Embraer SA (ERJ) 2014 Q2 法說會逐字稿

Presentation

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's second quarter 2014 results. Thank you for standing by.

(Operator Instructions)

As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br.

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 Curado, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; and Mr. Luciano Froes, Director of Investor Relations.

I would like now to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.

Thank you. Good morning, everybody, and thanks for joining our second quarter 2004 (sic) earnings results teleconference. As usual, we'll go through the presentation, and then we'll be ready to open for questions.

We will start on page 3, starting with the highlights of the businesses. In the first one, the commercial aviation business, we had a strong execution in the second quarter of 2014, with 29 deliveries, accounting for 43 E-Jets through the first half of 2014.

Regarding new E-Jet operators, we added two new airlines, the Borajet from Turkish and the Royal Air Maroc, in this quarter.

In relation to new aircraft sales, we had some good announcements, starting with Aurigny Air Services, with acquisition of one 195 E-Jet, and also some good activity in the Chinese market, with ICBC Leasing and HNA Group, which included current generation and E2 sales, as well.

Moving to next page, page 4, continuing sales announcements, highlighted for four deals. Trans States signed a deal for 100 175-E2s. Azul, with a signed LOI for 30 E195-E2s, with 20 options. The Fuji Dream Airlines placed an order for three E175s, plus three options. And Azal, from Azerbaijan, that ordered two additional E185s.

As far as demand status of the E2 family, we are happy with the current figures of 590 orders since the launch of the program, that including 210 firm orders in this total.

Next page, page 5, executive jet highlights. Starting with deliveries, like the commercial segment, we also had a strong execution in the second quarter, with 29 deliveries and accumulated of 49 aircraft deliveries in 2014.

Some also important milestones in recognition of our products, we had the Phenom family delivering its aircraft number 500, and also the Phenoms were elected as "best of the best" by Robb Report, another important information for this category.

As far as product capability, we had the Phenom 300 receiving certification from EASA for a steep approach operation, which opens up additional flight possibilities such as London City airport.

Moving to next page, defense and security highlights, we inaugurated the final assembly hangar for the KC-390, along with the contract signature for 28 units with the Brazilian air force.

In relation to the Brazilian fighter program, Embraer signed the MOU with SAAB for this project, and this is tied to the agreement between SAAB and the Brazilian government.

In relation to product maturity, our Xingu model celebrated 30 years of operation with the French air force and the French navy.

In relation to our controlled subsidiaries, Atech won two important projects with Brazilian federal police and India government. And Visiona continued to advance in the satellite program, with the conclusion of the preliminary design review phase.

Moving to next page, and finalizing the Company highlights, to mention two MOUs recently signed, with the first one, with Embraer, to assess liability of critical systems in the oil and gas industry. Possibilities of having contracts in this segment. And also, the announcement that Embraer and Boeing signed the MOU for implementing the sustainable biofuel R&D center in Brazil.

And with that, we now move into the financial information and results. We move to page 9, starting with the backlog information. Slight reduction compared with the first quarter, reflecting the strong execution in the quarter. But it's important to recall that part of the sales that was informed in the previous pages will be included in the backlog in the following quarters.

Next page, page 10, as far as deliveries, we already mentioned that we had a total of 58 deliveries in the second quarter: 29 in commercial aviation and another, the same amount, in executive jets, broken by 22 light jets and 7 large jets. We are maintaining our guidance for the year, as we expect a more balanced profile between the first and the second semester.

Next page, page 11, as far as revenue by segment, reflecting the good deliveries and performance, all business segments showed growth in the second quarter compared to last year. We had by business: $972 million in the second quarter for commercial aviation; $421 million in the executive jet business; and $357 million in defense and security -- almost $1.8 billion in the second quarter.

Specifically in the defense/security segment, we saw a slight reduction in revenues compared to the first quarter, in line with our indication and guidance, and by that we reaffirm our revenue guidance by segment for 2014.

Next page, page 12, in terms of consolidated net revenues, we reached $3 billion in the first semester of 2014, BRL6.8 billion, and we believe we are well positioned to meet our guidance for the full year, which represents $6.0 billion to $6.5 billion for 2014.

