Embraer S.A. (EMBJ) Q3 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer’s Third 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 have 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 belief, may, will, estimate, continue, anticipate, intend, expect and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company’s actual results could differ substantially from those anticipated in the forward-looking statements. Participants on today’s conference call are Mr. Frederico Curado, President and CEO; Mr. Paulo Penido, Chief Financial Officer; Mr. André Gaia, Head of IR; and Mr. Rodrigo Rosa, Controller. I would now like to turn the conference over to Mr. Curado. Please go ahead, sir. Frederico Curado – President and Chief Executive Officer: Good morning, everyone. Thank you for participating in our earnings call. I’ll just start by saying a few words about the quarter and also a little bit of the outlook as we see the development of the company. It was a good quarter, showing our progressive strength in the operations of the company. We did have a non-cash impact to our bottom line, which Paulo will later on describe into more detail, which is an accounting effect due to IFRS legislation in some non-monetized assets in our balance sheet, which is subject to a – when there is strong volatility in the exchange rate, we may have effects, positive or negative like that, but as far as the operations go, the company did produce strong results. Of course, a relevant fact is the recent subpoena we disclosed and we disclosed because we thought it was important, although, we really have no further details to say at this stage about the contents of the investigation, which is totally independent. Our role is to support it in the most proactive way we can but of course it’s a relevant fact for the life of the company that’s why we decided to disclose it at this stage. Obviously, as the process moves on and we have relevant information this will be brought to our stakeholders. We have had a good sales result in the quarter, not only in the commercials jets but also in business jets. The activity, we saw it picking up in a more meaningful way, but of course this whole situation in Europe again, kind of has stalled this recovery process. But I think the outlook, the way we see the world going forward is of a moderate growth. We do not work with a scenario where there will be a quick fix to the situation in Europe, which is not being European it’s also global in a sense. So, we don’t see a majestic return of growth in the world, but we do not see also, either we do not see a sharp crisis or any more deep recession. So we work within moderate growth scenario and our competitive positioning is to benefit of this challenging time to reinforce the strength of the company and to reinforce our ability to capture market share. As you know, there is a strong correlation between the economic growth in the Brazilian market, both the commercial jets and business jets, so there is not much you can do in that respect. And as we seek to diversify the company in terms of revenues and of course contribution to margins, we do see the Defense and Security segment has the most promising growth rate at least in the short and mid-term. We know obviously that the defense, the mood about the defense business in the United States is not particularly bright these days, but the situation in Brazil is quite different. The country has liked investment in that area for decades. It has a legitimate need to re-fleet and not only re-fleet but refurbish the armed forces in general. Last year, we presented the family of shareholders a proposition to open up the social, the companies objective, which was through to aerospace, so we opened up the scope to defense and security without the specific qualification allowing us to engage in other potential areas, such as navy, army, security forces and as you may or may not have read last night in satellite, we are just engaging to take the prime contractor role in the satellite program in Brazil. So, the way we see our defense business is different strategically than we see the commercial and business jets. In commercial and business jets we are global players, we’ve really worked towards being one of the major players in the market. We are definitely the third player in the commercial jets in the world, so we are the alternative in addition to Boeing and Airbus for mainline aircraft. We have a lot of work to do in the business jet to become a player of that magnitude, but we are steadily and very firmly working towards that direction. On the defense side, strategically, we see ourselves different. We’re more of a niche player, but we have, we just happen to debate in Brazil and with the structural need that the country has for security and defense does present an opportunity for us to establish ourselves as a defense house of Brazil if you will. The center of the supply chain is the defense industry and security industry in Brazil, and we do that with our technological base, with the strength of our balance sheet, with the corporate strength that we have, the global presence that we have and experience in managing complex contracts. So our strategy there is much more, and Luiz Aguiar will detail that later on today, is much more to really solidify our position in the center of the supply chain in Brazil. And as Brazil also developed its geopolitical presence and importance, more specifically in South America and Africa, that’s we believe that may bring opportunity for us for exports as well. So there is the organic growth as far as aeroplane platforms and the KC-390 is a key project for not only for Embraer but for Brazil. It’s one of the pillars of the new generation of equipment of the armed forces, but also the non-organic growth and diversification that we are also pursuing which translated into a couple of acquisitions that we did this year, small acquisitions but strategically important acquisitions of technological boutiques, some small companies in Brazil that added to our technological portfolio and so that really enhances our ability to serve more customers. We’re not seeing any activity as a name in itself. We do see specific as I said surgical activities, acquisitions or mergers or joint ventures to enhance our base in technology. I also would like to say a word about the continuous effort of our P3E Program, which is our Embraer Enterprise Excellence Program, which has been in the air for four years now, and has been the main, let’s say, corridor sustaining everything we’re doing in terms of transforming the company into a leaner company, transforming the company in the – every time I speak about P3E I speak a lot about P4 and sometimes it’s hard to relate directly P4 and results and numbers, but in the end that was actually the reason for the numbers is P4 that’s why out of the four pillars of the P3E, three are related to P4 and one is the Lean Manufacturing. The Lean Manufacturing is the most visible in result and action. It’s actually visible, you can see this in the production in the shop floor, you’ll see the automation, you’ll see the robotization, you will see the attitude of the cleaners of the factory, the reduction in working process inventories. But behind all that there is a huge effort as far as P4 and the recognition that we have had both in Brazil and recently in Florida. It’s one of the best companies to work for. It’s a major injection of multiplication for us to keep going. So, P3E is – it’s almost like the pursuit of excellence and the continuous improvement, it’s almost like a obsession that a company has and the top management have been, is and we will continue to be fully engaged in making that a beat, so the whole company may follow. I’d like to, also to say, I think one of the questions which I probably should anticipate here, and just to say a few words, I spoke a lot about defense but just a little bit more flavor on commercial jet and business jets. And then, I will finalize and pass it over to Paulo to follow. And on the business jets the market is I think flat is a good way to put that. There was a tremendous decrease in demand. There was obviously a speculation in everyone’s backlog. I think this is – this leverage is going away. We still have had cancellations this year, so that shows that there’s still some residual, let’s say, either speculation or inability to take – deliver the aircraft, during the backlog, this is not particular to Embraer by the way. This is also happening in some other vendors OEM, especially in the lower end of the product. But flattish, I think is what we see as far as the market. Our positioning is of continuous capture of market share. Our product line is improving and there will be a step function in our positive line. In our business plan we’ve certified the Legacy 500 and the Legacy 450. So, as far as contribution to revenues and margins, probably around 2014 that’s when we’d have the first model into service and probably one year after that the second model. So, our business, we’ve this potential upsides, as soon as we finalize the development, which is way down the road, probably 70% to 80% already done, first prototype is in the final assembly. We may not be able to fly the prototype this year, just next year, but I think we will bring some details on that later. But the point is that we’ve despite of the market which is not stellar as far as potential growth, the competitive position of Embraer is positive as we have in the downstream we have product which will come relatively soon to the market and into the ones we have completing our portfolio of products. And last but not least on the commercial aircraft. No secret that we have been studying very hard the potential, our potential entrants in the adjacent segment to E-Jets. The E-Jets, they go up to 120 seats, the Embraer 195 and the natural way to grow with the larger aircraft. Larger aircraft are always expecting to grow challenges, investor challenges, capital challenges of course and competitive challenges. So, whilst we do not have a firm final decision on that, I think it’s fair to share with you that we believe we could bring larger jets to the market at a relatively low rate. We learned a great deal with the E-Jets, the difficulties of this new generation of jets, which is highly digital a lot of the embarked software, integrated cockpit, its sophisticated system, I mean, we leave to the E-Jets and that I think enable