Embraer SA (ERJ) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's First Quarter 2008 Results.

(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 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 other markets where the company is present.

The words believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify forward-looking statements.

Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events or other factors.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur.

The company's actual results could differ substantially from those anticipated in the forward-looking statements.

Participants on today's conference call are Mr.

Frederico Fleury Curado, President and CEO; Mr.

Antonio Luiz Pizarro Manso, Chief Financial Officer; Mr.

Carlos Eduardo Camargo, Head of Investor Relations, and Mr.

Marcello Rodriguez, Controller.

I would now like to turn the conference over to Mr.

Curado.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining our conference call.

We will be discussing our first quarter 2008 results in U.S.

GAAP.

We already did in the Brazilian GAAP one hour ago

In summary, we had a quarter which was materially in line with our planning.

The sales side was positive again.

We had new orders, new customers integrated into our backlog, such as Petroecuador, such as Universal Airlines, Air Spain, Air Moldova, JetScape and of course, this new Brazilian airline which acquired 36 195s.

Several other customers, existing customers also have converted options into firm orders, such as Regional AirTrans, Virgin Blue, EgyptAir and Finnair and Lot.

And so the sales activity remains at a positive pace.

We had in this quarter as well -- in April actually, we had our annual shareholders meeting with a very high attendance, about 83% of our voting shares present at the assembly, which is a positive point in terms of the relationship between the company and its shareholders.

And last but not least, we concluded an important process of acquiring the 16.8 million shares or 4.2 million ADRs which the board has approved last year.

So in that endeavor we spent R$320 million, something about close to $109 million or so.

So with that summary, I will be back at the end for questions and answers.

But I will turn to Carlos so he can walk you through the highlights of the financial statements.

Okay, thank you, Frederico.

Good morning, everyone.

We delivered in the first quarter of 2008 45 jets and that represented the highest number of deliveries in one first quarter in the history of the company.

On the product mix deliveries, the commercial aviation represented around 70% of our total revenues.

Net revenues for this quarter totaled $1.3 billion, representing a 60% increase over the $832 million on the first quarter of 2007.

That was mainly due to the increase of deliveries and as I mentioned, the product mix delivered.

The gross margin in the first quarter was 20.4%, representing a decrease from the 22.5% gross margin of the first quarter 2007, due to the impact of 17.6% decrease in the exchange rate on the 50% portion of our COGS that are real-denominated.

And there was also the annual adjustment of our contract with our supply chain costs.

And furthermore, the decrease in the gross margin from 22.6% in the first quarter of 2007 to 20.4% in the first quarter of 2008 was attributed to that annual adjustment in supply costs and also to the product mix delivery.

Income from operations reached $49 million in the first quarter of 2008, that was more than 200% increase over the $15 million recorded for the same period last year.

The increase is due to the higher gross profit in the quarter and the operating margin was 3.6% in this quarter, representing an increase compared to the 1.9% operating margin of the first quarter 2007.

Despite the commercial and administrative expense reduction from the fourth quarter 2007 to the first quarter 2008, the income from operations was reduced due to lower deliveries and consequently, lower gross profit.

For the same reasons, cash generation as measured by the EBITDA reached $65 million in the first quarter of 2008 compared to $30 million in the first quarter of 2007.

Net income totaled $85 million in this quarter compared to $26 million in the first quarter of 2007 due to the increase in operating reserves.

The net margin also increased to 6.4% this year compared to 3.1% in the same period last year.

Trade accounts receivables and customer commercial financing totaled $770 million in the first quarter of 2008, representing a 3.7% decrease when compared to the $809 million in the first quarter of 2007, due to the normal course of the company's business.

Inventories increased to $2.7 billion during this quarter compared to $2.5 billion at the end of December 2007, as part of our plan to achieve the committed deliveries of 195 to 200 jets this year plus 10 to 15 Phenom 100s.

On March 31st of 2008, our total debt was $1.6 billion, compared to $1.7 billion on December 31st of 2007.