Next page, in relation to operating expenses, we reported $168 million SG&A expenses in the second quarter, accumulating $308 million for the semester. The slight increase from the first quarter is in line with our indication given in the first quarter when we announced the earnings. It's important to note that the year-to-date SG&A as a percentage of sales is approximately 10%. Operating expenses continues to be one of our main focus items in terms of management and cost control.

Next page, in relation to operating income, in the second quarter we had $187 million operating profit, with a 10.6% margin. For the first semester, operating income was $279 million, with a 9.3% margin. Once again, we expect a more balanced first and second semesters, and we are maintaining our guidance figures for the year, which represents a range of $540 million to $620 million in terms of EBIT and margin range between 9% and 9.5%.

Next page, as far as EBITDA, reflecting the previous operating figures, we reached $261 million in the second quarter, with a 14.8% margin, and $412 million in the first half, with a 13.7% margin. Also, for EBITDA, our guidance remains unchanged for the years, to the range of $780 million to $910 million, with a margin between 13% to 14%.

Page 16, next page, as far as net income, again reflecting the good performance, we reported a net profit of $143 million in the second quarter, with an 8.1% margin. For the first six months of 2014, the Company reported a total of net profit of $254 million and an 8.5% net margin.

In page 17, next page, in relation to inventories, we reported a total of $2.4 billion in the end of the second quarter, slightly below the figures for the same period of last year and also being monitored very close, which is key for our working capital management.

In page 18, regarding free cash flow, we had an outflow of $150 million in the second quarter and $554 million accumulated year to date. One of the primary reasons for this result was the increase of approximately $250 million in accounts receivable, mainly related to defense contracts. Of this $250 million, $150 million was already received in the very first days of July. The balance, we expect to be received in the second half of the year. With that being said, we are maintaining our free cash flow guidance of low double-digit for the year.

Next page, page 19, as far as investments, we had a total of $128 million year to date, broken by $21 million for research, $59 million for development, and $48 million for CapEx. For development, it's good to report that these figures is net of supplier contribution.

Although we expect higher investments in the second half of the year, we see some potential to end the year slightly below the $300 million for development. We had a guidance of $320 million. For research, we see a similar trend. And with regards of CapEx, that should be ramping up in the remaining of the year. But summing up all of this information, we are maintaining our investment outlook for 2014, of the total of $650 million.

Next page, and finalizing this presentation, in relation to the Company capital structure, page 20, we reported a net debt figure of $114 million in the end of second quarter, largely explained by the cash flow performance, as discussed.

Regarding our financial debt, we still show a very comfortable profile, with only 4% maturing in the next 12 months and average maturity of 5.7 years, in line with our business cycle.

With that, we conclude the presentation. We are now ready for the questions. Thank you.

Thank you. (Operator Instructions) Cai von Rumohr, Cowen and Company.

So, following the good orders you got at Farnborough and just after, maybe you could give us some color on your comfort with your ability to hold production of the RJ line until you bridge to the E2?

This is Fred. Well, there's no real change from last quarter. We remain comfortable.

As you may have seen, the order we had from Hainan Airlines, a large operator of 190s -- 40 aircraft, have been [trading] existing new ones and [training] new ones -- I think reinforces our theory. It's a good example of our theory that there is demand for aircraft right now, and there is demand for next generation aircraft down the road. And the commonality factor will play an important role in that exchange. So, we remain comfortable. So far, so good.

Can you give us some color in terms of how far you're sold out or how much is sold of 2015 and 2016 or where you still have slots that you need to fill?

Qualitatively, 2015 is looking good. We still have a few slots to fill, but we do not anticipate any issues for 2015. And 2016 looks certainly much better than what we had maybe a year or two years ago. And keep in mind that we do expect some activity in larger quantities in the United States for next year, for deliveries in 2016, 2017, and 2018. So, that's where we are.

And then, a quick one on other expenses. It was $19 million in the quarter. I just jumped onto the call, but can you give us a little color in terms of what was in there and what you expect in that line item for the year?

This is Luciano. Others was pretty stable, slightly down when compared to the same quarter last year. So, we had given an indication this line should hover at around the mid-teens -- so, around $15 million, or so -- as an expense in the quarter.

Note that the reduction in cancellation fees that we saw from previous years, given the executive jets environment, that also translated more to, again, this line being balanced at this level of expense.

So, that's what you can plan for that line.

Thank you very much.

Joe Nadal, J.P. Morgan.