us to do something the next step. But the challenge is not technical we think. The challenge is how to make sure that there is a return investment. And in the end we create shareholders value with an investment in our larger segment. When we work with the denominator, how many aircraft we would have to capture to justify the investments. Then we see that there is an element of risk there, because with the reengineering of the 737 and the A320 family, the potential open market decreases by the date. The response of the markets to the reengineering alternative of both Boeing and Airbus has bee massive. And also the difficulties, the entry barriers of the alternative propositions which are out there have also been not very encouraging. So the market is clearly endorsing the continuation of the 737 A320 family. And obviously, those are companies which have a significantly bigger size than ourselves and others, so that’s where the high risk is. So, again, we don’t make any firm final decision. At this stage, it’s important to share with you that we’re seeing a difficulty to have a return on capital employed exercise, when we think about investing a few billion dollars into the larger aircraft. At the same time, our E-Jets, they are performing well. They are relatively new aircraft, the 190, 195 were certified in 2006, so only five years ago. And the sales have been picking up to follow. Later on we’ll also talk a little bit more about the dynamics of the commercial jets and the E-Jets in particular. And we do see the E-Jets with a potential of a high longevity. I kind of look at the 737 as the program has been very well-managed by Boeing over this last 40 years. The 737 is going through its fourth generation, the first being the 100 and 200; and then, the second-generation of 300, 400 and 500; the third-generation is probably NGs and now MAX. So this, I think it’s a good benchmark of how a program can be well-managed and to keep a very attractive and a very competitive product to the marketplace. So, E-Jets definitely can have some similar longevity. And we are and we will continue and probably deepen even further now the discussion with our customers to determine what should be a new generation of our E-Jets. We certainly would consider new engines and potentially some other improvements as well. We do not see that happening in the short-term and mid-term. We see that happening more towards the end of the decade. We are very comfortable with the yearly improvement that we have been doing and we’ll continue to do on the E-Jets. So I think overall and just some final words. So, as a result of all that, the way we’ve seen capital allocation for the next few years with a continued investment in our own organic development. So, we still have a important task which is to bring the Legacy 500 and Legacy 450 to the market in the next couple of years. And as that investment phases out, most likely we will be already engaged into whatever will be the next generation of E-Jets. So, we see fundamentally a continuous investment in R&D for our operation obviously under the same side. There is a lot of important allocation of resource, engineering resources, but the capital obviously is funded by the contract, development contract, so that’s not capital allocation. But obviously, if this take out of our engineering capability that we could do, but otherwise to something else, so that has also to be kept into the equation. M&A is, let’s say, particularly pure against M&A. We’re very disciplined in the sense that first of all opportunities, we are alert and we are monitoring the market. And whenever that makes sense, as those two acquisitions that we did and those couple of joint ventures we just established, one for the Satellite and one for the UAV we will use that as well. But it’s not something that we are pursuing to see. And our ability to not have a formal policy on dividends, we have been a paying, let say, significant amount of our profits over the last 12 years in dividends, probably in the average from 35% to 60%. So, I think our vision is to be able to keep this 35% or so percent payment of dividends, which probably make this as one of the highest payers of dividends than our peers within the industry. So, a combination of investments in our own development is in plan, there is a fence as far as M&A and dividend, that’s – are very broad picture how is the capital allocation going forward. So, with all that said, I would like to as we’ve Paulo Penido to walk you through the results of the quarter. And just a few words, Paulo has joined us two months ago. Paulo has an extensive we are very fortunate to have Paulo willing to join us. Paulo has an extensive experience both in banks and industries and capital benefit industries. So, he is the Chief Financial Officer, who is a very seasoned and integrated very, very quickly into looking to our team. So, it’s a pleasure to have Paulo with us. And it’s his first aim whereas of many managed accounts. So, Paulo, if you could please walk us through and then we’d back in the end for question and answers. Thank you. Paulo Penido – Chief Financial Officer: Thank you and good morning everyone. Sorry, I got a cold, but I can speak no problem. We have a 15 page presentation where we’ll go through summaries and highlights and some financial results of the company. Now, starting on page three please. We would like to highlight the commercial jets, highlights in this quarter where we delivered 28 jets and we sold 17 E-Jets, it means that our firm orders reached 1,018 planes. Now in early October, there are six more orders from GECAS. And so, this is the book that says that it’s growing. This is a plane that has a, I’d say a long life ahead of us. It’s also important to hedge us that plane number 800 was delivered to China Southern Airlines. Moving to executive jets on page four. We would like to hedge that we have delivered 18 jets in this quarter and there was a very important order of 13 Legacy 650 from China’s Minsheng Financial, which is a confirmation that the Legacy is really present in China and will be an important plane in the aviation sector there. Now some highlights about defense and security. We have created in the third quarter a company called Harpia that is targeted to develop a Brazilian Unmanned Aerial System, creating new planes in this segment. That’s a new venture that we are doing it together with Elbit, another company, that we have the control of this new company. Moving through some other, I would say, facts. Embraer was named leader of the Dow Jones Sustainability Index in the aerospace and defense sector. That’s something that we’re very proud. And also, very important, we have tested with success the bio-jet fuel in one of our planes, there were three flights where the plane was – the fuel was tested with success, that’s important to register. Now, moving to numbers, we have had in the third quarter $1.36 billion revenue, which is very similar. It’s about at the same level of the second quarter. The mix was a little bit better, as you can see from more sales in the commercial aviation and the company is following its, I would say, expected track record in this in terms of revenues. In terms of deliveries, the 46 planes that we have delivered in the third quarter were I would say as expected according to our plans and comparable to the same level of planes that were delivered in the third quarter of last year. In terms of our firm order backlog, we have good news. It went up a little bit to US$16 billion, which means about three years of revenues, which is I would say a good level from our perspective. Moving to revenues, in U.S. million, as we have seen before just like to highlight our gross margin of 21%. That’s was I would say a solid margin from our perspective. Our expense remained flat both in terms of selling expense and G&A expense. And now on page 12; income from operations, the EBIT is also at a very, I would say, good level at 9.1% reaching US$124 million, which is again a solid and strong result. Another way to see it explaining of the factors, the EBITDA. EBITDA margin reached close to 14% and grow in terms of value from $153 million in the second quarter to $188 million in the third quarter. So it’s again a strong result. In terms of net income, and here comes the comment that Fred was saying. As you know, the IFRS force us to mark-to-market our inventories, our intangibles and our fixed assets with the new exchange rates. It creates a gain in Brazil, more reais, because of the higher interest rates. And there is a no cash provision for income tax. It reduced our profit to let’s say zero, or very close to zero. Then we’ve made an exercise, if the exchange rate were flat or somewhat flat, we would have had our $120 million, $130 million profit in the quarter. That’s just an hypothetical exercise that’s shown under as you see at zero. With I would say more depreciation of the tourist since the end of the quarter, this number will come back gradually to our results. Again, this is a non-cash impact. In terms of inventories, as we are planning strong quarter in the fourth quarter of the year, if we come back here to revenues we can see that we have had, on an accumulated basis, US$3.7 billion of revenues year-to-date at the end of the third quarter. If we repeat the first quarter with a revenue level around US$1.9 billion, US$1.2 billion, we’ll be reaching our guidance in terms of revenues. We have a natural increase in inventories, which is normal. We have some few planes waiting to be the delivered in the fourth quarter. As soon as we deliver these planes, our free cash flow will turn positive in the year and that’s how we expect to end the year. Attaining the guidance with positive free cash flow and reducing the inventory levels in the year. Our debt situation, as a result of this increase in inventory – temporary increase in inventories, we have taken some short term financing. You see the increase in the short-term financing. It reduced a little bit the average life of the debt, but this is a very, very comfortable situation. We are still with I would say strong cash position that tends increase gradually, when the inventory is reduced and when we perform the strong quarters that we have. We are leaving right now the first quarter of the year. That’s it in terms of I’d say providing some highlights about the company. Again, sorry for my voice. And we are now available for the Q&A session. Thank you.

