Embraer SA (ERJ) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter 2008 Results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions to participate will be given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded and webcasted at www.embraer.com.

This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer 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. Frederico Fleury Curado, President and CEO; Mr. Antonio Luiz Pizarro Manso, Chief Financial Officer; Mr. Carlos Eduardo Camargo, Head of Investor Relations; and Mr. [Rodrigo Horza], Controller. I would now like to turn the conference over to Mr. Curado. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining our conference. We'll be discussing our second quarter results which we sent out last night and also sent out along with the Brazilian GAAP, which we already had a conference a couple of hours ago.

First of all, in our effort to reduce the cycle of our consolidation of our statements, so it's the first time we can have this call within 30 days of closure of the quarter, so I'd like to outline that, our effort to release the results as soon as we can.

Besides Antonio and Carlos, which are known to everyone, I'd like to introduce also Rodrigo Horza. Rodrigo's the new Controller of Embraer and is also participating in this call. We are webcasting this conference as well. It is a live presentation, so if you want to follow it, you are welcome to.

We had a good quarter. In terms of programs, we announced two new models in the executive jets business, the Legacy 500 and the Legacy 450. We also had a significant development in terms of the certification effort in the Phenom 100 and the Phenom 300, which first prototype flew in this quarter, in the last quarter.

We also announced our new facilities in Melbourne, Florida, where we have our customer center and also have a second assembly line for the Phenom 100 and 300. We achieved certification of the 145 in Russia, which is important for our secondary markets, this placement of 50-seater jets potentially. We also got the 190 and 195s certification in China, which allowed us to deliver the first units already to Hainan Airlines of the 190.

We had contracts with another second within airline TRIP Linhas Aereas for the 175 jets here in Brazil. We had the important announcement of two VIP 190-based jets for the Brazilian Air Force, which will be transporting high-ranking officers of the Brazilian government, including the President, and we also formally joined the Global Compact program of the United Nations.

We also had another track of (inaudible) of our productivity and the competitive. We had important improvements in this quarter in terms of our financials, which I'm going to ask Carlos to walk you through. And I'll be back again for answers.

Thank you, Frederico. Good morning, everyone. In the second quarter, Embraer delivered 52 aircraft, an increase of 44% compared to 36 delivered in the second quarter of 2007, closing out the semester with a record 97 jets delivered. This result also represents a 59% increase over the 61 airplanes delivered during the first semester of 2007. The commercial aviation segment represented 69% of total revenues for the second quarter of 2008, representing an increase over the second quarter of 2007 but keeping the same levels of the first quarter of this year.

Net revenues for the second quarter totaled $1.6 billion, a 47% increase over the $1.1 billion in net revenues for the second quarter of 2007. Basically, this was an increase in deliveries. The gross margin totaled 21.9%, representing an increase over the 21.5% gross margin of the second quarter of 2007, again due to the higher number of deliveries and productivity gains achieved due to the improvement of the Company's industrial processes. The increase in the gross margin from 20.4% for the first quarter of this year to 21.9% in the second quarter can be attributed to the same reasons above and the reduction of overtime on the production line.

Income from operations reached $113 million in the second quarter, a significant increase over the $31 million recorded for the same period last year. The operating margin was 6.9% in this quarter, representing an increase over the 2.8% for the second quarter of 2007 and also an increase over the operating margin of 3.6% of the first quarter of this year.

Cash generation, as measured by EBITDA, reached $129 million in this quarter compared to $40 million in the second quarter of 2007. The increase in operating income resulted on growth in net income to which totaled $134 million in this quarter compared to $67 million in the second quarter of last year. The net margin increased to 8.2% this year compared to 6.1% last year.

Trade accounts receivable and customer commercial financing totaled $817 million this quarter, representing a 5% increase compared to $778 million in the first quarter of 2008, and that's due to the normal course of business of the Company.

During the second quarter, inventories increased to $2.8 billion compared to $2.7 billion in the first quarter, and this kind of inventory is part of Embraer's plan to achieve the committed deliveries of 195 to 200 jets this year.

