1 Q06


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1 Q06

  1. 1. LOCAL CONFERENCE CALL EMBRAER INT`L – (410) FIRST QUARTER 2006 EARNINGS RELEASE May 15 2006 Operator: Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer’s First Quarter 2006 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. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and webcasted at www.embraer.com This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things: general economic, political and business conditions, in Brazil and in other markets where the Company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The Company’s actual results could differ substantially from those anticipated in the forward-looking statements. Participants on today’s conference call are Mr. Maurício Botelho (Chief Executive Officer), Mr. Antonio Luiz Pizarro Manso (Chief Financial Officer) Mrs. Anna Cecilia Bettencourt (Head of Investor Relations) and Marcelo Rodrigues (Controller). I would now like to turn the conference over to Ms. Anna Cecilia Bettencourt. Please go ahead, madam. Ms. Anna Cecilia Bettencourt: Good Morning everyone, thank you for joining our conference call to discuss our first quarter 2006 results in US GAAP that were released on Friday, May 12th, simultaneously with the financial statements in Brazilian GAAP. Joining us today are Maurício Botelho, our CEO; Antonio Luiz Manzo, our CFO; Marcelo Rodrigues, our Controller. We are webcasting this conference call with a
  2. 2. slide presentation on our web site at www.embraer.com. I invite you all to follow it. Now Mr. Botelho will present the quarter highlights. Thank you. Mr. Maurício Botelho: Good Morning everyone, thank you very much for your attention. First of all, I must just tell you that I am contacted at this conference call. I am in Europe, so if anything wrong comes with the connection I will get through again, but maybe it happens that I will be out. But coming to our results that we are disclosing today, I want to say that we had in this quarter two very significant issues, very important issues. The first one is the already very widely disclosed corporate shareholding restructure that we implemented and approved on March 31st. This operation I qualify it as the most important issue that happened in the company's life since its privatization. It comprised over substituting all shares, preferred and common shares by only common shares and assuring Embraer as a pulverized Capital Corporation. This, for sure, will have impact in our future lives because it will create the basis for a sustainable growth and continuity in our business for years to come. I think that the access to capital market and increasing financial resources will be assured, which will allow us to develop further our public line and expand our presence in the world and in new programs. The second point which was really a big impact in our results, when we compare it to the first quarter 2005 has to do with the real appreciation. There is a chart, which shows how the real appreciation developed from the first quarter 2005 to first quarter 2006, representing a 17.7% year to year. This had a strong impact in terms of our gross margin and in terms of our Ebit margin. If the real would stay at a low level or at a high level, it would not matter so much. But the point is that when is in a decreasing, the real is going in a growing curve - this means, the dollar devaluating - then we have a problem. We acquire goods at a higher exchange rate and we recognize revenue at a lower one. This has a direct and straight impact on the gross margin. As a consequence, operational margins; Ebit margins and net margins would be also affected and this is what we have seen so far. If we consider just the last quarter 2005, we had an appreciation of just 2.4; as a consequence, we kept our gross margins and margins at the same levels and representing another situation that we are living, which is the entrance in service of the new aircraft family. But we will go through this later on. Secondarily, we are living with additional costs that are sustained by the company in view of the entrance in service of this new family, representing additional costs. But this will be over soon. Despite the reliability of the fleet has been significantly improving and, as we anticipated by mid year, the majority of the problems that were found in the systems and our own problems and the training from operators will be solved. I think that the level that we are reaching today with the operation is coming to very acceptable points and soon everything will be over. If we just compare what happened with us in this respect with the same situation
  3. 3. that we lived when we had the ERJ 145 jet into the market, we had in 1997, for instance, the gross margin was in 26.9%; in 98 it grew two points and in 99 it reached 32% in gross margin. The problems that we were living at that time they were much more concerning than the problems that we are living today. I have full confidence that the improvement in the operation will come from the actions we have been taking with our customers in terms of training of the crews and with our suppliers and within ourselves in terms to improving the quality and solving gaps that existed in the different systems. I would like to say also that however we see this decrease in margins, we show a very strong financial health. Our cash, net cash, with US$ 302 million; the indebtedness is in a very comfortably managed position, 72% in a long term basis; trade account receivables at a reasonable value