Excuse me. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mr. Nicolai Sebrell from Morgan Stanley. Nicolai Sebrell – Morgan Stanley: Hi, gentlemen. Two questions from me. First, I know there’s only a limited amount you can say about the investigation that you announced with your earnings release. But we’ve heard a couple and read a couple of different things that this might be part of a broader effort that doesn’t just involve you, might be a wider sweep. And I was wondering if there’s anything you could say to put this in context that might be more general in scope, to help us understand whether this is something that targeted, Embraer specifically, maybe more general effort? And then the second question is, if you could talk about executive jets a little bit more. If we look forward to 2012, and you had to estimate the risk, upside or downside relative to this numbers, I mean, you said it was holding steady, which seems to indicate that may be deliveries could be steady or may be up slightly next year. Any elaboration on that would be helpful.

Okay. Good morning, Nicolas. Well, we obviously are not in a position to say much more than what we have disclosed. And not only we are under the confidentiality of the subpoena, but also we are passive in the process. Our attitude is of full collaboration, the company has never – this is unchartered water for us, it has never leave that situation same as that before. So we are learning as it grows. So of course as – we just thought it was important to bring it to the attention of the public, to disclose it. And we have no information whatsoever about whether this is just us or a broader investigation. So I apologize, but this is exactly where we are. And as I said, we remain with serenity, knowing the seriousness of what the process like that is, the serenity of a company that has voluntarily adopted all the processes, the code ethics, adhere to the Global Compact of the United Nations following with follow-up reports. So we just have to wait and in an orderly way. As far as executive jet, we probably – I mean, this is not a guidance, the guidance we’ll provide early next year. But, I mean, we probably should have more revenues than this estimated $1 billion of this year, so would be more flat towards what we should have achieved in 2011, the $1.2 billion. So again, although, I’m not in a position to say it’s going to be $1.2 billion next year, we do expect to be more than the just $1 billion of this year. So we have a diversive component. We have had cancellations that did result – we were able to resell the aircraft, but we would not be able to deliver the aircraft this year. So part of that’s reflected in our inventories. Nicolai Sebrell – Morgan Stanley: Thank you. Much appreciated.