On June 30, our total debt was $1.6 billion. It's stable when compared to the previous quarters. The average maturity of our total debt was 3.6 years at the end of this quarter. From total debt, 43% is stated in reals and indexed to the TJLP at a weighted average interest rate of 8.29% per annum. The remaining $931 million are stated in other currency, primarily the US dollars with a weighted average interest rate of LIBOR +1.06% per annum. And the Company remained and kept its high level of liquidity, with a net cash position at the end of the second quarter of $524 million.

From our backlog, as of June 30, the backlog for the ERJ 145 70 totaled 41 aircraft, all of which will be produced and delivered to the Chinese market.

The firm order backlog for the E-Jet continued to show the high acceptance of this model in different regions of the world, accumulating a total of 437 jets to be delivered. And also on the backlog, including the commercial aviation, the executive aviation, and the defense and government segments totaled a new record of $20.7 billion at the end of this quarter, with special attention to the backlog of the executive aviation segment, that increased from $4.5 billion at the end of the first quarter of this year to approximately $6 billion in the second quarter of 2008.

With the 97 deliveries in the first semester, we affirm our delivery forecast for 2008 to deliver between 195 to 200 jets, tending towards the upper end of this guidance, and on top of that, 10 to 15 Phenom 100s.

Investments on R&D and the D&E will continue at the same level as previously disclosed of $243 million and $330 million, respectively, for 2008. And for 2009, our R&D investments are expected to be $352 million, and for CapEx VP&E we expect to invest $270 million.

Now we're going to open the session for Q&A, remembering that first we will answer the questions from the analysts, and after that we are going to answer the questions of the journalists. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question comes from Joe Nadol of JPMorgan. Please go ahead.

Thank you. Good morning.

Good morning.

Good morning.

My first question is on the R&D. You maintained a gross R&D of 243 for the year, and year to date, you're over $160 million, and I'm just wondering why the dramatic reduction is expected in the second half, and how much confidence you have in the forecast.

Yes, Joe--good morning first. I would see it dramatically reduced on the second half of the year. We are still analyzing the impact of the new models on our expenses of R&D. It's something that we do attest to that number previously recorded. But of course, we have studied, and if necessary, we will go public again and disclose if there is any change in the number or the new expectation that we might have if we see that there is a need to go public and tell the new number. But so far we are still keeping at that as the number. We are analyzing the change of and increase in that number, and so far we are keeping the same guidance for the year.

If the upward pressure, how much of that's related to currency, which I know is definitely hurting you, and how much of it's related to cost increases on the Phenom?

Yes, I'd say if you compare the currency, we had an appreciation of the currency of 16, between 16% and 17% in the comparison of quarters. And as you know, 97% of our expenses on R&D, they are real-denominated, so there is the balancing fact of those 16% to 17%, and the remaining is really the cost structure that we have finalized.

But the Phenom, I guess maybe a better way of asking this is how is the Phenom, how are the Phenom programs going in the Lineage, and are you on track for delivery of the 100 in the Lineage before year end, still?

Well, Joe, this is Fred. We were also a bit surprised with this higher R&D number, so I think your question is a very legitimate one. We had to answer fast how the thing will progress in the second half of the year. The Phenom program, the Phenom 100, both are going well. Most of the flight test campaign is over. We do expect certification some time around September or October. And yes, as you said, there's the exchange rate there. But we have to look into where also the crosses are writing. We do not have any events such as a major problem or something, it's just we're also a little bit surprised by the higher-than-expected number in the second quarter.

And the Lineage, Fred, the special conditions that are attached to it?

Yes, the first prototype will be coming back within several--we do not know exactly--but it's a matter of weeks now, fly back from the United States for final completion in Brazil and certification and delivery before the end of the year. So we are on track for both certifications, the Phenom 100 and Lineage 1000 and the first of the year is still in this exercise of the year.