of 480 million while commercial aircraft representing 136 million. We are, at this point, preparing to grow our delivery rates to increase them for the second half of the year as well as preparing ourselves to start deliveries – to have certified and to start deliveries - of the Embraer 195. This, at the same time that represents a very good perspective for the near future, it also represents an impact in inventories, which are consistently growing to allow us to launch this increase in performance. We have achieved also significant diversification. In this quarter, 62% of the revenues came from the commercial airlines business; 11% executive jets; 10% defense and 17% services. What I say is, furthermore, is that in conjunction with all these facts we have achieved significant new contracts: China Eastern Airlines Wuhan acquired 5 50- seat aircraft, which is going to be supplied by the Harting Embraer factory; Embraer and group US Airways group reached an agreement involving the previous contract, converting 57 ordered Embraer 170s into 25 firm Embraer 190 and 32 additional firm Embraer 190 aircraft, which are subject to reconfirmation by U.S. Airways. There are options over and above those figures. AirRepublica of Bogota, Colombia placed a firm order of five Embraer 190s with option for an additional 20 aircraft; while Jordanian Airlines acquired seven firm Embraer 195s with deliveries which are due to start in the fourth quarter 2006. These new contracts, as well as the others that were already achieved by the company are allowing us to maintain a solid firm order backlog over US$ 10 billion, representing about 350 aircraft to be delivered. Additionally, we can say that the executive jets business area is doing very well and the Phenom 100 and 300 are being very well accepted by the market. Recently, just as a lateral note, we presented to the market a new program, the Lineage 1000, which is, by our suppliers, being received a better acceptance than what we would imagine for the first week, when we presented it the Geneva show E base. Based on those facts, I will pass the word then to Anna Cecilia, to proceed with the results and performance detailed presentation. Please, Anna. Ms. Bettencourt: Thank you, Maurício. We delivered 27 aircraft in the first quarter of 2006, compared to 30 deliveries in the same period last year. And approximately
  4. 4. 60% of our aircraft delivery forecasted for 2006 are expected to be concentrated in the second half of the year. Due to this slightly lower number of aircraft delivered, the net revenues for the airline segment reached US$ 504 million in the first quarter 2006 compared to US$ 578 million in the same period last year. Despite the increase in net revenues, the decrease in gross margin the first quarter 2006 compared to first quarter 2005 is related to the E-Jet learning curve, as Maurício mentioned and the 17.7% average appreciation of the real against the US dollar during the period, which Maurício already explained in the beginning of this presentation. Due to the lower number of aircrafts delivered, net revenue for the airline segment reached US$ 504 million in the first quarter 2006 compared to US$ 578.2 million in the same period in 2005. Comparing the two first quarters 2005, net revenue for the same segments in the first quarter 2006 remained stable at US$ 78.5 million, representing 9.7% of the company's net revenue. Deliveries for the executive jet market doubled in the first quarter of 2006 resulting in a higher revenue, totaling US$ 86.1 million in the first quarter 2006, compared to US$ 33.1 million in the same period in 2005. Revenues of customer service and others segment increased 90.6%, mostly due to the revenue recognition of US$ 32.3 million from OGMA, a maintenance, repair and overhaul facility acquired in March 2005 and to the delivery of two used ERJ 145 aircraft to the Brazilian Air Force. Since approximately half of our operating expenses are denominated in reais, de 17.7% average appreciation of the real against the US dollar period over period had a negative impact on income from operations. Operating expenses also increased because of the company's effort to support the XXX 15.24 of the 190 model operation and of the implementation of a dedicated sales force in marketing strategy to promote the Phenom 100 and the Phenom 300, which will begin to recognize revenues starting mid of 2008, with the first deliveries of the Phenom 100. Additionally, the development of the Phenom 100 and Phenom 300 contributed to the increase of US$ 8.7 million in research and development in the period. Due to the lower operating result, net income in the first quarter 2006 decreased by US$ 31.2 over the same period in 2005, reaching US$ 65.3, equivalent to 37¢ of XXX 16.12 diluted ADS. Higher average cash, cash equivalent, and temporary cash investments available during the quarter contributed to an increase in net interest income, which reached US$ 32 million in the first quarter of 2006, compared to a net expense of US$ 7.1 million in the same period in 2005. During first quarter 2006, trade accounts receivable slightly increased by US$ 31.3 million to US$ 482.1 million. Of this total amount, approximately US$ 135.5 million is related to aircraft deliveries, XXX 16.53 sales financing arrangements are XXX 16.56 in process. Compared to first quarter 2005, accounts receivable decreased by 44%, a strong indicator of commitment to reduce participation in temporary sales finance structures, as we noticed the continuous recovery of the airline industry.