Excuse me. Our next question comes from Mr. Caio Dias from Santander. Caio Dias – Santander: Good morning, everyone. My first question is on the strategic decision regarding whether or not to launch a new family and or the enhancement of E-jets. As you mentioned during the presentation, the enhancement became a more likely scenario, you have not taken the final decision yet, but it’s clear that is the most likely scenario at this point. So my first question is, when are you going to take the final decision, if the end of the year is still the deadline for announcing the market – further announcement for the market? And second, if you decide to go ahead with the enhancement of E-jets, what is the expected level of CapEx and R&D involved in the program? And I have one third question related to the investigation. I understand you guys are not allowed to provide further information on the investigation, but I’d like only to confirm two information, I got from the press this morning. In one specific newspaper, they mentioned that this kind of investigation leads to fine of $2 million for the companies involved. Is that true that the limit is only $2 million? And another newspaper said that this investigation could threat your participation in the bidding process to sell Super Tucanos to the American government. Is that true or you are able to participate in the bidding process independently to the result of the investigation?

Okay. So your question with the three parts of that and three big ones. Okay. New family of commercial jets, we do not anticipate any splash announcement, big bang announcements at all, we’re going to do this and that. We’re actually starting to communicate, which is our strategic direction. So as you correctly said, it is unlikely that we pursue at this moment. So the question is when to engage, we’re not abandoning the possibility of coming to the largest segment eventually. We just do not see a window of opportunity at this stage, which it may be a different five years from now or some more time from now, it may be different. The relative position of the competitive landscape, so we just think now it’s not a – so the next few months, we will be detailing with our customers what could be the evolution of the E-Jets. We are improving the airplanes anyway, we have been doing that year by year and we’ll continue to do that. But that’s a step function – would really to adapt to new engines. The engines Caio are responsible for this new generation of engines are responsible for probably 80%, 90% of the benefit of the fuel-burn benefit that a new airplane may have. So that’s why I think the market was so much appreciative of the solutions that Boeing and Airbus adopted, because they really brought solutions of continuity to the market and also combines with continuous and seamless commonality of the cockpit and no need to train pilots, it’s the same cockpit airplane with the benefits of the new engines. Obviously, any new aircraft, blank sheet of paper aircraft tends to be a few percentage points better than an existing one. Technology evolves by the day, but the real bulk – the real chunk of benefit come from the engine. So we will be entertaining with our customers for the next few months and as we progress in defining what will be the new Jet, standard, which again, I do not anticipate for the mid or short term, if you take the Airbus, with the GTF engine, they are entering to service, if I’m not wrong, is something around end of 2015, early 2016. The Airbus that’s flying the NEO certainly new with CFM engines, you can probably a year later or something like that, so ‘16, ‘17. Max this 727 Max 2017, probably not much longer after that, it’s probably when we would be coming to the marketplace. But all that as we mature, the configuration of the airplanes, are you going to stretch the 195 or not, as we mature those decisions, we will be bringing them up to the knowledge of our customers and to the marketplace in general. So I see much modern evolution of our process other than, let’s say, a sharp announcement. I think today we’re clearly given an indication towards where we’re probably going. So as far as CapEx, we probably tend to, as far as assets, we have – I mean, next year, we have the final stage of the two plants in Portugal so there will be demands on the CapEx expenditures to finalize those two factors. As far as R&D, we see a stable, maybe a slight growth in the demand for our research and development, not only for our engineering product development in general, but also on our continuous research method of the R&D, research efforts because, we want to be ready, we need to be ready to go whenever we decide to go to a different product or a larger product as we are now. If we were to decide now to go to a larger segment, we are prepared to go. So you want – we need to keep that readiness if you will so that’s how we see investment going forward. And the last part of your question about the subpoena, I really have no way to make any sort of extrapolation of what the potential value of the – if something is found and determined that something was not consistent with the regulations, so the $2 million for me were absolutely no – totally inconclusive. We have no such estimate, or none. And, LAS, we don’t believe that – that was not me, sorry. We do not believe it’s an investigation, which is not finished, there is no conclusion would prevent us from competing or eventually winning the LAS contract in the United States. So this is our understanding. Caio Dias – Santander: Clear. Thank you very much.

Excuse me. Our next question comes from (indiscernible) from JPMorgan.

Hello, guys. My question has been answered. Thank you.

(Operator Instructions) Excuse me. Our next question comes from Mr. Caio Dias from Santander. Caio Dias – Santander: Hi, everyone. Sorry for asking so many questions. My question now is about the facility in China. What is the current status of the negotiation with the Chinese government regarding the production of the potential production of the legacies over there? Do you have a new one on that front?

Yeah. I referred that famous passage where, Chinese was asked about the French revolution and the answer was too early to tell. So we are trying to have Chinese patience, we are making progress, Caio. We are indeed making progress, it’s always challenging to put a date target to the conclusion. But we have an agreement with our partner there with AVIC. And with government, Chinese government has to formalize what has been already turned public several months ago, which is a formal approval of this venture. So I think we are in the final sprint. How long is that, it’s hard to estimate, but I think we are really coming closer to a positive outcome now. Caio Dias – Santander: Okay, thank you again.

Excuse me. Our next question comes from Mr. Augusto Ensiki from Morgan Stanley. Augusto Ensiki – Morgan Stanley: Good morning, gentlemen. A question from the third quarter results actually. Could you give us a little more detail in the other gains? How much of that was from cancellations – how much was from the two South African Airlink E170 cancels? And second to that, how much can we expect for, I mean, can we expect something similar from the JetBlue cancellations in the fourth quarter? Thank you.

The cancellation number we have included in our press release, which is US$28 million in the quarter. It was spread among different parts of our sequence but mostly in the Executive Aviation sector, where as was mentioned before, there is a type of clean up in some orders that were not very firm. So that’s the size, Augusto of the cancellation rather. Augusto Ensiki – Morgan Stanley: So the full $28 million was from cancels?

Sorry. Augusto Ensiki – Morgan Stanley: The full $28 million?

Yeah, $28 million, that’s cancellations, yes. Augusto Ensiki – Morgan Stanley: Okay. And so then the JetBlue cancellation won’t have a material impact on 4Q?

No as you saw, as a coincidence there was a sea from the new planes in terms of deliveries, there was no impact in terms of consolation, in terms of production, in terms of hopefully delivery of planes.