First off, I was wondering if you could provide us with the segment operating margins?

Sure, let me just --. In rough numbers, commercial aviation for the quarter, around just a little bit north of 11%; executive aviation, about 8.5%; defense and security, about 9.5%. And there is some others which are small, ancillary revenues. So, this is pretty much the breakdown.

Okay. That's much more even balanced than you had last quarter. I was wondering in particular on the executive side, as you look quarter to quarter, was the big improvement just volume? Was it price? Just if you could make the comparison and talk a little bit about the business jet environment?

Yes, I think it's a combination of volume and mix.

And more broadly speaking, what are you seeing in the market right now, for business jet demand?

Well, no material change. No fundamental change from what we saw last quarter. Market has not rebounded yet. Some softening in emerging markets, I must remark. Nothing that I think changes fundamental in the fundaments of the potential demand, but there has been some softness in China, for example, and in Brazil. Those markets are important markets for any OEM. But again, I think they're more temporary; that's at least the way we see it right now. So, no fundamental change.

In the US, US remains catching up, as we have mentioned in our last conversation. So, there's some good news. And there is some more balancing now in the emerging markets. The US is getting stronger. So, I think overall it's pretty much the same picture.

Fred, just one more question on that, you mentioned the emerging market, a little softer. You think it's temporary. Is that across your product line? Or, is that at the high end or the low end, specifically?

I think it's more actually -- it's a direct consequence --. Well, I probably have two different answers. In Brazil, it's part of the whole macroeconomic scenario, some uncertainty. We have elections coming up in a few months. So, it's not only airplanes and not only high or low segment; it's across all the economy. So, there is a caution, let's say, a sentiment.

In China, I think the question is much more on some question about luxury items in general. So, I don't think it affects a specific segment -- affects business jets, affects yachts. So, in China, there is a kind of a sentiment now about luxury, which everybody whom I talk with think that, yes, there will be an impact in the short term, but the potential demand, the outlook, is so strong that there is simply no way that this thing will be there forever. So, how long that's going to wash out, I don't know.

But those are the two main trends that we see in those two markets.

Okay. And I have just one more. Your margin year to date is 9.3%, I believe, EBIT margin. Usually, you're stronger in the second half as the volume goes up. So, your guidance looks pretty abundantly conservative at this point. What would you highlight as --? I know it's only Q2 here and anything can happen, but what would you highlight as the risks that have prevented you from raising the guidance here?

Joe, you may recall that we had mentioned several times we have been trying very much to maybe have a better balance between the first and second half. I would love to have quarters which are very close to each other as far as our revenues and results, et cetera; so, not much volatility. We are not there yet. So, we still see some variations from quarter to quarter.

So, having said that, in 2014 we do not expect, for example, what we saw last year, when we had the first -- significantly stronger second half compared to the first half. So, we have a more balanced year. That's why we have not revised upwards our guidance.

We do expect an equal or better path the next half, of course, to get to our numbers. Probably more concentrated -- not probably; certainly more concentrated in the last quarter. So, last quarter will be certainly stronger than the third quarter.

But at this stage, I think I probably could say that we don't see much downwards or downside risk. The best assessment we have is delivering the numbers. Some upside risks, maybe. We are not at all in a position to revise our guidance. So, it's conservatively good, I think, at this stage.

Okay. Thank you.

Noah Poponak, Goldman Sachs.

Fred, the Company keeps beating margin expectations on the P&L, but missing free cash flow expectations on the cash flow statement. I hear what you said on accounts receivable in the quarter, and I understand the business is pretty lumpy from a working capital and CapEx investment perspective. But just if I take a step back, big picture, free cash conversion has been pretty weak, going on four years in a row now.

I just wondered if you could talk about how much you're looking at that, how much it concerns you, how much you're trying to change it, and what you can do to change it? And to the extent that you can talk about at least the big working capital and CapEx items in 2015/2016, so that we can see how cash progresses as we move forward, that would be really helpful.

It's a very good question. We are certainly, as I think to your question last quarter -- maybe it was Ron's; I don't remember; or, Joe's -- we absolutely look at cash as one of our key performance indicators.

We did have this, let's call it, a little abnormal situation where $150 million which we did expect to be received in the last quarter, they were paid in the first days of July. So, we should have broken even on the quarter.