  5. 5. During the first quarter 2006, inventories increased by US$ 174.9 million, reaching US$ 1,686 million. This increase is due to the Embraer 170, 190 production ramp up for the second half of the year and the beginning of the series production of the first Embraer 195, which is expected to be certified by mid of 2006. As a result, we reached a net cash position of US$ 302 million in the first quarter of 2006. At the end of first quarter 2006 we had cash equivalents and temporary cash investments were $1.7 billion. On the same basis, short and long term loans, excluding non recourse debt and recourse debt were US$ 1.4 billion. Of the total debt, 72% is long term and 13% is attractively denominated in reais and indexed to the CDI at weighted average interest rate of 11.8% per annum. The remaining US$ 1.2 billion is denominated in other currencies, primarily US dollars, which are weighted average interest rate of 6.9% per annum. the long-term credit lines are due to mature between 2006 and 2011 and have an average lifetime of 2 years and 4 months. At the end of the quarter, we reported a firm order backlog of 341 jets, including 26 aircraft from the ERJ 145 family; and 315 aircraft from the Embraer 170, 190 family. At the end of the quarter also our firm backlog was US$ 10.4 billion, maintained if you compare to the remain XXX 19.23 previous quarters at the same level of US$ 10 billion. We maintained our forecast for deliveries of 145 aircraft in 2006 and 150 aircraft in 2007. Now, Operator, we may opened this conference call for the Q&A session. Thank you Q & A SESSION Operator: Ladies and gentlemen, we will now begin the Question and Answer session. If you have a question, please press the star (*) key, followed by the one (1) key on your touch-tone phone. Just one moment everyone, we are just waiting for ... Operator: Our first question comes from Ray Neidel, from Calyon Securities. Mr. Ray Neidel: Good morning everyone. Mr. Botelho: Good morning, how are you doing? Mr. Ray Neidel: good, good. Just a couple of general things here, with the R&D trends going forward. It seems like the bulk of the new products that you are doing, it seems like most of the R&D development, of course, should be out of the way. Is that a correct assumption to make?
  6. 6. Mr. Botelho: Sorry, I missed the last sentence, I missed, please. Mr. Neidel: The research and development going forward now that you have a lot of your product line is pretty well ready to go to market, will we see a decrease in R&D expenses going forward? Mr. Botelho: Yes, it is correct. At this present situation this is what we see. However, when one look at a company such as ours, which is heavily based on technology and new developments, improvements in products, this is not a situation that we would expect to be maintained as it is. We are studying and analyzing new programs. I have mentioned several times that in the executive business, executive jet market, we intend to launch two new aircrafts between the Phenom 300 and the Legacy 600. They are going to, in a near future, they will become a real program and other actions will be taken. Mr. Neidel: Ok. Now going forward with the business jets, you mentioned there is the learning curve that has penalized your earnings during this quarter. Going forward, how many curves should we expect to see that XXX 22.02 incur on a particular product? Mr. Botelho: It depends on the sophistication on the product. If we are talking about a very sophisticated aircraft, such as the Embraer 170 to 190, which is brand new in terms of technology for us – actually, if you compare the systems that are there with the systems that are being operated in other aircraft, rather than the 8080 22.32 - existing aircrafts have a lower level of technology than ours imbedded in this aircraft. So if the level of, let us see, impact in terms of putting the aircraft at full-service in a continuous basis will depend on the sort of the technology that you are using, if they are new or not. Of course, this represents also such our learning situation that becomes an asset for the company. This means that every new program you take the benefit of the lessons that you learned in the past and the trend is that you, more and more, you are more efficient in delivering and putting the product in full force in the market. Mr. Neidel: Ok, Great. And finally what the Embraer 170s and 190s, that family of aircraft becoming more important product line for the company, your revenues are going to go up, because it is a more expensive aircraft and I am assuming also that you should be getting higher margins of this aircraft after being sold worldwide. Is that a correct assumption and when will we see those margins starting to really affect the company? Mr. Botelho: It is, we expect the margins to grow, but it also depends on the competing environment. prices are defined not by the suppliers, but by that entity called market and the competition is always there and if we are not competing at this time, let us say, when we talk product to product, but there are other situations which may transform an aircraft, which is not a competitive aircraft if you look at it