Okay. Okay, and then a second question is just on the airline outlook. We've seen a couple--certainly, there's a lot of strains on the global airlines. We've seen some deferral announcements, specifically from Jet Blue and, I think, Virgin Blue, and I'm just wondering, as you look out to 2009, and the 171-90 program, how securely you feel about your ability to put other airlines in those slots and maintain 14 a month?

Yes, those two are (inaudible), that they are already and are taken care of. We've also impacts of deliveries for either this year or next year. So at this stage, the remaining question is options that we still have towards the end of next year, which is actually, it's been exercised. We are completely sold out. There have not been, we have to seek for some acceleration or some new customers. So at this date, I think we feel reasonably safe. Starting in '08, absolutely, it's everything is fully, fully--it's a solid 100% sold out deliveries out and next year, the only question remains not have any (inaudible). We do have a few options towards the end of the year which will have to wait for the contractual exercise dates to verify whether or not they will be exercised. And then we may have to seek for some (inaudible) more or a generation of existing orders. But reassuring both guidances for '08 and '09.

Okay. And then just an accounting question, finally. You had a larger-than-usual ForEx expense in the quarter. I don't know if Antonio or Rodrigo could shed some light on that and what your expectations are from that line and the rest of the year.

Yes, Joe, just a second. Joe, just one second, please.

This is Rodrigo speaking. Many of the gains last year on those lines are because of the appreciation of the real compared to US dollar, and because of the fact that (inaudible).

But it was much larger than usual, and the real has been appreciating for a long time. So was there something different that happened in the quarter? Was there a maturity of a hedge or something like that?

Yes, maybe one parts comes from this, and the other part comes from the difference in the liabilities and the assets. Investing market currency and that thing is considered the exceptional result in that quarter.

Okay. So we should expect that to decline for the remainder of the year, then?

Yes.

Okay.

That's (inaudible).

All right. Thank you.

You're welcome.

The next question comes from Bernardo Carneiro of Deutsche Bank. Please go ahead.

Hi. Good morning, everyone. I have a couple of questions. The first one, I'd like you to explain a little bit the positive revenues in the other operating income line which came from the sales of spare parts or the delivery of spare parts.

And the second question, I would like to have some color on the demand for business jets in the US. We are hearing that traffic control problems in the US are getting bigger because of congestion in major airports in the Unites States. I would like to hear your thoughts about that demand for the situation in terms of authorities in the US trying to control in hope that they could alter the situation that country.

And my third question, I'd like you to remind me and give me some color on the fact that you had such a low income tax. The Company reported a very low income tax rate of just 6% of pre-tax earnings, and I would like to have some more information on that. Thank you.

Okay, let me just observe that the issue on the royalties and the spare parts and others. This quarter, when we analyzed the other operating income and expenses, we saw that the most, the higher item of it, the most significant item of it, was the rights that we received from spare parts. Of course, that has been happening in the previous quarters, too, but this year, as other points on that line, were not--the most significant one was royalties. Those royalties, they would present some amounts that we receive from our suppliers when they sell parts directly to our customers. So we are entitled to receive royalties related to those spare parts that the suppliers sell directly to the customers.

And on the income tax, the low income tax, we always have the currency that affects the data of our calculation of our income tax. And you also have to consider that we have here in Brazil, we have the, I'll have to speak in Portuguese, but it's (spoken in Portuguese), which is a benefit that we have on the investment on R&D. So that also had a very strong impact on the calculation of our income tax.

And now I'm going to give this to Frederico.

On the business jets, of course, and there is a correlation between the GDP and the demand for worth with business aviation. But still the signs from the market are assuming that it is very robust, the short-term signs you can verify by the increase of our backlog. Of course, that increase was boosted by the launch of those two new models which we have several LOIs, which became subcontracts with the project, so part of that increase is of the first actual sales of the Legacy 450 and 500. So we kind of are sitting on a very strong backlog, and by the way, progress payments are happening as scheduled, so we have not had defaults except for one or two Phenom 100s, which we can easily move the line up. So in that sense, we have other progress payments on the Phenoms which are to be delivered this year or next year. They're happening as planned. So we really do not see any immediate threats to our either, neither backlog nor delivery for our business jets.

