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Embraer S.A. (NYSE:ERJ)

Q2 2012 Earnings Call

August 1, 2012, 09:00 am ET

Executives

Frederico Curado - President & CEO

Jose Filippo - EVP, Finance & Director, IR

Luciano Froes - IR

Analysts

Paulo Winterstein - Dow Jones

Jose Sergio Osse - Bloomberg

Operator

Ladies and gentlemen thank you for waiting and welcome to Embraer’s teleconference for the discussion of results referring to the second quarter 2012. The audio is being broadcast simultaneously at www.embraer.com.br where the respective presentation can be found. All participants are only listening to the teleconference during the presentation of the company and then we will start Q&A. (Operator Instructions)

Before starting we would like to clarify that this teleconference includes projections, declarations regarding the circumstances that has not yet occurred. These projections, these forecasts have as basis mostly current expectations from the company, forecast about future events and trends that may affect lines of business. These forecasts are subject to risks, uncertainties and assumptions that may include among others general economic condition, commercial policies in Brazil and in markets where Embraer operates.

The words, believe, may, might, estimate, continues, anticipate, intend, hope and similar terms have as a purpose to identify expectations. Embraer makes no guarantees to publish update or reviewing any forecast because of new information, future events or any other happening. Because of risks and uncertainties, estimates, events and circumstances may not occur, real results maybe very different from those mentioned here.

And today we have Mr. Frederico Curado, Mrs. [Elaine Suno] Accounting Manager and Mr. Luciano Froes, Director of Investor Relations.

Now I would like to give the word to Mr. Frederico Curado.

Frederico Curado

Good morning to all. I would like to thank you for your time here. We have Jose Filippo, Vice President of Finance, relations with investors. And as many of you know, he has been here with us since June; Mr. Filippo will do a brief presentation of results that maybe followed with a link at the Embraer page and then we will go to the Q&A. Thank you. Filippo?

Jose Filippo

Thank you and good morning to all. We would like to start the second quarter 2012 conference. By going to the third page, we would like to start talking about some of our highlights. So we will get started with commercial aviation.

We have the delivery of 35 E-Jets in the second quarter totaling 858 air jets already in operation. It’s also important to highlight that we sold five E190 during the London integration there to China’s Hebei Airlines. And another highlight in commercial aviation is that we have the opportunity with our partners during Rio+20 (inaudible) flight that was entirely contested with renewable jet fuel and so there has been a lot of interest with regarding sustainability. These are the highlights I wanted to talk about commercial aviation.

Next page have to do with executive aviation. We delivered 20 executive jets, 17 were light and 3 were large. We had an agreement with Avic to build the legacy 600/650 in Harbin, China. This reflects 10 aircrafts that for which we signed a leasing and so this aircraft will be produced in the factory and delivered as planned.

Next page has to do with defense and security. This is a segment that has been growing a lot and we have been growing 33% regarding the last quarter. In the quarter, we sold eight Super Tucano’s and flight simulator to Indonesia. We signed also an agreement with Boeing for the KC-390s and the A-29 Super Tucano; highlighting some technical aspects that has to do with integration. So far the main highlight per first segment, we had many important deliveries and that was strong performance in the company and now we are going to go on to details.

So first on page six, we have a very solid portfolio. We announced at the end of the second quarter, we had about two years of invoicing with what we had in request in orders which is already reflecting the request that we had for the second semester of the second quarter. We have had a little bit of success and we are going to be announcing. Our backlog is good and we are well positioned at the end of the quarter.

Our net revenues per segment probably most relevant for commercial aviation, we see a growth in defense and executive aviation as well. First quarter of 2012, we have 67% coming from commercial aviation, 15% from executive, 17% from defense and 1% from other sources of revenues. We already see this growth here from other units regarding and you know we were thinking that we could go to 80% in commercial aviation, but we also see a new segmentation for the company.

Following on page eight, we had net revenue – we’ve had great solid revenue in the second quarter. We had 385 billion Reals reflecting a very solid margins also in the first quarter and this can be explained by a more favorable mix in commercial aviation and also thanks to the dollar that helped to grow while decreasing a few expenses.

So let’s talking about revenue; moving onto page nine revenues and gross margin. We had about 390 billion Reals in the second quarter. If we analyze the accumulated amount during the year, we feel that this can reflect a very favorable mix and also some reduction programs, cost reduction programs as well as a very favorable exchange.

We are also talking about net revenues and a very important comment here is that during the second quarter we have some income tax considerations which helped us grow our dollar you know taxable, our taxable amount here was less than what was expected and so our standard income tax returns we had $369 million with a margin of 3.9% that was important. And so the adjusted interest due to non-recurring affects dealing with taxation.