Azul was the airline that’s confirmed 11 new orders. So the answer is no, there would be no – there’s no revenue coming in the fourth quarter due to the JetBlue cancellations. Augusto Ensiki – Morgan Stanley: Understood. Thank you very much.

Excuse me. Our next question comes from (indiscernible) from Future Capital.

Yes sir, good morning. I just had sort of one question on, I’m wondering if there’s any possibility in providing some initial thoughts on what you’re thinking about margins in ‘12? Particularly as it relates to the mix?

I’m sorry we just could not understand the question?

Sorry, I’m just wondering if it’s possible to provide some initial thoughts on what we should be looking at for margins in 2012? I’m wondering, I guess, mix might be slightly negative than 2012 based on what you’re talking about in terms of delivery?

Well, again it’s a bit premature to make any guidances there. So on a positive side all the efforts on the P3E and the lean manufacturing all that they are there. They are continuous, they’re growing. We – one comment that I have to need to make that’s couple of tail – a couple of headwinds which are important one is the labor cost in Brazil. It is probably going up in reais, something around 9% to 10% from this month on. So this is a tremendous challenge for us, of course, if the exchange rate goes up and compensates for debt. This is good, this is great news. If it doesn’t it’s just another, it’s stronger headwind for us as far as costs. Also, I think it’s reasonable to expect some pricing pressure, I have a very, very clear effort from Boeing and Airbus to really keep their situation in the narrow body scenario and against new entrants, so that puts the pricing pressure on everybody else and the whole competitive scenario. Having said that, I mean we were definitely working towards, you know continuous improvement, so quantification of that we’ll probably disclose early next year when we provide guidance for 2012 of fiscal year.

Thank you. That’s helpful and just one quick clarification on Legacy 500, I think you mentioned in your presentation that there was some small delay I guys in terms of first plane. Just wondering we’re still okay for EIS for the next year is that right, Q4?

I did not understand the last part of the question?

We’re still okay for an increase in service next year?

As instead no, no well we’re not next year, never next year. We are – we will, 2013, so we – I mean, we’re going to also – as soon as we determine more precisely, what is the – the issue we have which is with the softness of flight control. So, our supplier – they found out this late. So, we’re debating, probably going to bring that development in-house. So, there will be inevitably a delay on the first flight, which will not happen this year, will happen in the first half – towards the middle of next year, probably. So, that of course pushes the program a little bit. But as far as, let’s say, contribution to revenue in a meaningful way, probably 2014 is the year where you’d see the ramp-up of those airplanes. So, certification time may be, let’s say, end of 2013 or so, but just a few months of delay. But this as we – again, as we determinate exactly what’s the impact, we would give more precise data. 2014 is when we should have the Legacy 500 really bringing contribution to the business as far as quantities and the ramp-up in production. And about 12 months later, the four-seater standard, same design as today, just about a year later, the four-seater should be in a service.

That’s great. Thank you very much.

Okay.

Excuse me. Our next question comes from Mr. (indiscernible) from Morgan Stanley.

Hello and congratulations on results. And I know that you can’t comment very – I mean, on a limited basis regarding the situation right now in the U.S., but can you point out what’s the size of your contracts here in the U.S. and I mean the three countries mentioned on your disclosure, total size in billion of future contracts?

I think I’m obliterated. Can anybody help me? André Gaia: To break down the cost that you are at.

Has anybody understood?

Sorry.

Sorry. Could you repeat the question please? We just could not understand.

Total size of your contracts in the U.S. and the three countries mentioned on your disclosure?

Total size, what? André Gaia: The three countries.

What – which contract you asked?

Your revenue exposure…

I’m sorry.

You future backlog, revenue exposure in the U.S. and in the three countries?

Anyway, well, we do not foresee any change to our, let’s say, any participation in the United States, via our commercial activity, via our executive activity, via our possibility in the LAS contracts, we do not see any change to that at all. And then, obviously, we’re not in a position to disclose the three countries, again, because of the confidentiality of the whole process. So, this is where we are today, as soon as we are able again – we are passive in this investigation. Investigation is independent. The very nature of the investigation is independent. So, we are not in control. We are passive in the process. Our role is to support it the best way we can.

Okay. I understand that point. But at least, can you disclose I mean the total size of your exposure to the U.S. market or is that already disclosed in your statement?

Well, we do not have exposure to the U.S. market. I mean, the U.S. market is an important market to us. We do not have any specific exposure to the United States market. It’s – if you take – if you’re looking after – if you’re looking for the amount of revenue of Embraer through United States, we are about 15%, used to be 50%, now about 15%. But again, this is not an exposure, this is a market share and there is no exposure to talk about at this stage.

Okay, thank you.

(Operator Instructions)

Good morning.

Hello, (Joe).

A couple of questions. First of all, on free cash flow, you’re minus $275 million year-to-date, and I think we can understand why inventories are higher and you’re going release some of those, I imagine, in Q4 and then going into next year. But then there’s two other items that has been impacting the cash flow this year. One is the spare parts pools and one is aircraft that you are leasing. I’m wondering if you can talk a little bit about, first of all, the outlook for overall cash flow, are you going to have a big fourth quarter? What’s the cash flow opportunity next year for the company? And then, maybe a little bit of color on each of those three items?

Okay, Joe. I’ll just start answering, then Paulo and Gaia can help in more details. Yeah. Fundamentally, if you look at our inventories, Joe, we started the year with something around $2.2 billion. As we are growing some 5%, 7% in revenue this year, it’d be let’s say natural to have a little of a growth. And if you just apply that ratio to the inventory, maybe another $100 million, adding work in process. So, we are probably $400 million to $500 million above where we should be in inventory. So, hopefully, as we delivered something close to $1.82 billion in the last quarter, we have to critically reduce our inventory of the same amount. So, outlook is a positive free cash flow this year. You mentioned the two point, but also we have to take into account that we spent $85 million this year in acquisitions, which is not something which is regularly in our activity. So – but both of the reason of this negative is inventory and our expectation is that in the last quarter, this inventory will be reduced and therefore we have a positive – as we invoice those aircraft, positive trends or positive free cash flow. Now, Paulo, this is from third-parties.