  7. 7. individually, with our Embraer 190, for instance. Based on the connected values that are brought, they become competitive, I mean, 8318 for instance. As a product, it is a product which weighs 13 t more than ours. This way, it represents a burden in terms of acquisition price and operational cost. However, if the 8318 comes with a finance that is backed by export credit and receives in differentiated ways; if it is put together with other aircraft of the family, taking benefit of communality for instance. The typical example is the deal with Iberia, which was a dispute on a 110-seat aircraft, Embraer 195 and all of a sudden it was comprising 115-seat; 120; 150; 180 and then, what is price at that point? You don't know what it does mean. So the margin issue is something that, of course, it will improve because we will gain productivity. But it takes also something that is dependent on the competition level. We expect to have it growing. Mr. Neidel: Great, thank you very much. Mr. Botelho: Welcome, sir. Operator: Our next question comes from Daniela Bretthauer, of Santander Investments. Mr. Botelho: Olá, Daniela. Ms. Daniela Bretthauer: Hi, good morning. A quick question on you mentioned the fx impact on your gross margin and operating profit. In the past I had seen a table where you actually break down the average fx that you purchase and the reported and the impacting XXX 26.31. Do you have that information? That is for Anna. For gross margin and operating results, rather than just the margin that you show here in the chart? Ms. Bettencourt: Let me tell you, the table that you used to see is related to Brazilian GAAP, when you see the average exchange rate for the import and the average exchange rate for the export; while in US GAAP the impact applies only to the portion that is currently denominated in reais in our cost of goods sold, which is normally about 10% of the total cogs, above 10% of the total cogs if are denominated in reais. Ms. Bretthauer: But can I use that same spread for the US GAAP, then? Ms. Bettencourt: No, you can not, because in US GAAP de equipment; the material that we import, which are denominated in US dollars they are accounted in US dollars, so there is no translation, although the sales that in make, the exports that make in US dollars they are accounted in US dollars. So you should apply only to the 10% of our cogs, which are Brazilian denominated reais. Ms. Bretthauer: Ok, because I was just trying to sense if in US GAAP there was something else, rather than just the effect in tax and I guess by our answer it is,
  8. 8. there is no other effect, right? Ms. Bettencourt: If you look comparing, I mean, first quarter this year to the last quarter of 2005, you will see some slight improvement of 50 basis points, ok? Because the currency was not devaluated not that much, ok? just 2.4%, so we are starting see some improvement early in our gross margin. Ms. Bretthauer: Ok and finally, just to Maurício Botelho mentioned that there will be an impact of the certification of the 195 in inventories and I guess ... Mr. Botelho: No, no, sorry. It was not the certification, Daniela. Ms. Bretthauer: No, but there will be an impact because you are building up, you are taxing 28.57 that aircraft. Mr. Botelho: No, inventories is because we are starting to manufacture the aircraft to be delivered in the second-half, so we are growing our inventories to face the near delivery, that is it. Ms. Bretthauer: And can you quantify this impact? Just that we know how much inventories can drop? Ms. Bettencourt: Marcelo will answer this for you, Daniela. Mr. Marcelo Rodrigues: Hi, Daniela. Basically, we have US$ 1.6 billion in inventory and the trend for the year end is to 1.5 , US$ 1.45 billion. It is, as Maurício mentioned, it is influenciated by the initial of production and deliveries of ERJ 195 and also the ramp up of the 170, 190 family. So if we don't increase our production we will not be able to deliver the 145 aircraft in the year. Ms. Bretthauer: Ok, thanks and sorry, it was a little noisy here because the Confederação Brasileira de Futebol was just announcing the name of the players for the World Cup, so I could not really hear, but sorry about that. Bye. Mr. Botelho: Ok, you are welcome. Operator: Our next question comes from Joe Nadol, of J.P. Morgan. Mr. Botelho: hello Joe, how are you doing? Mr. Joe Nadol: Hello, Maurício. My first question is for you Maurício. Could you just update us on the market for the 190 and the 170 recently and how you think the bankruptcy is in the U.S. progressing, maybe touching on the rest of the world as well? Mr. Botelho: Very well. I keep saying that we see opportunities going on with this family of aircraft. Activity keeps being very hot, may I say, different areas of the
