2006* Financial And Corporate Governance Embraer Day 2006

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  • manner and that they do not carry any cost to the investor. The net outcome is that the value of the stock will not change. Modglian and Miller comes to note that empirical evidence which suggest that changes in regard to dividend policy influences the prices of stock. It should also note that many firms prefer policies that stipulate reasonable and stable dividends. A policy that increases dividends portrays a specific type of information to the firm’s shareholders including anticipation for higher earnings in future. On a similar note, dividends may be perceived as conveying information that is unfavorable concerning the earning prospect of a firm. In accordance to MM, the information content on the policies of dividend has an influence on the share price and not particularly the pattern of the dividend payments. ‘In the real world, dividend policy is relevant to a firm’s value’ In essence, changes in regard to payments to dividends is a representation of the signals to investors concerning the evaluation of the management in regard to the cash flow and future earnings of the company. As an insider, the management is perceived as having access to full information concerning a company’s future profitability, which is availed to existing and potential investors. Changes on dividends are perceived to providing unambiguous indicators concerning the future prospect for a company. Information which may not be relayed through other methods such as management presentations on security and annual reports can be relayed through changes in dividends. The signal impact of dividend changes is the same as the signaling impact in the changes on the capital structure. 2. From the perspective of investors, the level of dividend payment is quiet important. Moreover, the stability of dividend payment when regarded over important is also important in building a positive image for the company. Therefore, the company management ought to be aware that uncertainty in dividend payment created by poor dividend policies could alienate potential and existing investors. Dividend payments that are unstable will have an impact on the perception of investors on the performance of the company in financial markets. In other words it may influence potential investors in decisions regarding whether to invest or divest in the company. The statement by Modigliani and Miller (1961) does not hold true since bad dividend policies will have a negative ramification on the value of the firm. It should be considered that dividend is a negative representation of the cash flow to an entity. On the other hand, special dividend could affect a firm’s value either negatively or positively depending on the reason for issuance of the special dividend. For instance, the firm value could be positively impacted by special dividends consisting of payouts for early investors that are derived from operating cash flow in recouping a section of their investment. This offers a suggestion that the firm is capable of operating with more operating cash flow and less investment. A firm value may also be positively impacted by special dividends consists cash achieved through debt or other leverage methods. This also suggest that a firm’s cash flow is capable of covering interest payment with no necessity of worrying on financial distress. On the other hand, a firm’s value will be negatively affected if the special payouts consist of payouts, which are aimed at reducing unused cash/cash equivalent on a company’s balance sheet. This also offers a suggestion that the firm has run out of projects that could enable it in generating reasonable returns. Special dividends may also occur when payouts are made with stock rather than cash. This offers a suggestion that the company is overvalued and is capable of artificially increasing EPS without necessarily making changes on its business operations. In supporting the relevancy of dividend policy in raising a company’s value, Lintner (1959)
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2006* Financial And Corporate Governance Embraer Day 2006

  1. 1. Embraer Capital Reorganizatio n
  2. 2. Capital Reorganization • Financing the expansion programs through the equity capital markets • Creation of an acquisition currency for potential expansions • The increase in liquidity and better market perception of the Company • The improvement in corporate governance and transparency, in addition to the listing in the “Novo Mercado”,
  3. 3. Embraer Capital Structure Ordinary Shares: 738,699,207 BOZANO GROUP 11.1% PREVI OTHERS NYSE (PENSION 41.3% FUND) 16.4% SISTEL (PENSION FUND) 7.4% BNDESPAR OTHERS 6.3% BOVESPA 17.8% Sharholders with more than 5% participation October, 2006
  4. 4. Corporate Governance
  5. 5. Corporate Governance • Active Board of Directors & Permanent Fiscal Board acting as an Audit Commitee. • Board of Directors Composition: Eight representatives elected by all Shareholders; Two representatives indicated by the Employees; One governament representative.