You can say, yeah. André Gaia: Regard to the – that’s André Gaia. Regard to the spare part pools, we’ve got a couple more investments this year, as we got minute momentum in terms of selling those type of programs. We expect those investments on inventories – bringing up inventories for spare parts to decrease next year. But, of course, if we keep selling more, well, we have to adjust to that. But the expectation right now is to have the – is more investments in the spare part pools going forward next year. Regards to the aircraft, I think Joe that we – it’s a little bit open opportunity, as you cut the deal. So, it’s hard to be very precise, but we don’t expect to keep buying aircraft back. So, we don’t have, nothing in the backlog, in the pipeline right now, and I think that’s where we are.

Okay. André Gaia: Okay?

Yes. A second question is just on to the executive jet area. You had more cancellations or at least more income from cancellations in the third quarter than you’ve had for certainly a while, and you lowered your revenue guidance this quarter. So, I know the market has been tough for a long time, but is it getting worse? Are you seeing any implications of what’s been going on in the market since August really impacting your business or is this just you ran out of time to sell the aircraft? Which is really the bigger driver?

No, I don’t think it’s getting worst. It was actually getting better in the, let’s say, July, August, September timeframe. And we actually started to go a little bit more upbeat about our sales prospect. We….

Excuse me, ladies and gentlemen, please hold. We’ll soon resume the conference call. Thanks you. Excuse me, ladies and gentlemen, please hold. We’ll soon resume the conference call. Thank you. Excuse me, ladies and gentlemen, please hold. We’ll soon resume the conference call. Thank you.

Is that cash that’s likely to – some of that goes back to shareholders in some way or do you increase your investments in defense or executive jet, or how do you think about where that cash that you made in six or twelve months ago, that might be going to commercial, where does it go?

Yeah. I think that question is not in the short term. I think the commitments that we have in existing development programs and the stuff with the new – the curve of investments on the – let’s say, on the range in E-Jets, vis-à-vis in new aircraft. The first part of the curve will be very similar, the peak will be less. So, the demand on capital for development in the next year let’s say timeframe we said of three to five years, I don’t think, will be fundamentally different than what it would be if we were going to a larger investment. Going to a larger investment maybe would require us to…

Excuse me, ladies and gentlemen. Please hold. We’ll soon resume the conference call. Thank you. Excuse me, ladies and gentlemen. Please hold. We’ll soon resume the conference call. Thank you.

That can be an opportunity too early to decide that and too early to decide a reasonable strategy to get there. With organic, with the combination with somebody else, that answer, I think it’s a few years down the road. Defense only, of course, if we have – if we find a suitable acquisition opportunity because we’re not going to invest capital at risk on a defense contract. So, by definition, we are totally conservative. As far as defense development have to be self-funded, so capital with the acquisition that as we did this year, $85 million. So you should not see – the company cash flow will be sufficient in the next, let’s say, two years, three years, four years, five years to sustain our research and development effort. That’s I think where the bulk of the investment will be and again keeping the dividends at a reasonably high level – where they have been for the last several years.

Good morning, gentlemen. Two questions from me, if I may. The first is on the 50-seat jet market. How are you seeing that now with American Airlines and some of the U.S. carriers, for example, telegraphing that they’re having some financial strain? How are you seeing residual values on the 50 seaters, down the line, holding up and how is your outlook holding up, maybe re-marketing these aircraft to carriers in the former Soviet Union, etcetera? And the second question very quickly, I was intrigued with your JV with the Elbit Systems guys, the market for unmanned aerial vehicles. Longer term, who are you thinking is going to be your end customer? Are we talking about large NATO countries? Are we talking about smaller governments within the Americas that have drug cartel problems or something like this or you see more of a domestic application for your UAV?

Okay, well 50 seaters. Of course, the higher the price, the volume becomes the tertiary economics work. They are gradually leaving the U.S. market and going towards other sectors there and markets in the world. They are still an attractive solution for airlines – the second tier airlines that currently flies total for us or perhaps smaller aircraft upgrading to ERJ 145s, for example, flying in countries where they never flew before. The ERJ 145 is holding value, better than the other corner or the other products of the same category. So, we feel relatively confident about the market is relatively organized in that sense of secondary market. I mean we are not, let’s say, totally involved in that but we are a player in that market, so we do have a few of those airplanes in our portfolio and they are in lease operations throughout the world. So we are making sure that we have a very strong customer support, parts availability, technical support and the aircraft engineering support even in the aircraft. So I think we are as good as we can be in an obviously challenging economic scenario for any figure, including total aircraft. The future productivity of new airplanes has been due for a long, long time. About the UAV joint venture, Brazil has virtually n – so the focus is Brazil clearly. The focus is Brazil, so in the country armed forces and also potentially some police forces. Brazil is absolutely, I think, almost virgin as far as UAVs. There is one prototype in test today, so they’re big enough for the Air Force for sure. There is federal police, which is equivalent of the FBI in Brazil, the federal police, Polícia Federal. They also are a potential user of UAV. So there our focus being Brazil and the countries where Brazil may have some geopolitical influence, but it’s not to mention the, let’s say, at least not in the short-term, but a global player to compete with Global Hawks or the federal police. And we are more humble that at present we’re really focusing more with the domestic markets and the opportunities.

Good morning. Wanted to ask you about the pace of order demand in the Commercial Aviation segment? You started the year saying book-to-bill above 1. Looks like you’re tracking pretty much right through that, but you’ve kind of exited ‘10 and started ‘11 at a much faster pace. Think that if we included everything you announced at Paris in the first half of the year looks like you are maybe going to a service book-to-bill of two. I just wonder if you could talk about the degree to which potential customers have kind of backed up because of all the macro headlines we’re seeing or not? And just what you see for new orders through the end of the year and maybe into the first half of ‘12 as well based on conversations you’re having today?