  9. 9. world, different customers, but the main point is what is happening in the United States, that is due to the relevance, the weight and the relevance of this market. While we distribute our products around the world, we have spread the customer base, but the fact is that another outside the United States is 10 aircrafts, 15 aircrafts at most. In the United States you talk about tens of aircrafts, hundreds, and this is what is the impact. What we see is that the environment is developing, I think, in a very reasonable way. We see movements from Northwest, positive movements, agreements with pilots, restructuring of their operation and I think that they are going and all the valuation that we have is that they are going, they are progressing with their plans and very likely they may go out of the Chapter 11 situation nearly next year, maximum. So this is good news, because then they are in the process of considering a new fleet of aircraft. At the same time, we see other customers also operating, and operating very well the product 170 and looking at this problem with large satisfaction, which is good, because of future expansions. This is what I can tell you Joe, I believe that things may become hotter in a medium time. Mr. Nadol: My second question for you, Maurício, is on the narrow body replacement programs that both, Boeing and Airbus are the studying. You have mentioned a couple of times, I think publicly very recently, that you think you could be a partner with either one of them. Can you give us any more color on the degree that you have had conversations with them, if any, and what the time to these programs you think might be? Mr. Botelho: I don't have a timing for it, neither I do have a program for that. What I have been commenting in different occasions is that I see, look at both companies and I see the challenges that they are facing, both of them. Huge programs on their hands, some with parallel programs which demand resources in an extraordinary way and this is valid for both companies. And then we look at us and we have to recognize that we have capabilities that could be very useful and very relevant in situations such as this one that I perceive. What I have mentioned is that - and this is how feel it - is that if I were them I would be looking at us. But this doesn't mean actually there is anything going on, or any program already existing. Mr. Nadol: Ok. I have two more questions on operating expenses, very specific questions. The first is you note that on the 190 there has been additional selling expenses, and I imagine you are just getting the aircraft all the tailing problems fixed. Can you comment on a, what the incremental amount of selling expenses do those problems were in the quarter? And then, secondly, are you directly compensating Jet Blue and/or Air Canada for their, they had their taking to their PNL? Mr. Botelho: Well, I don't have the figure that you asked for, I don't have but Anna, do you have?
  10. 10. Ms. Bettencourt: Yes, we do have. We are talking about, in terms of a new sales force structure and for the business that we are talking about something about 6, US$ 7 million, ok? And product and support we are talking about 16, US$ 17 million. Mr. Rodrigues: The influence of the real against the dollar in this month, in this quarter, is very strong. Mr. Botelho: But also is important to realize that the second portion of your question about compensation, this is not actually the approach. What we have seen is that the aircraft presented some difficulties, but not only that. It presented also that there were problems in training the different crews; internal problems from the customers, as well as ours. So what is at place, is a joint effort from the customer side; from our side to solve the issues as fast as possible and this is what is happening. Nobody has talked or has shown up something like compensation, nothing like that. Mr. Nadol: So do you think that this runs off starting in Q2? I mean that Jet Blue has been saying that the aircraft is doing a lot better. Mr. Botelho: Well, in a presentation provided by one of the top executives something like two, three weeks ago, they just mentioned that our aircraft presented a better dispatch reliability than the Airbus 8020, so let us move it on. Mr. Nadol: Ok. The final question is on the 10 to US$ 12 million charge for OGMA for this some kind of legal provision. Is that a onetimer? Is that a one time charge? If you could just give a little bit of comment on that? Mr. Botelho: Anna, this is for you. Ms. Bettencourt: Marcelo will answer this question. Mr. Rodrigues: This expense is related to, it was considered in the price when we purchased OGMA, but it is related to accounts receivable that if we receive we would have to pay for the Portuguese government, this is the realization of that process. Mr. Nadol: Is non-recurring? Mr. Rodrigues: no, it is not recurring. Mr. Nadol: Ok, thank you. Mr. Botelho: Thank you, Joe. Operator: And the next question comes from Heidi Wood, from Morgan Stanley.