But of course, at least structurally, if the current stress situation in the US economy and higher prices, if they keep being like that for a long, long time, it is obvious that the industry will be affected. But at this stage, we do not see any short-term threat.

But I also have a question to your Camargo, so basically, the Company is increasing investing and the expenses, which may have more savings by this (speaks Portuguese) allowed by the government. So can we expect continuing low income tax rates going forward, around 6% to 5%? Or the currency has a greater effect in this (speaks Portuguese)?

You have another, all considered, we work with those interest expense levels. The Company does not work with those low levels. Of course, history has shown that we have had those levels. But, and of course, there's a limit for the benefit that you can use out of that (speaks Portuguese). Of course, we have not exceeded the limit yet, but there is a limit to what, just about just investing on that, and expecting to reduce the effect that would have because of that. But I would say that as we answered in the first question, yes, that's one R&D is something we are still in the (inaudible). We are seeing the numbers. There isn't mostly increase EBITDA, and but for the rest of the year, best of the income tax, we are not working double across currency. It will continue having some impact on it, but those very low numbers are not the numbers that we work on our forecast.

Okay. Just going back on the third-party sales, why does the Company report in the other operating income instead of reporting as other revenues on the top line?

Because those are, we do not have a revenue from the sale of the parts directly. We receive a royalty over that sale. For the revenue of the sale, you'd follow the supplier. So it's something that we have, we already recognized. The royalties that we receive over, so it's not a direct revenue over the sale.

Okay. Thank you very much.

You're welcome.

The next question comes from Hassan Sabir of DA Capital. Please go ahead. Mr. Sabir, your line is open, sir. Hassan Sabir of DA Capital? Okay, we will go to the next question. Ron Epstein of Merrill Lynch. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Question for you, Fred. The announcement you guys made just a couple, maybe a week or two ago, about the two facilities in Portugal, maybe you could just give us some more information on that and color, what you're thinking there?

Sure. One of the elements, one of the strategies of our recovery process is we invest into leaner manufacturing operations and automation as well. So as we, of course, as we grow, as we have more products and more investment in industrial activities, we are seeking to have investments in state-of-the-art, highly automated facilities. And we, in that strategy, this is exactly what we decided to do in terms of, number one, a composites facility which has, of course, a technological strategic importance for us. We have been doing composites for almost 20 years now, but there are new processes out there. As you know, we have been investing significantly in pretty competitive technology, and one of the main avenues in industrial research is composites. So we're going to have state-of-the-art processes in that facility.

The other reason, although it's not driven by the same technological appeal, but very large machines, complex machines, and very large metallic assemblies such as typically the (inaudible) wing box. We, if you analyze the supply chain in the world, we think there is two elements. One is the real significant margin there which can be captured. If we do our work properly, we're going to capture that advantage in terms of costs. And number two, also in terms of bottlenecks. We cannot run the risk of having problems with supply like spars or anything like that. So there is also this strategic valuation difference.

Those investments, they were absolutely, they do happen somewhere, so they were already in our planning, so this is not on top of what, there's no change in our (inaudible) year guidances. The location of that, of course, we looked at it from Brazil, we looked from Mexico for other, you know, Eastern Europe. A combination of volume of investments and also the legal incentives that may be brought by the local governments, and Portugal was our preferred choice.

Okay. And does this have anything to with OGMA, or is it completely separate from OGMA?

That's totally separate. This is Embraer.

Okay.

I know we have, we have the other shareholders in OGMA. This is Embraer.

Okay. Okay, great. And then for Carlos, maybe a couple of quick financial questions. The SG&A in the quarter was much lower than kind of the previous run rate. Do we expect that for the second half of the year?

Yes, it's going to be in line with what we have seen. Of course, never forgetting the effect of the currency, but to date we have been offsetting very well with the (inaudible), so it's certain that for the remainder of the year, it's quite a number that you can work with the numbers that you have shown in the first quarters.

Okay. And I noticed this quarter you guys didn't have employees' profit sharing on the income statement. Is it someplace else, or are you doing some sort of different incentive?