No, there was no major back-off. The airplane sales, at least for us, have always been something which is not steady, so it’s pretty randomic. Sometimes you have a very good quarter. By the way it’s very difficult to try to follow an aerospace company, an aerospace and defense company on a quarterly basis because, especially on the commercial side. Defense is more stable. These are really like in – they are really an event. So one contract for 50 airplanes is a major event and we’ll concentrate there. So the activity – well, we still have things that we have announced as MoUs which have not yet come to fruition, especially in China. I think we still have – Paulo can confirm that later, but we still have 10 airplanes in China which are done but not in our backlog yet, for now it’s not there. And the ad campaigns are just about to finish. We probably will be announcing a new leasing company anytime today, Paulo, tomorrow, I mean Monday?

Monday.

Monday, we’ll be announcing a new. Let me – if you allow me now to take your question – answer your question to talk a little bit about the strategy there with the leasing companies. We see a potential constraint in credit for financing aircraft. The capital market is too pretty much close for financing of aircraft. The ECA, they have an intake capacity and they cannot finance 100% of their exports, of course. And the lower leasing – and the banks were very active in leasing with multi-year – yes, which we have to believe they have at least more difficult to engage into a large amount of credit going forward. So the role of leasing companies is increasing in financing airplanes. So this is one aspect. The second aspect is the markets and capital average of those leasing companies, which in the end you cannot enjoy wider competing with the assured leasing companies. If you consider current leasing companies, your job is done. Then you’re probably heading towards the competition of the leasing term for a given customer. If you work like the way we do which well, it’s almost as a market environment of all operations. We actually work together and we have two examples. We have examples of airlines that we are working through and later on a short came and had a follow-on business and vice versa. Airlines have started with leasing our business, with our aircraft and then eventually acquiring then directly from Embraer. So I would dare to say that we still have relatively low participation of a leasing company in our backlog. This should be the numbers. Boeing and Airbus typically are 25%, 30% to 40% in a given moment, especially in the A327. In our case it’s something like 10%, 12%, 15%. So we are making – Paulo is making big efforts to really augment the cost-efficient leasing numbers in our backlog and it’s hard to break in because it’s the liquidity of the existing assets 320s and 737s is very high. It’s very easily to move airplanes around. And we are building some history, not recent but last, probably 15 years, 20 years. We are just coming – we are just becoming the third alternative for leasing companies. So as the 190 family of jets, a brother customer base, it’s more than 60 customers at this stage. So we are coming close, not in volume, but in quality of our backlog and the diversified backlog closer to the mainline. That’s a bread and butter product. So this is a potential upside for the family, so one we announced simply then as leasing companies. The numbers are not huge, but again the quality, the key implication of the third asset out there, not only 737s, there is 190 as well. That’s a great development. So we feel very comfortable we’re going to surpass the 1.1 ratio this year, probably not really two, 2:1 and we do expect some announcements towards the end of the year. And the activity – so again, Paulo can repeat that for – again but the activity is flowing, so we’re not seeing a reduction in activity. We’re not seeing anybody back-off. The JetBlue 11 airplanes which is actually old news because there will be – we were working with that to alleviate some of their backlog in this triangle deal because it was, let’s say, actually very good for everybody. So I hope I’ve answered your question.

Yeah, that’s helpful. Just one follow-up on Defense, your prepared remarks stand very positive on the prospects there, the segments down 11%. How fast do you expect your Defense segment to grow in 2012?

Again, without committing to a guidance, it may be even double-digit. We are going to be more specific early next year, but we have to run back of the KC-39 development, so let me put it in this way. If the existing, by the way, we have not – the increasing revenues on the Defense side and our revenue reports saying that the Brazilian government is helping Embraer, this is actually not accurate because fundamentally we are ramping that existing program as far as the budgetary allocation. So KC-39 has been the main progress. This – next year is the engagement of engineering and that program will be higher. So unless there is a budgetary constraint or a reduction or anything there of that nature, if everything goes as planned, we should have a robust growth next year.

Thank you.

Good morning. (Indiscernible) with Bloomberg Research. Question for you, starting with the commercial side of the business, can you talk to me about the production capability on the commercial side? It looks like you’ve produced about six 195s per quarter and this quarter you delivered 22 190s, which looks a pretty good result. Can you talk to me about what the capability is to produce aircraft on the commercial side especially per quarter?

Sure. The installed capacity of the company is probably something about 15 airplanes a month, which will translate into 180 airplanes a year. Our peak year was 2008, that was 165 airplanes. So this 180 – 15 a month probably the installed capacity with no further investments. Of course, variable cost, more people obviously you would need. We’re running around 9 today so we have plenty of capacity to grow. And the production – the investment structure is totally flexible, it’s totally agnostic, it’s the 170, 190, 175, 195, so it depends a lot on how the demand goes. That’s the beauty of having this family. So it’s, let me rephrase, let me correct a little bit. It cannot be like 180, 190, 195, 170, 175. Some jigs are specific, wing jigs for example. But as far as the assembly process is identical and standardized. So, we have downscaled our production, trying to keep the efficiency and it was successful in the challenge. We were successful in doing so. If we have any tailwind as far as demand, we can react very soon.

Thank you. Is there a limit as to 195s per month?

I just would not know by heart, just in order of magnitude maybe two-thirds of those 180 a year so might be 10 a month. So capacity is not an issue for us. Our challenge is to move the capacity that we have. And we are that this will be more precise. We used to use 4 jigs for assembly 190 wings. 195 has the same wing. And we have gone to 2 now. So we can come close to the total production of 15, maybe not the whole, maybe a year in a specific model, but close to that. So again, this is not on my topic of concerns at all. Capacity is there and if we have to start using – jig that we’re not using we can do like that. And we can also add people relatively easy, and ramp up. So the real challenge is on the market side, the demand side.

Okay. Last question, can you help us understand how that works on the executive aviation side of the business. What’s your flexibility there in your production capability?