The average tenure of our total debt was 3.9 years at the end of this quarter, longer than the average tenure of 3.5 years at the end of the last quarter, because of the payment of some matured credit lines.

Our net cash position decreased from $740 million in the end of the first quarter of 2007 to $650 million at March 31, 2008, due to our cash management strategy, that also included the share buyback already mentioned.

As of March 31, 2008, our firm order backlog for the ERJ-145 family totaled 43 aircraft, all of which will be produced and delivered to the Chinese market.

The firm order backlog for the E-Jet continue to show the high acceptance of this model in different regions of the world, accumulating a total of 466 jets to be delivered.

On March 31, 2008, Embraer's firm order backlog, including the commercial aviation, the executive aviation and the defense and government segments, totaled a new record high of $20.3 billion.

We maintain our delivery forecast for this year between 195 to 200 jets and 10 to 15 Phenom 100 jets, whose certification is expected for the second half of this year.

Investments on R&D and PP&E were maintained at the same levels previously disclosed of $243 million and $330 million respectively and as a consequence of the approval of the MSJ and the MLJ business jets programs, we revisited our estimates for R&D investments for 2009, adding $100 million to our previous guidance.

And total R&D investments for that year are expected to be $352 million and the previous forecast of $270 million of investments for PP&E are still maintained.

We will now open the session for Q&A.

Remember that we will answer first the questions from analysts and investors, and after that, we will answer the questions from the press.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Joe Nadol from J.P.

Morgan.

Please go ahead.

Good morning.

Good morning, Joe.

My first question is, Fred, up front you said that the quarter was materially in line with your planning.

So as far as your 8% to 9% operating margin guidance for the year goes, do you still feel like that's the right range?

We still do, Joe.

We, of course, as we deliver more aircraft, having a pretty much stable cost in the company on the fixed side, so the volume has a direct increase -- sorry, direct impact on the operating margin and onwards.

And of course, you know, we have always to remember that by certification of the Phenom towards year end, we recognize some contribution towards our P&D that will help of course our guidance.

So at this stage, we are still maintaining our 8% to 9% guidance.

And it is fair to say that you would expect sequential improvement each quarter in both gross and operating margin as we progress through the year?

Yes, I think it is fair.

Okay.

Secondly, there has been a lot of turmoil in the U.S.

recently, obviously in the airline industry.

And I am wondering how you are looking at the status of your scheduled deliveries to your major customers over the next couple of years.

Have you received any calls for potential deferrals or everything remains intact?

Well, so far, everything is okay.

Of course, this is a constant monitoring.

Believe it or not, we have some sales activity in the United States going on right now.

Sales financing, which is always a good thermometer for the firm deliveries, for 2008 it looks really good in terms of already committed financing.

And 2009 as well.

Last quarter, we switched 10 aircraft, I guess it was 10, Carlos, accounts from U.S.

--

Yes.

So apart from that, we have not had any indication of cancellation or postponement.

But of course, Joe, this is a daily exercise we have to monitor very, very intensely.

Okay, and then finally, you've had a number of irons in the fire in China.

And I am just wondering if you could update us on how those are coming.

Do you anticipate some order activity in the coming months there?

How are things there?

Well, I think this is the same.

There is a lot of activity there, sales activity.

But of course, it is a market where there are some still some regulations, government approvals or import licenses.

So it is twofold.

One side is the commercial day to day battle of catching a customer and defeating competitors, on the other hand, also we have to work with the customer and with the government to seek import licenses.

So at this stage, it is relatively the same position where we were.

But at least the activity is at the same level.

Okay, thank you.

Thank you.

Our next question comes from Ron Epstein from Merrill Lynch.

Please go ahead.

Yes, hi.

Good morning, guys.

Good morning.

Fred, if you could clarify just one quick thing.

The R&D level for 2008, what are you expecting that to be?

And then, what do you expect the offset from suppliers to be on the Phenom when the Phenom gets certificated?

Well, the number is $243 million for 2008, you are asking, Ron?

Yes, that's right.

Yes, we maintain the $243 million for whole -- I mean, defense excluded because this is self-financed.