And this $250 million, if you compare the position of our year-end 2013 to where we are now, or to the second quarter, this $250 million which are -- they should have been converted from accounts receivable to cash. And that would pretty much put us in line with our planning to deliver our expected figures of break-even at the end of the year, or slightly positive. I think low double-digits is our outlook.

I think it's quite an achievement, that we have to take into account we are IFRS and we are developing significant quantity of programs in parallel. So, therefore, the volume of investment that we have, we must look at Embraer Air in a more, let's say, longer cycle.

If you're looking for, let's say, a classic one-to-one cash conversion ratio, we are not [here]. We have been investing heavily in all three of our businesses, in business jets, with two new models, one just a few days from certification; the other one, next year. We have the E2, of course is a big investment. And the KC-390 as well. And several others, smaller programs.

So, I think it's -- if we are able to deliver our slightly positive free cash flow by the year-end, with all the investments that we have been endeavoring, I think it's a -- we see it's a very solid results as far as cash.

We really have to be careful about this accounts receivable, so we do not really get this out of control. So, I think that's where our focus is as far as cash.

Okay. Are 2015 and 2016 conversion likely to be better, because there's a little bit of a gap between what you've been doing in the executive jet business and the timing of E2 investments? Or, are E2 investments earlier than that suggests, plus you still have stuff going on in the defense segment? Or, is it just too early to tell?

It's early to tell, Noah, a little bit early. Fundamentally, we are already engaging -- the engineering resources we are freeing from executive are being engaged in the E2. And so, it's a very respectful ramp-up as far as engineering resources. So, in a very preliminary, very qualitative outlook, I don't see any fundamental change. Of course, as we refine the numbers towards year-end, we're going to have a better picture.

Okay. And then, just one other question I had, in the commercial jet business, I was reading some press over the past few days that's been out on the Brazilian government putting out some more details on a regional aviation development program. Actually, I haven't heard you guys discuss that a ton in the past. Is that something that can actually move the needle for your order book over the next six to 18 months? Or, what are you seeing coming out of that?

Well, moving the needle? The program, I think it's a very important attempt to develop or, let's say, to recover what the country had in many years ago. The country, if you go back 25 years ago, we had something like 250 to 300 cities with commercial service in Brazil. The number today is less than 50% of that, believe it or not. So, the airports are out there. Nobody is flying to them.

And there's [millions] of reasons for that, but the question is the government has of course understood that regional aviation is -- especially for Brazil, a country with so large territory and so, let's say, restricted infrastructure for roads and for railroads. So, flying is really the way of people use to be moved from place to place in Brazil. And keep in mind we have a forest which is 50% of our territory. So, it's a country which naturally deserves, or requires, aviation service.

So, by stimulating regional flying, we don't have to be very optimistic to see that if this thing really flies -- and looks like the government is very serious about it -- we should be able to sell more aircraft, not only to Azul but also to other airlines, which currently do not operate regional jets.

So, would that move the needle? We hope so. But we have to see how this thing is implemented. Several of these measures, several of the items went to Congress. So, they're not exclusive to the executive branch. So, we have to see how fast Congress passes those pieces of legislation, or whatever they have to approve.

But I think it's good news on the home front for us.

Okay. All right. Thanks a lot.

Pete Skibitski, Drexel Hamilton.

Good morning, guys. Nice quarter. Frederico, on the Legacy 500, is that on track for first delivery? Will we see one deliver in the third quarter?

Well, first of all, we have to get the certification, which I said was by the end of July, which is today. We will miss this for a few days. Everything is already delivered -- everything is already with the certification authority. We do expect within any day to have the certification of the Legacy 500.

And as far as production, I'm not sure, but I think that sounds right, about one or two deliveries in the first quarter. I think about six airplanes we are planning to produce this year, this second half.

Okay. That's great. And then, I wanted to ask a couple of more questions, one of the FX-2. It's just some of the stuff in the press leads me to believe that maybe when the contract is finally signed off on -- and it sounds like it's getting closer -- that it could potentially be maybe much larger for you guys than maybe expectations a year or so ago? So, I was just wondering if you could tell us maybe what your expectations are for your cut of the FX-2 program and maybe when you think the contract will be finalized?