We also have plenty of flexibility on the Phenom family, like everybody else. We were expecting maybe significantly higher demand for small jets. We were never a believer of this blacken the skies type of thing, the air taxi, we were never. But we did believe that the clear demand for small business jet will be much higher than what it is today. And again, we had a good company everybody saw that. So for example in the Phenom family we have two assembly lines. One in Brazil and one in Melbourne in U. S., and so we again we have overcapacity in that sense. We’re probably going to – we have to concentrate our production as much as possible to get efficiency, but it’s not a concern. On the Legacy 650, Legacy 650 is the assembly line of the 145 which capacity in the past, long past was 10 a month. So we’re technically way below that capacity and furthermore with the line in China. So the capacity is a (indiscernible) but integration of assets is my concern, rather than the ability to grow. We can grow really in low risk way, if the demand is there.

Thanks.

Oh, sorry.

In terms of cash flow first, let me start of there. The inventory reduction in the fourth quarter, do you anticipate that to be of similar magnitudes as you saw last year’s fourth quarter?

Yeah. We did this at the end results, the end figure. Yeah, it’s probably higher than the $2.2 billion that we started the year. If we just extrapolate the growth in revenue, that’s 6%, 7%. And if you extrapolate that the inventory that would naturally take us from $2.2 billion to $2.4 billion. This is not really acceptable because of course we should be more effective, more efficient in there. But in the current environment, I don’t know it will be $200 million to $300 million above, so from the $2.8 billion down to $2.5 billion, $2.4 billion. This is where our estimates are.

In the development expense, last quarter you said it’s down to $160 million net, $210 million gross. It looks like you’re even under running that. Is the $160 million still the right number for you?

No it will be little less. It will be less than that probably. Yeah.

And moving to the guidance just a clarification, was the default payments of $28 million expected in the prior guidance, because you didn’t change the EBIT number and obviously the sales in executive aviation came down, but the gross margin in executive aviation wouldn’t look to be enough to offset?

Yeah, that’s a good question. It was not expected. We expected to deliver the aircraft and get some margins. So no, delivering, of course, being there happened to clip the actual operational profit, absolute number, but that was not the way we thought it would be.

It looks like there’s some upside to that number given the default numbers came in.

Hopefully.

And then the last one from me, in terms of executive aviation backlog, can you give a picture of where it fits today relative to year-end last year, where you think it will fit at year-end relative to last year’s year-end. And what the mix is between light and non-Phenom’s at this point?

I may ask Gaia to help me on that. I don’t see a major change into the mix of Phenom and non-Phenom. There is a change the Phenom 300 is outselling the Phenom 100. This is, let’s say, obviously a positive surprise and development for us, it’s a $9 million airplane, versus a $4 million airplane, but it’s outselling. And we’re seeing more let’s say cancelations in 100 area than in the 300 area. André do you think the 100 in the Phemoms and the Legacy will see any major shift of the combination of the two going forward? André Gaia: No. I don’t see any major shift and I do support Fred’s comment there that there are less cancellations in the Phenom 300 line than there are on the 100 line.

Back to on the overall business jets, yes, executive aviation overall aviation business. Yeah, do not know by product but the business jet.

Paulo or Fred, can you give us little more color on gross margins in the quarter, they declined from the second quarter. I’m just wondering if you could talk to kind of the puts and takes that drove out compression decline?

Paulo will give that figure.

Will be the mix of the products, different mix, different margin. Of course, we can go bit in details, but well it’s not appropriate to do it. Rightly, let’s fix on it, different mix?

More on the revenue than on the cost?

That’s right. Costs somewhat stable and mix a little bit different than the reduction in the margin, which is not a meaningful one from 22.4%, 21.2%, 1% reduction.

Thank you.

A question here.

I guess you can’t talk too much about it, you did mention a leasing company and that will be a total new business for you and I guess there’d be some risk involved with that and it probably would be a consumer of capital. Correct me if I’m thinking right but are you going to get a big thing just kind of a backup to move your product?

Which company for?

Talking about the leasing company before?

I mentioned the one for satellite and the one for UAVs?

Right, yeah. So are those going to be very limited just to that product area?

Yeah.

You have no plans of going into leasing the 170s.

Leasing, no, no.

Okay.

We’re, no, no, sorry. No, no, we have no – we have very let’s say conservative to say the lease about financing sales.

Yeah.

It’s like, we’re, it could turn to be a good investor company, we’re not in the financing business.

I got you. Why would you, just the satellite and the other product, there is no way to financing that, are you thinking about doing that?

Which products?

The products that you’re thinking about doing leasing for?

No, nothing about doing leasing. What I mentioned was to get leasing companies to buy our aircraft.

Okay.

So, for example the Air Lease Company, the ALC we signed, that’s a great example, because we signed a contract for ten airplanes in the Farnborough last – at Farnborough last year. And in a year they went from 10 airplanes to 31 airplanes. And good news is to our knowledge all of them are placed in the marketplace. (Indiscernible) if you take our backlog, the participation of the source of leading companies buying airplanes speculatively from us to push them into the market. It’s very small compared to Boeing and Airbus. So our strategy is leasing focused in that segment on the airlines which is the normal marketing but also to diversify our customer base and have a modern marketing arm, we wanted to have from day one. We just could not, not only to convince the leasing companies to invest in our aircraft because the customer base was very small. Regional jet is sort of not a good place for a result to be. The same cost that a leasing company has to man the 777 the same cost to manage say 145 fundamentally is the same task. The 190 family really proved to be a mainline aircraft. It’s not a regional jet. And this is why we’re now having 50 customers, probably at least two thirds of them leasing the aircraft side by side with the Boeing or Airbus products, which proved our rightsizing strategy which from day one, which if you have markets with lower density of passengers, the 190 is the right answer for that instead of 320 or 737. So BA, British Airways, Lufthansa, KLM, Air France, Finnair, China Southern, many are corporate, 50 plus customers. Have the airlines incorporated business. So 190 is recognized the third mainliner there and we are doing everything we can to get the leading companies more and more excited about that I believe. We have plans to create a (indiscernible).

You’re not hinting towards you might be moving towards the 140, 150 seaters, are you?

Not – probably not at this stage, maybe down the road, maybe.

Excuse me. 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 – President and Chief Executive Officer: I’d like to thank you again for participating and wish everyone a nice weekend. Thank you.

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