And the contribution for the certification of the Phenom I think is in the range of $80 million or something like that.

So you could see an $80 million offset to the $243 million when it gets certified?

Yes, that is basically -- and that of course is part, is intrinsic to our guidance.

So this is one of the results which will take us to the guidance.

Okay, okay.

That is great.

And then just another question.

In terms of the efficiencies you are getting with labor, how was overtime in Q1 and how do you expect that to trend through the rest of the year?

I do not have the exact numbers, but it was lower than -- we are lower than last year, that is for sure.

I do not have the precise number here.

Carlos?

Around 15%.

Yes.

I think -- if you are after what is really penalizing the gross margin, it is much more on the materials side than on the labor side.

Okay, and on the materials side, that was just price -- annual price readjustments?

Well, it is that and it is also the average cost of the inventory as the currency decreases, not just the -- the currency has two effects on us.

First, just a second please.

So as a matter of fact, in U.S.

GAAP it's just one.

The other is just applicable to Brazilian GAAP.

So basically an escalation, an escalation in materials, Ron, is really -- as we had already foreseen, it is really the responsible, the main responsible for that, and of course the product mix as well, because we had less legacies this quarter than the average of the year.

Okay, okay.

And just to think again, when the escalation of materials, is that just truly just the cost of titanium, the cost of the raw materials that are going into your supply chain and what they pass through to you?

No.

And of course, the contractual escalations on the items, [B&A] items like all the equipment [ranges] units, the pumps, et cetera.

So the regular contractual escalation and yearly escalation.

Okay, great.

And then another question for you.

With the credit markets still kind of very slow and stuck, if you will, what impact have you seen on aircraft financing?

And have we seen any change kind of going forward with the BNDS potentially offering backstop financing on aircraft?

Antonio, why don't you?

Yes, Ron.

With some aircraft, you have the BNDS support.

For this year, all the deliveries are completely financed.

We don't have any kind of (inaudible) for this year.

For the next year, it is missing few aircraft.

BNDS is possible to enter more than this year.

We have to almost see 20 aircraft just financed for BNDS in 2008 and for the next year, we just discuss if necessary, will it be possible if come.

Okay, that's great.

Thanks, guys.

Thanks, Ron.

Our next question comes from [Mans Larson] from Canyon Partners.

Please go ahead.

Hey, thanks, guys.

Just a quick question, you have already answered part of it in the first couple of questions here.

But given that you have had these price increases on both the material and then also the currency issue that you discussed which have pressured your margins, will you be able to -- because I am curious to how you will improve that over the course of the year and if you believe that it is just the operating leverage by delivering more planes that will help you overcome that, or are you taking other measures to overcome those sort of unfavorable cost developments as well?

No, it's the combination of factors is -- it affords the higher level of deliveries.

It is also the product mix throughout the next three quarters.

We shall have a better mix of executive jet legacies and commercial jet legacies having a better margin than commercial jets.

And also, the dilution of the escalation on the cost side, on the materials side that goes in the aircraft, they will also enjoy some escalation in the market and so that will also help us to dilute this step-up on the escalation in the first quarter.

So it is a combination of factors.

And of course, last but not least, the continuous improvement program that we have in house addressing not only production, but also the whole administrative efficiency of the company.

So we remain locked and focused in all the three programs.

So we expect a combination on all those fronts.

Okay, great.

And then just a second question on the Phenom 100 development, could you provide a little bit more color on how that is progressing and on the licensing process there?

And you obviously reiterated at the beginning of the call that you are going to deliver 10 to 15 planes this year and you see no obstacles there and is there a chance of potentially delivering more than that?

Yes, no, more than that, no.

No, there is no chance of delivering more than that.

And the campaign is progressing well.

We had last week the conclusion of the [cold soak] campaign, which is clear the icing side of the aircraft, which probably was the last very serious [floater] is done, [cold soak] is done.

So the airplane is now free to really explore the whole envelope.

And so we do not expect any technical surprises.

So we do not expect any obstacle, we do not see any obstacles.