No, we have, after discussing with the auditors, we have decided it would be better for the Company, it would make more sense if we just move it, the profit sharing in the area where the employee is allocated. So profit sharing for engineering is on the R&D line, from the production team on the product line, from the people that are selling side, on the selling expenses, and for administrative people is on the G&A line. So we just, we still pay the profit sharing, but we just moved the line. Instead of having one single line for it, we now are adding it to where it is generated.

Okay. And then I look, I need one more financial question. I believe your official EBIT operating margin guidance was at 8% to 9% for the year. Given that you were below that first quarter, this quarter you guys were just a smidge below 7%. Do you think you can make that, can you make up the difference in the second half of the year to get to 8% to 9% for the year?

Yes, we believe we can. Remember, Ron, we have $80 million, the combination of the specification of ten 100s which will help us, but if you do the math, taking aside this $80 million nonrecurring event, which was part of the guidance, and we had to choose something like 8.8% in the second half of the year. And we believe it's doable.

Next quarter, probably we'll do something materially equivalent to this quarter, and we expect to have a better fourth quarter with higher number of deliveries.

Okay, okay, that's good. And then I need one more question, Fred, and then I'll let someone else ask a question. With the change in the fuel prices and more talk about turboprops, has Embraer thought about getting back into the turboprop game?

Yes, we are. We are thinking--we've actually--we constantly look at the market, at the customers, the product, it's a means and not an end. So in the past, in the recent years, of course, turbo props, they were really a niche product, and our vision today is that they may become again a real platform for whatever number of facts, up to 70, 80, 90, 100, we don't know. We are studying heavily what is the next--which are, actually, the next platforms for commercial aviation, both in the small and also on the higher end--new engines, et cetera. And definitely turbo prop is part of the, it's is back to the drawing board in the sense of--not the drawing board, I'm sorry--back to the analysis board in terms of a possible platform for region aviation.

Okay, and then just one last one. The $80 million that you get for the Phenom in that second half of the year, that's an R&D offset, right?

Yes it is, correct.

(Inaudible), that's accounted for in the 243, right?

No, the 243 is the gross amount.

Okay? So, yes, we are really, in that sense, as Joe noted earlier, we are really off track that we have to go deeper. And, certainly, actions are already being addressed to, I meant being thought up to be addressed to make sure that we do not overrun our 8% to 9% EBIT.

Okay, great. Thank you, guys.

You're welcome.

The next question comes from [Hassan Sabir] of DeA Capital. Please go ahead.

Hi. Congratulations, guys, for a great quarter and all the achievements for the first half of the year. I just had a very quick question regarding the AMR-135 that they plan to take down and they're taking a charge for it. Is there any recourse to you guys? And how will that be handled, if it is?

Well, we are working with AMR. They are obviously not in default, and we have absolutely no expectations that any airplane will have any problem in terms of defaulting of payments or something. What we are doing with AMR is working with them to see how we can possibly help them to re-market those airplanes, not necessarily to the commercial, to the regional airline market, but even considering other alternatives. So it's a proactive, constructive joint work to see how we can gradually, or they can gradually reposition their aircraft.

Okay. But they have already taken a charge for that in their second quarter--a massive charge. So how does that work out for you, then?

Well, we have no direct impact. I believe the charge was due to the fact the airplanes are on the ground, and they are paying that service with--those airplanes are financed by BNDES, and so I cannot speak on their behalf--but I would assume this charge is, it's payments they are honoring, vis-à-vis the non-revenue or no generation of wealth due to the airplanes being parked.

Hassan Sabir. Thank you very much.

You're welcome.

The next question comes from Rodrigo Goes of UBS. Please go ahead.

Good morning, guys. Just to be sure, then, the 243 number for R&D this year, that should be after the contribution from your sharing partners. That should be closer to 153, is that correct?

Yes, yes. As it is a gross amount, and you take out the $80 million, yes.

Okay. What's the expectation for next year in terms of contribution for your sharing partners? Otherwise, the 352, what should that really become?