  6. 6. Corporate Governance Audit Comitee – Conselho Fiscal • Composed of five members including one financial expert • Elected in a annual general shareholders’ meeting • Makes financial reporting recommendations to management and the board • Responsible for handling whistleblower complains • Oversees the relationship between managers and external auditors
  7. 7. Corporate Governance Corporate Governance Actions Trading policy Disclosure Policy Risk management Code of Ethics & Conduct Disclosure Comitee Accountability Brazilian Gaap & US Gaap Simultaneously
  8. 8. Corporate Governance Implementation Status SOX # 404 Risks Internal Testing Avaliation Report Scope and Identification Controls Internal External 20F Planning & Objectives Docum Controls Auditors 31/12/06 1 2 3 4 5 Remediations April 2007 Completed In process
  9. 9. Dividends US$ Million R$ Milhões 62.7% 60.0% 63% 46.6% 54% 50% 33.2% 204 187 42% 112 585 68 445 195 242 2003 2004 2005 9M06 2003 2004 2005 9M06 Dividends Pay-out Ratio Dividends Pay-Out Ratio
  10. 10. Off-Balance Sheet Exposure
  11. 11. Off Balance Sheet Exposure The maximum potential payments represent the “worst-case scenario,” and do not necessarily reflect the expected results by the Company. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets the Company could liquidate or receive from other parties to offset its payments under guarantees. Source: 20 F note 34 US$ million 2005 June 30 2006 Maximum Financial Guarantees 1,768 1,721 RVGs 878 906 Mutually Exclusive Exposure* (415) (418) Provisions & Liabilities Recorded (54) (53) Off Balance Sheet Exposure 2,177 2,156 Estimated proceeds from performance 2,127 2,209 guarantees and underlying assets *The residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered and therefore have not been combined to calculate the maximum exposure
  12. 12. Off Balance Sheet Exposure Trade-in options Provide a customer with the right to trade-in existing aircraft upon the purchase of a new aircraft. The trade in price per aircraft is less than the original sales price of the aircraft and less than management’s estimation for the future market value of the relevant aircraft. 6 Commercial jets are subject to trade-in Of the total 914 firm orders and 133 options signed for the ERJ 145 family since 1996, only 7 were trade-ins of EMB 120s (Brasilia). Of the total 543 firm orders and 421 options signed for the EMBRAER 170/190 family since 1999, only 6 included trade-in options.
  13. 13. Risk Management
  14. 14. ECC Leasing Asset Management is responsible for all administration and technical issues related to Embraer’s portfolio of pre-owned aircraft. ECC Leasing Company Ltd (ECC Leasing) was incorporated in Dublin (Ireland) on September 19th, 2002. Main Responsibilities • Manage Embraer’s pre-owned aircraft assets • Vehicle for remarketing pre-owned aircraft resulting from trade-in/up supporting new aircraft sales • Manage remarketing obligations assumed by Embraer before lenders or leasing companies • Search for potential airlines on the market to acquire or lease the aircraft from ECC Leasing’s portfolio • Main focus on activities that involve Embraer products • Manage activities of appraisal, acquisition, maintenance, leasing and remarketing of pre-owned aircraft
  15. 15. Asset Management Remarketing Activities 5 ex-Rio Sul ERJ 145 7 ex-Rio Sul ERJ 145 1 ex-Rio Sul ERJ 145 Leased to Aerolitoral ( Mexico) Sold to FAB ( Brazil ) Sold to DPF ( Brazil ) 2005 2005 2005 7 ex-Rio Sul EMB 120 2 ex-Rio Sul ERJ 145 1 EMB 120 Sold to FAB ( Brazil ) In advanced negotiation In advanced negotiation 2005 with potential customer with potential customer