Of course, the certification is always challenging.

But I think the bulk of the technical challenges are already surpassed and the flight test campaign has proven basically the design of the aircraft.

So this last phase of the campaign, we enter into this maturity flight which is much more a reliability component to make sure that they do not have infant mortality going into service.

It is more related to dispatch-ability than to the flight envelope itself.

There is probably about $600 accumulated so far.

So it's -- I think it is doing quite well.

Okay, great.

Appreciate it.

Thanks a lot.

Our next question comes from Bernardo Caneiro.

Please go ahead with your question.

Good morning, everyone.

I have two questions.

One, if you expect to increase prices given the currency appreciation and the increases in materials costs in the next months?

The second question is how the company and what were the reasons for Embraer to report the $20 million tax benefits in this quarter?

Thank you.

Okay, as far as prices go, all our contracts, they had escalation clauses as well.

So we tried to match those as much as possible with our cost escalations, with every contract you have these components.

But sometimes, we have a little bit of a mismatch.

But prices go naturally up with escalation clauses.

As far as list prices go, list prices, maybe you are referring to what Airbus did recently.

They are more indicative prices.

I'm not aware of any airline having bought an airliner for its list price.

So it is more indicative.

So I think it is more like an indication of the market than anything else.

So we've annually also, we don't make a big fuss about this but annually, if you keep track of our list price, they have also constantly increased over the last several years.

But in the end, the reality is, the deal prices, if they have a -- and the manufacturer can get with the customer and that's the moment of truth.

So to be more direct, we to expect price increases.

It is much more coming from our installations than just raising the nominal prices of the aircraft.

As far as $20 million, Marcello, Antonio?

Yes, basically, as you know, the income tax calculated on the BR GAAP, with its adjustment in the local statement.

So we have three major impacts, where the first one is the interest on capital that is an expense for the income tax.

Another one is the R&D incentive that we have with (inaudible).

Another one is the adjustment, where you exclude the variation on investments on your subsidiaries abroad, where you have to make the adjustment in the [labor].

And all those three impacts, that explains the effect on the income tax expense.

Okay.

Thank you.

I also have another question, sorry, I got late into the call.

Could you repeat the revised guidance for R&D expenses and CapEx for 2008 and 2009, please?

It's -- 2008, Ben, is -- R&D first, $243 million, in 2009, $352 million.

$352 million is $100 million above the previous guidance due to the launch of the MSJ/MLJ.

So there is no change in 2008 and there is a $100 million change upwards in 2009 due to the MLJ/MSJ.

Now, PP&E is maintained at the previous level, $330 million in '08, $270 million '09.

Okay, thank you very much.

Our next question comes from Rodrigo Goes from UBS - Pactual.

Please go ahead.

Good morning.

Just a couple of questions.

The first one, on your taxes, what should we be using going forward as an effective tax rate in our models?

If you could provide some guidance on that, I would appreciate it.

Second question is, as margins recover going forward, where would you expect the operating margins to be, say in the fourth quarter this year, more or less?

Okay, so the tax, as you know, it's a very -- has a huge influence on the (inaudible) and let's say local effects.

But for our guidance, you could use from 15% to 18% as, let's say as the effective rate for your forecast.

Okay.

So if you take our guidance, I will give you a -- in the last quarter, it would be, of course it would be positively contaminated with the recognition of our certifications.

But we have basically to produce the next three quarters an average somewhere around 8% or so to achieve our -- 8% to 9%, 8.5% to achieve our guidance.

So as I responded to, I think it was to Ron or to Joe, I guess, we do expect to have increasing margins and typically, the seasonality that last quarter is the highest in terms of deliveries.

So we should have the highest results in that quarter.

Okay.

Considering you did 3.5% in the first quarter, I am guessing to average that, call it 8% for the year, you need to be well in the double digits -- low teens, right, at the end of the year?

Is that a fair assumption?

Yes, if we consider the certification, yes.

Right, those $80 million, right, which -- should we expect that S80 million to hit your P&L in fourth quarter?

I believe it is very difficult to today to say between three and four.