  11. 11. Mr. Botelho: Hello Heidi. Ms. Heidi Wood: Hello, Maurício how are you? A couple of questions. I wanted a follow-up on someone who asked before, I just want to understand this R&D expenses a little bit better, that is going from last year to this year, that US$ 20 million delta, it looks like about 5 of it is foreign exchange and about you said, I think, 8.7 was the Phenom 100 and 300. So there is a sort of a US$ 6 million increase on E-Jets and I guess I thought that that expense was going to be tailing down. Can you talk a little bit about why that number was a bit higher? Mr. Botelho: Anna, please. Mr. Rodrigues: Yes, I can tell you. This expense related to a retrofit of a XXX 38.51 that we sold. As you know, XXX normally have a of a much higher cost than the regular one, so when you sell that we take the excess of cost and put it directly on the CPV, on the guarantee expenses. Ms. Wood: Ok, and so would you describe this period as a sort of peak on the expense for you, be heading down after this ? Mr. Rodrigues: Yes, because when you finalize the working with the XXX 39.27 we take out the excess of costs from the inventory and we recognized directly on the R&D, which is an expense in US GAAP and it is a further asset in Brazilian GAAP. Ms. Wood: Ok. And then on the gross margin front, XXX 39.52, can you provide to me a better breakdown from that year over year decline to the 28.7%, how much of that was foreign currency and how much of that was learning curve? Ms. Bettencourt: Well, normally we do not open, but what we can tell is that 10% of our cog, about 10% of our cog is Brazilian real denominated, so if you apply 17.7% devaluation, so that average then is an increase, a decrease in our gross margin. And the relation is that, remember that first quarter last year we delivered approximately, I think, 18 ERJ 145, which is much more mature product and this last quarter we delivered only 4 ERJ 145, so declining from 16 in the first quarter 2005 to 4. So this, although we are seeing already some learning curve improvements with the Embraer 170, but the additional Embraer 190, which the delivery started at the end of last year, we could not increase that much our margin. Ms. Wood: Exactly, I mean, that is why it is a little bit tough to break it down on the outside, is that mix of effects - product mix and then learning curve, so maybe let me ask in another way. When you look at the progress you are making on the E170, 190 family, how are you doing relative to the plan? Ms. Bettencourt: We are doing as we planned, I mean, with the Embraer 170, production lead time for the Embraer 170 improved, in the XXX 41.52 since launch
  12. 12. to 2 days. Also you must take into consideration that we expanded our customer basis adding new customers, so we have a less concentrated delivery, but if you look back to a specific customer, if you look back to the Embraer 190, a month of the delivery is what either Jet Blue or Air Canada at the beginning, we are not benefiting from expanding the customer base and also the learning curve associated with the 190 product. Ms. Wood: Ok, great. And the last question I would someone else to jump in, but, can you talk to us a little bit about, you are doing very nicely on this business jet area already and can you give us a sense as to the profile of the business jet buyer you are seeing? Are they mostly US domestic, are these corporations, are these individuals? And where are you gaining the most traction with your current product lines? Mr. Botelho: It depends on the product that we are looking at. The Legacy, we are talking about corporations, about charter companies, shared ownership companies, that is basically where the interest is. Very few individuals. If you go to the Phenom 100 and Phenom 300, you have also a different type of customer, but then you find, on the Phenom 100, you will find more individuals in that respect. So it will depend on the program. The fact is that I think we are achieving what we intended. We are starting, I know enough that we are just starting, but I know that. But what I mean is that we are achieving what we intended, we are achieving a different sorts of customers, because we are addressing them with different products. The Lineage itself, we introduced it in the E-base airshow and there are just comments that normally we don't do that, because it really doesn't mean anything of significance, because it is not a commitment, it does not buy to anybody, so we should not take in account as something of value, but just as a general information, at that show we had 10 lineage "sold" - under quotes - because there was no commitment. We expect to transform them in commitment soon, but this shows that the products are good, the products are calling the attention from the market and we are very happy with that. Ms. Wood: Great, thank you very much guys. Mr. Botelho: Thank you. Operator: And the next question have comes from Sandra Arnaud, from ATW Magazine. Mr. Botelho: Hello, Sandra. Ms. Sandra Arnaud: Good morning, it might be afternoon where you are. I wanted to ask you the 195 that is going to go to XXX 45.03 is it going to be this summer or how does it look in terms of being on time for that delivery schedule? Are you still expecting it will turn out the way you liked?