  16. 16. Asset Management Remarketing Activities 2 EMBRAER 170 Pre-Series 2 ex-LOT ERJ 145 1 ex-LOT ERJ 145 Leased to Paramount ( India ) Leased to BMI ( England ) Leased to Lagunair (Spain ) 2005/2006 2006 2006 1 EMB 120 2 ex-LOT ERJ 145 Sold to CVRD ( Brazil ) Leased to Satena ( Colombia ) 2006 2006
  17. 17. Asset Management Remarketing Activities 1 EMBRAER 170 Pre-Series 1 EMB 170 Pre serie 2 Legacy Leased to Satena ( Colombia ) Leased to Air Caraïbes Sold to FAB ( Brazil ) 2006 (Guadeloupe) 2006 2006
  18. 18. Asset Management Portfolio ERJ- 145.065 ERJ- 145.016 ERJ- 145.083 ERJ- 145.021 ERJ- 145.089 ERJ- 145.002 ERJ- 145.090 ERJ- 145.003 ERJ- 145.852 ERJ- 145.861 ERJ- 145.495 EMB-170.005 EMB-170.002 ERJ- 145.528 ERJ- 145.165 ERJ- 145. 227 EMB-170.006 EMB- 170.004 EMB 120.044 ERJ- 145.336 EMB 120.052 ERJ- 145.339 EMB 120.355 EMB 120.041 EMB 120.356 Available mid 2007 EMB 120.064 EMB 120.323 EMB 120.166 ERJ- 145.155 EMB 120.313 ERJ 145. 001 ERJ- 145.114 ERJ- 145.600 ERJ- 145.137 In advanced negotiation ERJ- 145.608 EMB 120.357 with potential customer In advanced negotiation EMB- 170.017 EMB 120.359 with Angolan Government
  19. 19. Parked Aircraft - World Jet Aircraft (Western Built) (as of Sep 05, 2006) Seat Segment Number % of 600 30 - 60 61 - 90 91 - 120 Seg Manuf. of Parked % Fleet Aircraft Parked Boeing 149 53% 12% Douglas 86 30% 28% 500 Fokker 29 10% 11% 91-120 BAe 19 7% 15% Airbus 0 0% 0% Number of Aircraft 400 Embraer 0 0% 0% Total 283 100% 15% BAe 52 51% 25% 300 Fokker 45 45% 30% 61-90 Douglas 2 2% 8% Bombardier 2 2% 1% 200 Embraer 0 0% 0% Total 101 100% 12% Bombardier 82 71% 8% 30-60 100 Fairchild 30 26% 32% Embraer 4 3% 0% Total 116 100% 6% 0 95 96 97 98 99 00 01 02 03 04 05 6 t/0 19 19 19 19 19 20 20 20 20 20 20 se Source: BACK (Operator Category: Scheduled Airline, Non Scheduled, Leasing and Financial Institution)
  20. 20. ERJ 145 LR Year over Year Residual Value Curve New Aircraft – Uninflated Values 2005 & 2006 Values 20 18 16 14 12 US$Million 10 8 6 4 2 0 r1 r2 r3 r4 r5 r6 r7 r8 r9 r1 0 r1 1 r1 2 r1 3 r1 4 r1 5 r1 6 y ea y ea y ea y ea y ea y ea y ea y ea y ea ea ea ea ea ea ea ea y y y y y y y 2nd half 2005 2nd half 2006
  21. 21. EMBRAER 170 LR Year over Year Residual Value Curve New Aircraft – Uninflated Values 2005 & 2006 Values 30 25 20 US$Million 15 10 5 0 r1 r2 r3 r4 r5 r6 r7 r8 r9 0 1 2 3 4 5 6 ea ea ea ea ea ea ea ea ea r1 r1 r1 r1 r1 r1 r1 y y y y y y y y y y ea y ea y ea y ea y ea y ea y ea 2nd half 2005 2nd half 2006
  22. 22. EMBRAER 190 AR Year over Year Residual Value Curve New Aircraft – Uninflated Values 2005 & 2006 Values 35 30 25 20 US$Million 15 10 5 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 ar ar ar ar ar ar ar ar ar r1 r1 r1 r1 r1 r1 r1 ye ye ye ye ye ye ye ye ye ye a ye a ye a ye a ye a ye a ye a 2nd half 2005 2nd half 2006
  23. 23. Sales Finance
  24. 24. Financing Sources (1995~2Q 2006) BNDES 42% Market 58% 1995 – 2Q2006 # Aircraft US$ BI Market 669 $ 12.8 BNDES 479 $ 7.7 Note: % Delivered Aircraft Total 1,148 $ 20.5
  25. 25. Financing Sources Evolution 94% 84% 83% 73% 60% 55% 45% 40% 27% 16% 17% 6% 2001 2002 2003 2004 2005 2006 1S ECA - BNDES Market Note: % Delivered Aircraft
  26. 26. Financing Source Forecast Forecasted FY 2006 to FY 2008 financing to commercial aviation: BNDES 20% Capital MKT 5% Banks & Leasing Co * Commercial Aircraft Forecast
