and how do you think about where, market share shakes out there over the next three to five years?

Frederico Curado

It is indeed a complex question and I do not believe there is a simple answer to that. I can share my views with you. It's a very, very small market today. A market done and aided by high-profile brand aircraft, Gulfstream in particular, and large aircraft. So this goes very consistent with the Chinese culture of brand awareness, and the importance they attach to brand. And of course, size of the airplanes. If my numbers are correct there, there are just a few hundred airplanes, corporate airplanes fly in China which we can consider almost zero. It's almost a non-existing market and the Chinese government in their last five-year plan, they have mentioned about their willingness also to develop in their pursuit to become a major player in aerospace. They are not only focusing on commercial aircrafts, but they are focusing also on tier I equipment such as

Engines avionics and tough hydraulics et cetera and lately on business jets.

There is a (inaudible) out there for a professional collaboration with a western manufacturer and of course Embraer is considering and submitting a response to that that which is not directly connected to our project in Harbin.

Our project in Harbin is much more driven by the continuity of that investment, any 50-seater, either jet or turboprop at today’s oil prices and probably never again, we will have feasibility as far as economics just to lower the number of seats even for turboprops.

So the solution would be either to do something else or to close, shutdown the factory. I think we just delivered the last aircraft by the way. So, the Legacy being a derivative of the 145, investment is really small compared to the adaptation of their factory for something else.

So, I think we’ve got kind of a fast track for this potentially booming market in China.

And so there are advantages of being the first to the market, the first to be there locally. The most I will love to say, well this solidifies our position as the major partner of the Chinese business jet aviation. I don’t think we can say that. I think we have a nice leapstart and it will depend a lot on how we succeed the markets in the airplane.

We have the advantage that the Legacy is indeed a fabulous aircraft as far as size, as far as operational cost and we have the whole infrastructure in place. We have a bunch of spare parts for the 145 fleet to have our second fleet on site, so it’s an airplane which is already supported, or I would say a sister airplane already supported.

In China, we have probably six or seven airplanes in service in China. So do we actually no, we have a winner opportunity, to make the first strike in China, but I see they definitely want to do something much, much deeper such as they are doing in the ALD21 and particularly in the (inaudible).

So I foresee one day a Chinese indigenous business jets, either developed by themselves or developed by themselves with somebody else. Those movements I think would be more clear within the next my point of view 12 months to 24 months and so in a very synthetic view, this how I see our position there.

Noah Poponak - Goldman Sachs

And how do you feel about your chances of being the winner of that of R5, that’s presumably with COMAC?

Frederico Curado

It’s really hard to say at this stage, its not even in my piece, (inaudible) just collect information and again as a broad range of manufacturers when you put – you know when you consider people like Gulfstream and Embraer and Cessna and Beechcraft and Bombardier, we are so different with different coverages of product sizes and its I think just the way to talk.

I would love to say, well being a partner of AVIC in Harbin that gives us a preferential treatment; I would love to believe that, I do not. I think we are at the same position as everybody else.

Again, we do have an opportunity of a fresh start and to be in the market first than anybody else and even if there is another project to establish a production in China, going to take whoever is left so a second player longer than us to be there. But apart from that it is our wish is what we work for, but I really cannot say that we had some, any special leverage because of Harbin.

Operator

(Operator Instructions) This concludes today's question-and-answer session. I would like to invite Mr. Curado to proceed with his closing statement. Please go ahead sir.

Frederico Curado

Just thank you all for your time and attention and consideration. So talk to you next quarter. Thank you very much. Have a great week all of you.

Operator

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

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