It is pretty low because the higher part of the recognition comes with the certification of the first model of any of the (inaudible) family. So for next year, it's something around $20 million, $20 million to $25 million. It's not such a relevant number, closer to 2006. Yes, we're going to have the certification of the 300, so it's not such a big amount, so it is something around $20 million to $25 million maximum.

Okay, perfect. The royalties--is that something we should expect going forward? How do we model that line?

I would not say so, Rodrigo, because we did have a concentrated effort. We had those rights in our contracts, and I would say they were not being properly enforced by Embraer, and so we have kind of a task force to recover some past due. So I would say no. There will be something, but we had some cumulative effect in this quarter.

Okay.

You have to consider that at this specific quarter, it had a bigger impact on the other operating income or expenses. But it's (inaudible) we're going to have in the coming quarters, too.

But not necessarily--

But not necessarily as relevant as it was this quarter. We are turning every stone here.

Okay, okay. And profit-sharing, that should be just--that line goes to zero, basically, going forward, with those expenses being allocated elsewhere?

Yes, yes.

Okay. Finally--well, just, more really quickly-- interest expenses, actually, the interest income, I should say. That was way, way ahead of what I had modeled out. Is your--I guess is the real component, I guess the real piece of your cash balance, is that collecting CDI, is that why this was so high? How should we look at that line going forward?

We have the investment in reals, throughout the year for positive trends, and (inaudible) from it--.

Right.

And you have also these are from hedge instruments, too, that you have the quality reserves from it. But as we mentioned, we have--let me just get back to the number here--44% of our cash position, it is in Brazilian reals, and it is invested here in Brazil.

And so assuming your cash balance is more or less stable, that should be a recurring number?

Yes, it should. Of course, you have to always consider the hedge results. But on the real portion of our cash position, you have to consider it.

Okay, okay, perfect. And, finally, just on your gross margins, what shall we expect for the remainder of this year and perhaps for 2009, if you could give us some color on that?

You have, as Fred mentioned, we expect, in terms of deliveries, the second quarter to be pretty--the third quarter, I'm sorry--pretty close to the second quarter with (inaudible) for the fourth quarter because of the high number of deliveries. We believe that the fourth quarter is going to be a very positive indicative of what will be for the next year. So, but of course, the level that we are presenting today is something that we expect to have improvement.

We are pretty much focused on guidance until then and estimate on the EBIT margin for this year and for next year, which are still pretty much achievable for the Company.

Okay, that's good. Thank you very much, guys.

Thank you.

The next question comes from Nicolai Sebrell of Morgan Stanley. Please go ahead.

Good day, gentlemen, two questions related to the ERJs that you're working with AMR and other companies within the US. The first is, how many ERJs in the US are coming due or have value guarantees that are coming due over the next 12 months, or in 2009, or however you think of it?

And then the second one is how big is the size, how many ERJs are there in the US today relative to how many you think the demand will be, one or two years down the line, given how scope clauses have changed?

We have, I think, roughly, 650 airplanes in the 145 family of aircraft in the United States, roughly. And the combined--and I think probably there are something like 1,500 between the two manufacturers. We did recently a very thorough study, an analysis on what is the potential attrition of those airplanes. We believe something between 250 and 350 airplanes will exit the U.S. market within the next five years. This is a result of our analysis, of course. We are working to the extent we can work to make sure that this exit is organized and they find homes somewhere else, either secondary markets in the emerging markets such as Russia or Latin America or Africa but also in conversions to our applications such as VIP or such as corporate shuttle or whatever. So this is the global picture we have on this thing in terms of the RBG. Antonio?

We have the (inaudible) to finance these (inaudible) and we needed to help them but did not have an obligation in relation (inaudible). If they don't incur (technical difficulty) we have only to support to the finance, not we have to support the client at this moment. Our obligation really is of the financing if it happens somewhere and it will offer the client.

Okay. So if we were to take those 250 to 350 jets or just call it 300, the midpoint, would it be reasonable to say maybe a third of those, or between a third and a half of those are Embraer airjets? And so my question would be of that portion, do all of them have some sort of guarantee associated with them, or is it just a portion of them?