On page 10, talking about expenses in 2012, we had [$235 million] with a net, it was important to highlight that we had a growth at the beginning of June in the amount of $500 million and we had some, we will have some maturity of some of these investments in 2022. This will generate more resources of money at hand but it's important to highlight that we had a lengthening of our debt with just 6.1 years. This made us have a lengthening of the average negotiations for some of our debts.

And then closing, as we have announced, we have a few forecasting elements here for 2012. We believe that performance already accumulated in the company for the past six months that this is going to facilitate our EBIT margins for and have a margin of 9% to 9.5% and our previous margins are going to be 8% to 8.5%, 9% to 9.5%. Our EBITDA were increasing our projections in terms of cash to $390 and earnings before taxes. In relation to the previous amount is going to go from 12.5% to 13% but basically this is what we wanted to convey as far as our results are concerned we are going to open to Q&A and we have our team here prepared for answers. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question comes from Carolina (inaudible).

Unidentified Analyst

I just like to know about the company’s having a little bit of lower level. I would like to know that a little bit longer than two years and how we can have a recovery of this backlog throughout the year?

Unidentified Company Representative

Good morning Carolina. Thank you actually as we said, our backlog was [$2,000,900] in three years and first we had some very strong deliveries in the second quarter. And we work with commercial opportunities. We have to be very concerned with this and remain competitive with the markets that today currently it has all these situations that we are seeing. I believe that we can see some different announcements that maybe different from the standard and that might be different from the rest of what the company does. We see some opportunities but at the moment, we see no problem regarding the company’s financial mobility.

Unidentified Analyst

For the time being there was the possibility of other companies are acquiring Embraer. How about the defense segment what are the possibilities?

Jose Filippo

We don’t have any information to publicize right now. We have no confirmations for the time being. We cannot show anything definitive right now.

Operator

Our next question comes from Paulo Winterstein from Dow Jones.

Paulo Winterstein - Dow Jones

You have commented that there was a more favorable scenario for [EBITDA] but are there some areas that are more favorable than other? And could you please explain this a little bit better. Thank you.

Jose Filippo

Well the most favorable is probably associated to something that’s already happened throughout the year I think also some other general sectors such as (inaudible) and also some incentives from the government that the government has been giving companies in Brazil I believe that affects us positively, and there have been some cost reductions and in the sense we have a more favorable positive environment. So this has to do more with Brazil in the external market rates exactly thank you.

Operator

Our next question comes from Brad Haynes from (inaudible).

Unidentified Analyst

I just wanted to go along the line of that was the portfolio that generally for the past decade, we were talking about you know, some deliveries now we see one sale for every three deliveries and what are some comments regarding Embraer having to resist its production rhythm in various things. So I wanted to know a little bit about you guys about the backlog level?

Jose Filippo

Brad, actually we were not working with the perspective of reduction. Resisting our production rhythm we were working with a portfolio for about three years and that's again invoicing besides the fact that commercial activities in the company represent some opportunities and there are some things that are happening and that might make a difference, but we are not working at this point in time with a reduction of activity. This is not the case here. Thank you.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

So continuing along the train of thought regarding the backlog. What are the company's expectations and what is expected for the next quarter?

Unidentified Company Representative

(Inaudible) were then our expectations within our third quarter. What we can say, we were performing as announced and this is reflecting mainly on commercial aviation and we have an economic situation that everybody is seeing and there's a few cancellations. This is probably what's a little bit different from the first quarter, but this is part of the program and with our deliveries. For the second quarter, for our deliveries we have a little bit of different perspective. We continue with the same production results that have been announced and I think that's very detailed in the backlog and our announcement. That's what we were working with, with this forecast.

Unidentified Analyst

And has that affected executive aviation in sales?

Unidentified Company Representative

I didn’t get your question. I am sorry.

In the euro zone for Embraer, sales of commercial aircraft has been affected. Actually, the general economic fluctuations interferes in the overall forecast or prospect of the company, but there are no differences or specific segments. This situation determines, we haven't seen this for quite a long time and we don’t really have any information regarding the company segment. That’s not the case.

Operator

Our next question comes from Jose Sergio Osse from Bloomberg.

Jose Sergio Osse - Bloomberg

I would like to know what the profit is on sales to the United States and I have a few questions. You talked about few cancellations in the next quarter. How many exactly were there and delays. What was impact of this for the company’s backlog in financial terms and something else, the size, the effects in the income tax. What was the impact of the dollar higher than 11% in the second quarter?

Unidentified Company Representative

Okay, so let's go to the part here. You know (inaudible) but, so regarding the American program, the process was cancelled. They were Super Tucano’s. The process should be reviewed until next year. It should be decided and that's the situation that we are in currently. Regarding cancellations, we have a detail. When we announced the backlog, we had about 10 commercial jets and that started circulating.