  13. 13. Mr. Botelho: It is on schedule, it is on schedule. We intend to have it set to fly by June and the first delivery, if I am not wrong, is August. But we are on schedule. Ms. Arnaud: So you expect the first delivery to be in August? Mr. Botelho: As planned, really I don't have here in my head, but it is on schedule, nothing new from what has been forecasted before. Ms. Arnaud: Ok. The other thing, I was going to look, ask you about the sales of the 135, 145. Are you getting any new orders or if are you just filling the back orders that you have? what is the status at 135, 145 production? Mr. Botelho: Very few new orders today, very few new orders, but still are, still are. Ms. Arnaud: You are still getting some. Has the availability of use the aircraft affected that? Mr. Botelho: Of course, of course. Today, as let us call, the large regional airlines which have intensely acquired 50-seat aircraft, they want to progress further, because the clothes are relaxing and so on. If they want to grow with a 70-seater or above that travel, they will try to find users for their 50-seaters. So, in fact, there is enough of used 50-seaters. For our side, very few. Antonio may say how many, but very few. Ms. Arnaud: And are some of these people, do you anticipate that they might want to convert their orders to the larger aircraft? Is that a trend that continues? Mr. Botelho: Sorry Sandra, I missed you. Ms. Arnaud: I am sorry. The trend towards a larger RJ, the 170, 190 type of aircraft. Do you anticipate that any of these orders that are on backlog, do you anticipate some of these people may switch, or convert their orders to the larger aircraft? Mr. Botelho: Well, some. You had a lot, for instance, had converted some orders into 175. There are options, always offered in a sense that they can exercise the option, they can change the aircraft from one type to another type. So it may happen. Ms. Arnaud: Thank you, these were my questions. Mr. Botelho: It was good to talk to you. Thank you. Ms. Arnaud: Thank you.
  14. 14. Operator: Our next question comes from Ron Epstein, from Merrill Lynch. Mr. Ron Epstein: Good morning. Mr. Botelho: Hello Ron, how are you doing? Mr. Epstein: Good, how are you Maurício? Mr. Botelho: Traveling hard. Mr. Epstein: Very good. The first question is for Anna. Have you included the offsets from suppliers you have on R&D, what is the R&D plan for the year? Ms. Bettencourt: Just a moment please. We are talking about US$ 200 million R&D gross, but again 80, almost 90%, between 80 and 90% of the total R&D is local currency denominated, so we are talking about engineer, ok? so it is been affected by the currency fluctuation. Mr. Epstein: Now, of that 200 gross, how much offset will there be from supplier payments, for example, when the 195 gets certified, don't you get something back from the supplier to offsetting ... Ms. Bettencourt: Yes, some offsetting, we are talking about, in terms of offsetting, around US$ 40 million. Mr. Epstein: So Q1 is a kind of really front loaded in terms of R&D, if you are using US$ 160 million net XXX 49.19, then Q1 is front loaded. Ms. Bettencourt: Yes. It depends, I mean we will be recognizing some contributions from the XXX 49.29 in the second half of the year. Mr. Epstein: Ok. Then another question for you, Anna. At the end of March quarterly call you mentioned that you thought, it was not you, the company thought that the gross margin would be in the 30% range, may be for the year? Is that no longer the case? Where are you thinking about gross margin for this year? Where should we think about modeling them? Ms. Bettencourt: We still are keeping 30% gross margin, ok? but if we still see some stronger fluctuation in the currency, we will be around 29%, something like that. Mr. Epstein: If the currency continues to strengthen. But if we assume stabilized, flat? Ms. Bettencourt: Yes, we are keeping the 30% average for the year. Mr. Rodrigues: Ron, we wait to arrive in the end of the year in that level of 30%,
  15. 15. ok? Mr. Epstein: And then we go back to the E-jets now, what is the cycle time in the 170, the 190? And how far behind are you in production? I remember in the beginning of the year you guys were a couple of weeks behind, so that is right, three questions. Mr. Botelho: We are taking it to the panic position. We are reverting the situation. Hello? Mr. Epstein: What is the cycle time now on the 170 and the 190? Mr. Botelho: It is about 4.6 months. Mr. Epstein: for both airplanes? Mr. Botelho: Yes, the 190 is somewhat bigger than that. I can tell you about five months. Mr. Epstein: And Maurício, a question for you. When do you guys tell the world all the business that you sold? So far there was one announcement of 50 Phenom 100s. When do we learn about the rest of the Jets? Mr. Botelho: We will be announcing the number of backlog and deliveries and so on by mid July, during the XXX 51.29 show. We have an Investor meeting over there, Investors and analysts meeting over there and we intend to announce it at that point. Mr. Epstein: Ok, that is great. Thank you. Mr. Botelho: Thank you, Ron. Operator: The next question we have comes from Brian Straile, from Inca Investments. Mr. Botelho: Hello. Mr. Brian Straile: Hello, good morning. I have a question about the income tax rate, relating to how the gap income/tax expands. How that relates to the Brazilian GAAP? I noticed that in it is in the Brazilian GAAP that you have $83 million expense and 8 million in the U.S.? Can you explain for the difference in that? Ms. Bettencourt: Yes, well, just to clarify that this last quarter, due to this restructuring, capital restructuring, we did not distribute interest on shareholders' equity, which is tax deductible, so it is a tax benefit for a Brazilian company, ok? And regarding the difference between Brazilian GAAP, the tax rate, and US GAAP, the tax rate, Marcelo Rodrigues will address the differences.