Yes, well, I think it's fair to assume that at this stage, and that those numbers are, of course, they are--they come from models and some bottom-up analysis-- but I think it's fair to say if the market share today, the bulk of 45 and 55, 45, anywhere to 55 Bombardier. Let's call it half. So it's fair to imagine that about half will be the ERJ aircraft. And the answer is no, we do not have warranties on all aircraft.

I'm sorry, say that last part again?

We do not have warranty for all ERJs that are sold. We do not have. Some, but not all.

And "some" means half or a third or a majority?

A majority to deliver, all the 1,000, the majority, but it's no more than 50% of this.

We have the same information on the (inaudible) right?

Okay, all right, perfect. Thanks a lot, guys.

You're welcome.

The next question comes from Steve Trent of Citigroup. Please go ahead.

Good morning, guys.

Good morning, Steve.

Oh, good morning. Most of my questions have been answered at this point. Just, actually, one thing--the Legacy 450 and Legacy 500, which you guys are planning on launching 2012, 2013. Any color as to whether you have partners on that, that might help you along in terms of contribution to the R&D expenditure?

Yes, absolutely, yes, but at this stage, I don't think we are disclosing any figure.

Yes, we just disclosed the $750 million total estimate, but as we were still negotiating with some of the suppliers, it's something that we didn't make public yet.

Okay, fair enough. Thanks very much, guys.

You're very welcome.

Your next question comes from Joe Nadol of J.P. Morgan. Please go ahead.

I just had one follow-up, which was on the finance and guarantee side of things. You know, Mesa has been struggling, and I'm wondering if--what you can tell us about your provision to your reserves on any guarantees for Mesa?

Joe, we have in our [20SE] the provision for some financial guarantees there, and it is not really considered as working very close to Mesa. If you need or not to make some provision in (inaudible). We have that all off balance information today. And we are looking very close at them and if we feel that is becoming risky, certainly, we are going to make that provision is more. But in this moment, we don't have inside our balance sheet any kind of provision for them.

You don't have a provision?

No, no, not yet.

Okay, just judging by the stock market, which, obviously, is a very imperfect indicator, but the stock is down over 90% in the last 12 months, and it's been very public that they have some liquidity concerns.

Yes, we understand that, and we are very close in this what would be possible to put at best (inaudible) in another client. That is because that we work with them, and we believe in this moment this order is not big for us.

It's important to say, Joe, that they won the first level of the court. They won the case, I mean, they are-- not against, but defending from Delta's actions, so at this stage, we don't really know. We do know that there is a very intense negotiation between several parties, and majorly between Delta and Mesa. We do not have a more direct participation on those, but it's--I think the likelihood the airplanes will just be dumped as it seemed (inaudible) maybe a couple of months ago. I think today the likelihood of that happening is lower. But we are monitoring this very, very closely, and if we think this thing will--so far, we think there will be--no overnight solution, but if we determine that there is not, of course, we have to make provision for that.

Okay. Thank you.

The next question comes from Jorge Moro of Legg Mason. Please go ahead.

Hi, Carlos. Thanks for taking my questions. I have a quick one. Basically, if you look at your backlog, and the composition, if you do, roughly, a quick calculation of, like, price per plane, it looks to be moving up quite impressive. Is this because of a change of mix? It is because you are raising prices, a combination of both, just ask quickly can comment on that. Thank you very much.

Yes, I think of it as a mix. Of course, when you have more executive jets, they have a high impact. Of course, when you analyze this, see more deliveries for the 190 and the 195 jets, we churned the biggest portion of our backlog and, of course, the deliveries have been (inaudible), too. You have that contributing to those positive issues and, of course, you have always to consider the escalation that we apply on every aircraft that we deliver through the year. So I'll say that it is a combination of escalation; of course, the mix has an influence. Mix, inside the--between segments, that, like, executive and commercial and, of course, the mix internally on each business segment, too.

Thank you very much.