It is September or October.

It's basically hard to say.

In the second semester, certainly you will see.

Okay, okay, perfect.

All right, thanks a lot.

Okay.

You are welcome.

Our next question comes from Steve Trent from Citigroup.

Please go ahead.

Good morning, gentlemen.

Bom dia, Steve.

Bom dia.

Most of my questions have been answered.

Just one or two follow-ups looking at the risk sharing you are talking about on the R&D side for this year.

As we get into 2009 with the Phenom 300 and the Lineage, any sort of color as to what we might see for 2009 in terms of risk sharing?

Well, whichever they are, Steve, they are in our guidance from 10% to 12%.

I personally do not know the number here.

Yes, I believe it is in relation of 10%, 12%.

It would not make a big difference [if it comes that] in the next years.

We do have some contributions from the Phenom 300.

But the Lineage -- the Lineage doesn't have anything and the Phenom has would be this year.

So whatever is left for the Phenom 300 certification next year.

Yes, we will be working on some guidance for that too.

We are going to plan -- we are planning to disclose that soon about the investment guidance and also the offset by the contribution from risk sharing.

It is not significant is going to be this year.

Okay, great.

And just, one other thing, if you can remind us as to what exchange rate assumption you might be using for 2008 vis-a-vis your margin guidance?

Thank you.

Vis-a-vis, did he say that?

Yes.

When we built our estimates last year for those guidance for the 8% to 9%, we used the current exchange rate we had at that time.

It was around 1.75.

We considered an effect of $0.05 less wouldn't have a huge impact on those estimates, okay?

So far, we are seeing numbers lower than what we expected, but we haven't already visited those numbers because, of course, there will be some impact but it wouldn't be that significant for us to go public and give a new guidance on it.

Very clear.

Thanks very much, guys.

You are welcome.

(OPERATOR INSTRUCTIONS) Our next question comes from Don Kwiatkowski from Schroeders.

Please go ahead.

Hi, just one question.

Can you tell me what the scope of the buyback program, how much is the buyback program and if it can be extended going forward?

Yes.

We already bought -- we already completed the buyback program.

It was 16 million -- 16.8 million common shares.

That represents 4.2 million ADRs.

That represented R$320 million, I am sorry, and also 2.3% of our capital.

So far, we have no plan to ask for approval of our board of any new buyback program.

Okay, thank you.

Our next question comes from Vinicius Canheu of Credit Suisse.

Please go ahead.

Hi, good morning, everyone.

Thanks for the call.

Good morning.

I have a question related to the workforce -- new workforce that you hired last year to improve the production of the company.

So how is the evolution of the productivity of this workforce doing versus your expectation and when do you think they will be fully productive at levels that you believe that they can reach?

Well, we are pretty much getting there.

I mean, let me emphasize that we have been growing our production steadily and our workforce is kept at the level of June -- actually, July last year.

So the productivity is right there.

The training phase I think is probably over.

We just have a few people in there.

So I think we are almost at the level of reaching full productivity according to that and according to the plan.

Okay.

And in terms of the points of attention that you flagged last year, is there any one -- any point of attention that still concerns the company or not, it is pretty much addressed?

No.

There are always several points of attention which we have to constantly monitor and some we can manage, some we cannot.

In terms of scenario, I mean, we are not in autopilot yet.

I mean, we are still in the evolution phase, still attacking bottlenecks, still having a very hard focus on making sure that we streamline, ramp up and achieve a stable, predictable level of production without the management effort that we have been applying.

So there is some not concern, there is some work to be done there.

And of course in the external scenario, this whole situation in the United States and the potential impact of the global economy, this is an obvious point that we are monitoring.

As we have said, so far, we have not been impacted directly by any of those problems, not a firm backlog, not sales financing.

We did see a little bit of a cooling off in terms of the business jets in the United States as we have a very strong backlog, and we did not see any cancellation in our firm backlog in [the (technical difficulty) jets.

But that's a point of concern.

And of course, the last, I think major point of concern is the currency in Brazil.