  27. 27. Diversification of Financing Sources - USA We obtained positive results in contacting banks and investors, searching new mechanisms and sources for financing our customers. Among them, we shall emphasize: Alexander Hamilton Debis Air Finance MetLife Capital Alliance Capital Fifty Third Bank Mitsui American State Bank Finova Nation City Ameritech Credit Corp. Fleet Bank Phillip Morris Attransco GATX South Trust Bank First Teachers Insurance Bank of America ICX Corp. The Cit Group Bell Atlantic Integra Transamerica BNY Capital Funding Jefferson Pilot Life Travellers Insurance Chrysler Capital Corp. John Hancock Wachovia Bank Comerica JP Morgan Chase Zions Credit Corp
  28. 28. Diversification of Financing Sources Rest of World Banco Austria Austria Barclays United Kingdom BCI Italy Bell Atlantic United States BNP France CALL United Kingdom Citibank New York - London - Asia Coronation Ireland Credit Lyonnais France Deustch Bank Germany Die Nationale Investeringsbank Netherlands Hamburgische Landesbank Germany HSH Nord Bank AG Germany Ingepar France Landesbank Sachsen Girozentrale Germany Lloyds Bank PLC United Kingdom Natexis France Norddeutsche Landesbank Girozentrale Germany Royal Bank Leasing Ltd. United Kingdom Standard Chartered United Kingdom Transasian Air Australia
  29. 29. Financing Structures (1995~2Q 2006) Finance Cash Lease 1% 5% Operating Lease 5% Tax Lease 46% Straight Financing 40% Bridge 1% Total: 1,148 aircraft Note: % Delivered Aircraft
  30. 30. EETC and Secured Financing $14 $12 2.1 RJ Secured Financing: 100% CAL $10 Continental EETC (% Total Volume) Continental EETC (% Total Volume) $8 0.2 US$ Billion Dec 2003 - - US$ 414 MM (27%) Dec 2003 US$ 414 MM (27%) Jun 2004 - - US$ 174 MM (16%) Jun 2004 US$ 174 MM (16%) $6 Sep 2005 - - US$ 311 MM (42%) 0.4 Sep 2005 US$ 311 MM (42%) 10.4 Aug 2006 –– US$ 54 MM (4%*) Aug 2006 US$ 54 MM (4%*) 1.1 $4 8.0 0.5 5.0 $2 3.7 3.4 2.7 0.4 0.2 1.1 0.3 1.5 0.9 $- 0.4 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* Mainline Aircraft Secured Financing RJ Secured Financing Source: Citigroup * Forecast
  31. 31. EETC and Secured Financing % of Total Secured Aircraft Issuance 1997-2006 1st Half Embraer Participation 33% RJ Secured Financing 13% Mainline Aircraft Secured Financing 87% Source: Citigroup
  32. 32. Financial Results
  33. 33. Jet Deliveries 160 161 148 141 131 96 101 93 59 1998 1999 2000 2001 2002 2003 2004 2005 9M06
  34. 34. Net Revenue by Segment 9M06 9M05 Customer Customer Services and Services and Others 15% ExecutiveOthers 10% Aviation 6% Commercial Executive Defense and Aviation 67% Aviation 13% Government 12% Defense and Government 6% Commercial Aviation 72%
  35. 35. Net Revenues and Gross Margin – US GAAP US$ million 39.4% 39.6% 37.7% 34.1% 30.2% 28.4% 3,830 3,441 2,927 2,723 2,526 2,144 2001 2002 2003 2004 2005 9M06 Net Revenue Gross Margin
  36. 36. Net Revenues and Gross Margin – BR GAAP R$ million 44,6% 41,6% 35,8% 33,3% 23,7% 25,0% 10.231 9.133 6.891 7.748 6.571 6.012 2001 2002 2003 2004 2005 9M 06 Receita Líquida Margem Bruta
  37. 37. Income from Operations- US GAAP US$ Million 22.3% 18.6% 15.8% 651 13.2% 12.3% 544 505 470 8.0% 265 218 2001 2002 2003 2004 2005 9M06 Income from Operations Margin
  38. 38. Income from Operations – BR GAAP R$ million 28,0% 28,0% 18,9% 16,8% 2.167 1.928 8,6% 1.714 6,9% 1.243 787 414 2001 2002 2003 2004 2005 9M 06 Luc ro Oper ac ional Margem Oper ac ional
  39. 39. Net Income – US GAAP US$ Million 1 1 .1 % 1 1 .6 % 1 1 .2 % 9 .8 % 8 .8 % 446 6 .3 % 380 328 266 223 136 2001 2002 2003 2004 2005 9 M0 6 Ne t In c o me Ne t Ma r g in