You're welcome.

The next question comes from Augusto Encici of Morgan Stanley. Please go ahead.

Hi, gentlemen. Good morning. Before I ask about your recent announcement that you are raising expectation of biz net revenue from 20% to 25% of the total by 2010? Do you expect that because of increased biz net revenue or just maybe an increase relative to the others as in maybe commercial revenue would go down?

No, it's business jet outgrowing the others. We see growth across the board. As we are fortunate, we have this very severe R&D effort in the business aviation market with the Phenom 100, with five models listed in development. The two CMs are (inaudible) and now starting the two new Legacies. And as far that goes, when they come into service, they're going to help us out a lot in terms of generating revenue. So by 2010, we shall reach a much higher level of Phenom production at both 100 and 300 and Lineage, of course. So that is the reason.

Okay, great. Thank you very much.

The next question is a follow-up from Ron Epstein of Merrill Lynch. Please go ahead.

Hey, guys. Just a follow-on to Joe's question. There was some speculation in the press that you guys purchased back from Republic some of the ERJ-135 LRs. Is that, in fact, true? And, if so, how many have you guys gotten your hands on?

This is not rough. This is part of the--the answer is we are trading in 15 ERJ-135s, which is an old commitment we had from one of several contracts we had of E-jets in the past. Remember, we have over--today, I think we have 210 or so airplanes at Republic, and more than half of those are E-jets. So in that scope, we had--they had a choice, actually, to keep the airplanes or trade them in back, and they decided to take them back. So this has been known for some time, but there is no problem. They start coming in October, yes.

And that we would, the jets have a provision for up to 18 aircraft before--that we're marketing.

Yes, and we have already a home for some of those, and so this has been at work for some time by our used aircraft guys.

Can you say what region of the world -- the home you found for them has been?

So far, Brazil.

All right, great. Thank you.

You're welcome.

The final question for today comes from John Venusti of Kynikos Associates. Please go ahead.

Yes, hi, good morning.

Good morning.

Just a couple of quick questions. I thought I had heard that you were reiterating your '08 and your '09 guidance. Can you give us a refresher on the '09 guidance?

Sure. In terms of revenues, $7.1 billion in terms of delivery, a range between 195 to 200 aircraft, and on top of those, between 120 and 250 Phenoms. In terms of EBIT, something that's in 10% to 12%.

Great, thank you. Another quick question regarding your 190 and 195. I noticed that there were no new orders in the second quarter for those aircraft. Correct me if I'm wrong about that, a. And, b, can you comment on that? Should we take that as a seasonality factor, or is there an industry conditions or competition rising in that area?

A, you are right. We had 175 but not 195s, and I think this is just due to, number one, there is a clear reduction of activity in terms of new aircraft demands, but we have several campaigns going on, which this did not happen, we did not have anything happen in this quarter, so nothing specifically to alarm.

But, of course, not having the U.S. market buying any aircraft, this is--you know, the U.S. market still is 50% of the world (inaudible) for any type of aircraft. So, of course, it puts another (inaudible) across the board in the whole industry--some pressure.

Right, okay. So you think it's more industry conditions rather than competition coming from other--?

Oh, absolutely, yes.

Okay, great. Thank you.

You're welcome.

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, thank you all for taking the time to be with us this morning, and as we have been saying consistently for the last 15 months, we have a plan to recover the Company. Of course, we had some extra headwinds with the Brazilian currency, with the situation abroad, but the message is we will adapt and keep adapting ourselves to make sure that we keep on track despite the extraordinary effects that may happen such as a worldwide decrease in terms of wealth or high oil prices. So we are attuned and continue to be very confident that the major stress of the company is diversification towards the business jets and investments towards automation and lean manufacturing; working also to reduce our indirect costs.

I think all those fundamentals, they are basically the strategies which will allow us to keep improving our results and keep our recovery plans on track. So appreciate, again, your time this morning, and we will talk again within three months. Thank you.

If you need any further information, please call the Investor Relations Department within the Company.

That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day and thank you for using Chorus Call Brazil.