And there is one major, there is one major new and major fact which happened last week, when Standard & Poor's declared Brazil investment-grade.

So the trend is, the real may get even stronger.

And if it gets too much stronger, that of course will have an unforeseeable impact.

But that definitely we are not working with that scenario at this stage, but that is something which we are clearly trying to keep an eye on.

Okay, thank you very much.

Our next question is a follow-up from Ron Epstein from Merrill Lynch.

Please go ahead.

Hey, guys.

I just had a quick follow-up question for you.

We haven't really talked too much about it.

But Fred, can you give us just a little summary of maybe some of the campaigns that you are able to talk about or just kind of give us a feel for the activity that is going on with regard to the large commercial jet sales?

You know, that's going to be a short answer, right?

We cannot release comments on specific campaigns.

But activity in Asia remains -- I answered already, Joe I think, talking about China.

There we have of course two challenges, to sell and to get approval.

But through here, we are being optimistic.

We are having first deliveries coming soon, 190s to [H&A].

But we hope the 190s flying in China will help the whole image of the product.

And we have to do attention, we have a very solid order backlog.

And a lot of orders are coming from confirmation of options.

So between campaigns and options being confirmed, so far, the horizon remains solid.

And Mauricio is not here, but Mauricio committed to keep at least a one to one ratio, and that is what he is looking at.

Okay, okay.

And then maybe just one quick follow-on about airplane sales, tough again.

If we were to see some successful consolidation in the North American airlines, for example, say the Delta-Northwest thing actually happened, and we were to see some 50-seaters come out of the fleet because of it, do you think there is home for those airplanes in other regions of the world?

Yes, I think this is certainly a potential challenge for 50-seater manufacturers and depending on the model, we see in, let's say, non-traditional markets like Russia, maybe some secondary markets such as Africa, Asia, Latin America.

So so far, the 145 has held quite well.

We have been -- it has been very easy to be move airplanes around.

But your question is correct.

I mean, if deliveries, a high volume of 50-seaters coming to the market at once, that of course would be not easy to digest because the primary markets, they are not open to 50-seaters at all.

So it's a big challenge.

So on the other side, a consolidation may open opportunities for our E-Jets.

So we are looking at that situation, both at the potential threat in terms of having some 50-seaters on the ground but also on the opportunity of maybe accelerating the placement of our E-Jets, which we believe would suit well in some replacement of existing fleets.

Okay, great.

Thanks, Fred.

Our next question comes from [Jacob Rosenbloom] from Goldman Sachs.

Please go ahead.

Good morning.

We just wanted to get a sense -- talk a little bit about the backlog, if you can comment on it.

We know that it is at record levels.

But has the pace -- is the pace still very strong?

We're just thinking based on what's going on in the U.S.

and with oil prices hovering where they are today, and with credit how it has repriced and access to credit has changed a bit, do you feel that the pace of additions to your backlog continue to be as strong as they used to be or are people just more cautious?

Yes, so far, it has been.

We actually -- usually, the first quarter of the year, of any year, usually is weak in terms of sales activity and sales orders.

This was not the case this year.

So it's hard to talk about the future, but so far, it has been actually over our expectations.

We are launching two new jets now, the MSJ and MLJ.

It is reasonable to suppose that we will acquire a decent amount of sales in those jets.

And on the executive side, I think we probably should be -- well, probably beyond just maintaining backlog.

On the airlines side, it is going to depend a lot on the next few months.

But so far, we have been able to keep it.

And any comment on - too add to this, any comment on your production capabilities on the E-Jets on a per-month basis given your backlog?

Yes.

We had reached the nominal capacity, install capacity of 14 aircraft a month, in 170, 175, 190 and 195.

And that's where we are.

But as I said, I mean, we are not yet at the stage where the factory is running in an autopilot mode, so to speak.

We still have a lot of management work to make sure that the shortages are compensated, some overtime.

So we are way better, way better than 12 months ago, but we are not completely, let's say, relaxed about our production efficiency and continue to yet.