  40. 40. Net Income – BR GAAP R$ million 16% 15% 13% 9% 8% 7% 1.179 1.281 1.101 587 709 406 2001 2002 2003 2004 2005 9M06 lucro líquido Margem
  41. 41. Effective Tax Rate BR GAAP Differences between accounting and fiscal records US GAAP All BR GAAP and US GAAP accounting differences are considered to calculate the deferred income tax Effective Tax Rates 2001 2002 2003 2004 2005 9M06 BR GAAP 30,6% 26,6% 29,8% 20,8% 19,7% 25,9% US GAAP 40.3% 45.6% 25.8% 22.7% 8.4% 18.0%
  42. 42. Effective Tax Rate – 9M06 US GAAP BR GAAP US$ THOUSANDS R$ THOUSANDS Income Before taxes 329,958 565,197 Nominal expense 34% tax rate 112,186 192,167 Permanent additions 5,742 35,675 Permanent exclusions (1,679) (18,369) Interest on Shareholders Equity (34%) (32,041) (70,304) Other items (24,753) 7,061 Total expenses 59,455 146,230 Effective tax rate 18.0% 25.9%
  43. 43. Balance Sheet
  44. 44. Accounts Receivable Breakdown US GAAP BR GAAP US$ Million R$ million 488 100 136 140 32 1,085 233 294 302 70 351 346 332 368 823 302 754 719 797 577 3Q05 4Q05 1Q06 2Q06 3Q06 3T05 4T05 1T06 2T06 3T06 Oth e rs C o m m e rcia l Airlin e Ma rke t
  45. 45. Aircraft Financing Support US GAAP BR GAAP US$ Million R$ million 488 278 229 651 174 1,085 497 378 164 357 136 140 233 294 302 100 32 70 3Q05 4Q05 1Q06 2Q06 3Q06 3T05 4T05 1T06 2T06 3T06 A c c o u n t s R e c e i v a b le s C o s u t m e r a n d C o m m e r c a i l F n i a n c n i g u C o s tu m e r a n d C o m m e r c ia l F in a n c in g
  46. 46. Inventories US GAAP BR GAAP US$ Million R$ Million 1,886 4,417 1,601 1,648 1,639 1,511 4,115 4,053 3,967 3,971 3Q05 4Q05 1Q06 2Q06 3Q06 3T05 4T05 1T06 2T06 3T06
  47. 47. Net Cash (Debt) Position US GAAP BR GAAP US$ Million R$ Million 527 507 1,102 360 302 657 1,139 843 97 216 3T05 4T05 1T06 2T06 3T06 3Q05 4Q05 1Q06 2Q06 3Q06
  48. 48. Loans Total Debt of US$ 1,599.8 Million Brazilian Currency 25% Short Term Long Term 48% 52% Foreign Currency 75% • Average cost in R$ = 8.5 % p/a Loans Average Maturity: 1 year and • Average cost in US$ =7.2 % p/a 11 months
  49. 49. Loans Maturity US$ million 76 0 1,6 0 0 13 1 2 76 18 8 201 44 Total Short- 2007 2008 2009 2010 2011 term
  50. 50. Emissão de Bond Tombstone Sumário dos termos Tombstone Sumário dos termos Emissor: Embraer Overseas Limited 20 de outubro de 2006 Guarantidor: Empresa Brasileira de Aeronáutica S.A. Principal: US$ 400 milhões Formato: 144 A/ Reg S com Registration Rights Ratings: Baa3/BBB- (Moody/S&P) Vencimento: 24 de Janeiro de 2017 Coupon: 6,375% Yield: 6,466% US$400.000.000 Spread sobre UST: 168 bps Preço: 99,289% 6,375% Bonds com Vencimento em 2017 Joint Bookrunners: J.P. Morgan Securities Inc. e Citigroup
  51. 51. Investments
  52. 52. R&D – PP&E 9M06 173 158 153 143 148 131 114 111 100 84 70 64 59 50 2000 2001 2002 2003 2004 2005 9M06 PP&E R&D
  53. 53. Research & Development Forecast Previous New US$ Million 2007 2007 2008 Commercial Aviation 54 51 22 Executive Aviation 87 127 90 Technology Development 47 59 61 TOTAL 188 237 173 Defense & Government 21 32 48 Defense & Government R&D are funded by their contracts and are included as Cost of sales and services
  54. 54. PP&E Previous New US$ Million 2007 2007 2008 Productivity 77 77 52 Production Ramp Up - 104 36 Customer Services - 13 29 TOTAL 77 194 117
  55. 55. Contributions from Risk Sharing Partners US$ Million 246 14 1 108 - 55 42 17 20 Total 2001 2002 2003 2004 2005 2006E 2007E 2008/2010E
  56. 56. THANK YOU! Investor Relations Phone: + 5512 3927- 4404 investor.relations@embraer.com.br www.embraer.com.br

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