Jose Sergio Osse - Bloomberg

So this is a cancellation, not a delay, right?

Unidentified Company Representative

Correct. Cancellation. Regarding income tax and the effect of dollar, there are some assets, you know, stocks that we have some effects of the valuation of the stocks and the adaptation -- like in Brazil where the company is safe and because of income taxes, we have to create an income tax over the gain and this is an effect that is due to accounting movements. Now this can be recognized, this amount is recognized or accounted for in the income tax and this is what we have been doing for example with our sales for some product and that's where our assets get more value. Now for as far as comps are concerned because we have a little bit of our value in rails, these costs are currently diluted, the reduction of these comps. We have smaller cost and that here we have a positive effect due to the exchange in the products. Basically this is it.

Jose Sergio Osse - Bloomberg

Exactly and what is the number for this positive effect, can you say or not?

Unidentified Company Representative

It’s approximately 15 trillion in the quarter. 10, 15 in the quarter.

Jose Sergio Osse - Bloomberg

Reals or dollars?

Unidentified Company Representative

Dollars.

Jose Sergio Osse - Bloomberg

Today, what is your current forecast in dollars regarding to the percentage?

Unidentified Company Representative

It’s something about a third of the costs in reals and a third as a cost in dollars, so I am sorry. One-third in reals and two thirds in dollars.

Jose Sergio Osse - Bloomberg

And the last question here. What is the recovery or progress for the executive aviation market which depends highly on corporate sector?

Unidentified Company Representative

Executive aviation as we talked earlier here has a characteristic in which you have a bigger concentration in the second quarter historically. That's what we've been seeing. We do not see a change in this profile and we cannot change a see a different change here just because of the fact that historically, you probably will see a second quarter that's a little bit stronger and more deliveries in executive aviation.

Operator

(Operator Instructions) Our next question comes from (inaudible)

Unidentified Analyst

First I just have a question here. The positive impact of dollar between 10 million and 15 million in the second quarter, but specifically what can you tell me about gains?

Unidentified Company Representative

Exactly you know we have a better improved cost here, so there is a positive impact, so the positive impact was a reduction of costs, right? Yes, but of course there's a negative impact which is the deferred income tax but the $10 to $15, $10 million to $15 million, that those would be a positive impact right.

Unidentified Analyst

Yes thank you. So what update you have regarding the [Augistinas] plant? At the end of June there was an agreement that was signed between Embraer and (inaudible) but currently what are things like and as production, aircraft production already started or how are things?

Unidentified Company Representative

Well we did close the agreement. Now we have some favorable conditions for productions to start happening. So we are hoping to start delivering this aircraft next year and we have about 10 aircrafts and that we are going to be delivering next year.

Unidentified Analyst

So the 10 year, the 10 orders are already going to start the manufactures.

Unidentified Company Representative

Yes we are starting. We are producing those 10 orders this year.

Unidentified Analyst

But you haven't started yet or have you?

Unidentified Company Representative

You seem to consider that we have started because there is some participation from the plant. The formal, the structure part, that.

Unidentified Analyst

No, no, but when this segment which have been started the contract, has said that this had already been, had already started so we thought that the participation had, was already under work.

Unidentified Company Representative

Now this is already happening, the plan was to start delivering these aircrafts next year, and there are 10 orders correct up till now for executive aircraft. Right now we announced, have 10 orders, yes. And there are some options.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Good morning. I would like to find out if you are having a number for jets that were sold in first quarter this year and last year. And what is the total forecast of deliveries for 2012?

Unidentified Company Representative

We are working on getting the information for you here. This year we sold 17 jets in the first quarter. Last year, I don't have these numbers here, perhaps a little bit more and I can send you this information. We can maintain our deliveries per segment.

Unidentified Analyst

Something else I wanted to ask here. And the satellite project, just Embraer has some activities and are there any bids underway and how soon can Embraer start working in this project?

Unidentified Company Representative

Well the company is getting very structured regarding this process. So it's getting ready to start working for the production of operations and right now there's no major activities.

Since here in terms of our budget, we're talking 15 million reals for this year and that's very you know non-specific information. Now that's to get started with the project or the bidding or what not, I am hiring employees, none of that.

I don’t have any details on this, we are at the initial phase and for now we don’t have that much information. We are starting to like with the forecast and we don’t have any like details to publicize right now.

Operator

(Operator Instructions) I would like to end our Q&A here. I would like to go to Mr. Filippo for final considerations.

Jose Filippo

I would like to thank you for your time here and especially your questions. We hope that we were able to communicate the necessary information. We are at your service to give you new explanations, should you need it. Have a nice day and thank you.

Operator

Embraer’s teleconference has now come to an end. We would like to thank everybody’s participation. Have a nice day.

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