  16. 16. Mr. Rodrigues: The income tax, the effective income tax rate in Brazilian GAAP is influenciated negatively for the payer, of course, based on the exchange variation of investments abroad. So we have to add up the expense that we had in the Brazilian GAAP to the income tax. The opposite effect would happen in the US GAAP. Based in our investments abroad, specially in Europe, where you have the exchange variation between real and euro, excuse me, dollars and euros. So we had to exclude the effects, so we had in the nominal rates 34%, but the effective rate was reduced on the second quarter. Ok? Mr. Straile: Ok. The next question I have is regarding the Phenom program and I understand that you are expensing some of the sale expenses currently. Are any of the expenses being capitalized for that program? Mr. Rodrigues: No, no. None of those expenses is capitalized, nor in Brazilian GAAP or US GAAP. They go directly in the PNL. Mr. Straile: Ok. And those Phenoms, are they being built on the 145 lines? Production Lines? Mr. Botelho: No, they are not going to be there. First of all, it is important see that it is a different sort of aircraft, different specifications, so it is likely to be, to have the structure manufactured in one of our plans in the hinterland of Sao Paulo and the assembly line in another plant out of São José. Mr. Straile: OK, thank you. Those were my questions. Mr. Botelho: Thank you. Operator: The next question comes from Lori Ranson, of Aviation Daily. Ms. Lori Ranson: Hello everyone. I was just wondering if you could clarify my colleague made earlier in terms of preparing to grow the delivery rate in the second half of the year. Can you tell me how many planes you are delivering a month now and how much you expect that to grow? Mr. Botelho: We have a guidance of 145 aircrafts for this year. We are attaining ourselves to this guidance. We have delivered 37 in the first quarter and normally every first half of the year comprises about 40% of the annual deliveries and this is because we have a significant number of holidays in this first part of the year, so normally it comes 40% first half and second half 60%. We are attaining to the 145, this means that we will grow our rate of deliveries from the second half, sorry, second quarter and further on, on the third and fourth quarter. Just a matter of mathematics, I did not make the account in here, but the way is that, 145; 40% second half, first half, we had delivered 37, so you will know how many in the second quarter. And then 60% in the second half year.
  17. 17. Ms. Ranson: All right, thank you. Mr. Botelho: Thank you. Operator: Again, if you would like to ask a question, please press star and then the 1 key on you touch- tone phone. We have a question from Darren Shannon, from Flight Global. Mr. Darren Shannon: How are you all doing? Mr. Botelho: Hello Shannon, how are you doing? Mr. Shannon: I am fine, thank you. Can you give me some more details about this next generation of business jets you mentioned? The one between the Phenom 300 and the Legacy? Mr. Botelho: No, unfortunately no. The program is not launched, so is still in studies. Mr. Shannon: There will be something by the end of the year? Mr. Botelho: Probably not, most likely next year. Mr. Shannon: Ok. Can you give us an update on your production schedule for the Phenom? You have been talking about expanding it and doubling its to open up some slots. Mr. Botelho: Yes, that is our intent. We had planned for a significant number of aircraft per month; if we would attain to that program, we would be accepting orders just for 2010 and the way to allow us to satisfy the market demand we will expand our production line, but details on that I will not disclose until the plan is totally finalized. Mr. Shannon: Thank you very much. Mr. Botelho: Thank you Shannon. Operator: This does conclude today’s question and answer session. I would like to invite Mr. Botelho to proceed with his closing statements. Please go ahead, sir. Mr. Botelho: Well, thank you. Thank you very much for your attention. I appreciated having you talking to us and we are ready to clarify any further doubt in my have. Please contact us directly and what I can say is that we are firm on track on what we are planning for the year and we will be showing better figures on quarters to come. Thank you. I pass the word to Antonio Luiz and my colleagues
  18. 18. in Brazil. Mr. Antonio Luiz Pizarro Manso: Thank you very much. We - Anna, Marcelo and me wait your questions directly whenever it is necessary. Ms. Bettencourt: And we hope to see you in July this year in our analyst meeting and investors during the airshow which will be July 19th, in London. Mr. Rodrigues: Thank you very much for all, we are available here to answer any questions. Bye. Mr. Botelho: Goodbye, thank you, good job sir. Operator: Thank you sir, take care.