So we still have some bottlenecks which we are attacking and hopefully before the end of the year, I will be able to say that, well now, this is kind of a -- we can take it for granted that the airplanes will be there without any surprises.

Our next question comes from Joe Nadol as a follow-up from J.P.

Morgan.

Please go ahead.

Thanks, just a couple of follow-ups.

Fred, could you give any indication on the MSJ and MLJ, what sort of demand levels you are actually seeing?

Any way you can quantify maybe your letters of intent or even just qualitatively?

We have, I think have over 100 letters of intent, which do not mean necessarily that they will turn into orders.

I think there is a high likelihood that they will, but it is certainly a nice start.

But we will be announcing pricing and more conditions in EBACE in a few weeks, actually two weeks from now.

And from that, between EBACE in May, and NBAA, which I think is in October, we will have a pretty much good idea about the level of confirmation of those LOIs.

You are going to start taking actual orders at EBACE?

That is correct.

And we will be announcing pricing, because you know, we try to convince customers to take orders without prices, they didn't accept.

But so as we have pricing on EBACE, we also have already made our framework contract for the MSJ, MLJ.

So we will start to see the actual contractual activity at EBACE.

Okay.

And then just a second follow-up, which is on the R&D, there has been a lot of questions on it and I just want to make sure that I got the numbers right.

So we are looking for $163 million of net R&D this year?

That is the correct number, right?

That is correct.

Okay.

Yes.

And just to be more precise, on top of that, there is another $54 million which are defense related, which is self-funded by the customer.

That doesn't show up in your P&L at all?

Correct.

Right.

And the -- the $243 has remained solid.

It's been pointed out already, obviously, that the currency has still been strengthening.

Have you been cutting back on R&D or finding places to trim, or is it just that the currency hasn't moved enough that you had some buffer in there and you haven't had to really change any plans to keep your guidance?

No, so far what we have done is really kept our R&D resources at the given level.

And as we've launched new programs, we had to disengage workforce from other previous programs following developments which are finishing and we can reengage.

So actually, there is a very big challenge here to manage all those new programs, keeping the workforce at the same level, which we are doing.

But there is nothing else similar to what we are doing in the production area.

To your question, if the currency goes crazy, I mean, it's hard to say, because we -- in principle, I would not like to sacrifice the future by sacrificing R&D today, because of today's costs and sacrifice or delaying or canceling any program.

This is certainly not for me a reasonable alternative.

But if the currency -- so, but if the currency goes too much south, we'll have certainly to reanalyze our currency measures and maybe do something more intense, something more radical.

But we are, I think, in a beautiful track of recovery.

But of course, this is a management exercise.

There is a very strong impact to our currency which may impact our R&D.

We are concerned -- basically, we have to find those savings elsewhere in the company.

I would not -- I would increase or prioritize R&D.

Okay.

And that $80 million, that was contemplated in your original guidance when you gave guidance last year of eight to 9%, right?

Yes, absolutely.

This is one of the essentials of the program.

Yes.

Thank you.

This concludes today's question-and-answer session.

I would like to invite Mr.

Curado to proceed with his closing statements.

Please go ahead, sir.

Well, I think that the first quarter results were, as I said, in line with our planning.

They were, I think they were significant improvements over the first quarter 2007.

But of course, the results are still insufficient and we know that.

The important thing is, we are moving forward in other recovery, as I explained already, significant time talking about production and this continues to be -- remains a focus, a personal focus of mine.

And we have plenty of challenges.

We have two certifications this year, Phenom 100 and Lineage 1000.

We have just started the flight test campaign on the Phenom 300, which flew well by the late and great news.

We should have execute highlight.

Launching the new MFJ, MLJ, the E-Jets, you made have heard about the ETOPS to 120 minutes.

I mean, this is a big boy's achievement.

I mean, this -- the 190 is 120 minutes ETOPS certified now.

So there is a lot on our plate and we are working very hard to make sure we deliver on all those objectives, and so far, we are on track.

Thank you very much for joining us today.

Okay, great.

Thank you.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation.

Have a good day an thank you for using Chorus Call Brazil.