I think that's a very, very good assessment, and as we now know a little bit more about the program and we of course have been interfacing with SAAB very intensively in which role we should play. I think it's fair to say that today we are probably seeing a larger role than what we saw before the contract was -- before SAAB was selected.

The contract is still under negotiation between SAAB and the Brazilian air force. So, they are the prime contractor. Th expectation is that the contract is signed before year-end. In parallel, we are working with SAAB to define exactly what that role is.

When we talk about [eventually] producing the airplanes in Brazil in our plants in Gaviao Peixoto, this is certainly -- this will bring a higher potential revenue for the Company. And also, SAAB asked us to coordinate, or manage, a super first tier, the supplier to the program, organizing, coordinate all efforts in Brazil. This of course increases our role as well.

On top of those two points, there will be development for a new version of the airplane, with is the two-seater version of the airplane, in which we also were positively surprised that we probably have a higher participation in that development than what we foresaw some time ago.

So, I think, to your question, the answer is, yes, we see a potential higher importance of the program for Embraer at this stage. As we go down the road until the end of the year, we're going to have some more precise understanding and figures, I suppose, about that.

That's great. Great news. And then, just one last question, if I could? I think I saw during the quarter some positive developments regarding extending the INSS, the payroll tax break. I'm wondering, is that your understanding as well? Is the payroll tax break going to be extended? And when do you think we'll know for sure about that?

Yes, it is. This [break] is of course not only for aerospace, for, I don't know, tens and tens of sectors, industrial sectors in Brazil. This is really, let's say, a need for the Brazilian industry in general and also for the service sector.

The current government has stated that this is for good. It does depend on some Congressional confirmation, but we believe this is going to happen, even before the election.

So, it's something which is important for Brazil to be more competitive. Our industry is losing competitiveness, and this will certainly help the Brazilian industry and also the service sector to regain competitiveness. So, we expect to be permanent.

Okay. Within the next two months?

Yes. It's hard to put a deadline on anything in Congress, but this is what we have been hearing and reading recently.

That's great. Thanks very much.

Eduardo Couto, Morgan Stanley.

Good morning, guys, and congratulations on the results. I have two questions from my side. First, on the regional aviation plan, Fred, just getting back to that a little bit, given the idea of the governments to launch this regional planning in Brazil, arriving the beginning of next year, can we assume that if the plan really goes through early next year we may see potential orders, even for the first generation of E-Jets, maybe from new customers in Brazil? Is it something possible? And also, helping your transition from the E1 to the E2?

And a second point, are you more comfortable now for the transition, given that you got some orders from China, there is this regional aviation plan in Brazil? So, what's your view for the transition now vis-a-vis six months ago?

As you know, the package, some actions will be implemented earlier, and some will be implemented directly, like stimulation of regional flights out of (inaudible). So, that should improve the demand for smaller aircraft. But several of the actions will depend on Congress.

So, it's a very tough question to answer. Should we expect orders next six months? I think probably unlikely. I stick to Noah's time frame of 12 to 18 months more likely, yes.

So, yes, definitely that may be a good tailwinds for E1 and for the transition, which by the way we see as we advance. We remain comfortable. We are having orders of E1s. And in 2015, we do expect some activity in United States and larger quantities for 175s replacing 50-seaters.

So, 2015 looks good at this stage. 2016 looks good, actually, two years out. And 2016 and 2017 and 2018, the bulk of that demand, we probably will start seeing some activity in more meaningful numbers in 2015.

So, so far, so good. We are not fundamentally feeling different from what we felt last quarter. We feel good about it.

Okay. And just another point, Fred, regarding taxes in Brazil. There is the tax rebate for Brazilian exports, the Reintegra. I think the government is bringing it back. Can you comment a little bit about the potential impact from this tax rebate on exports for Embraer?

Sure. Again, Eduardo, as you know -- we are both based in Brazil -- the tax system in Brazil is very cumbersome, and we still [export taxes. Everybody in the country exports taxes]. So, the Reintegra, I think is an attempt of the government to somehow compensate for this situation, which only will be resolved if we have a profound tax reform, which -- well, God knows when that may occur.

So, it is a very important instrument because although it's not mathematically perfect, but it's an attempt to offset this cascade of taxes that we embed in our products before we export, and that takes away competitiveness of Brazilian exporters.

Now, the way this was brought back to the active stage, the way that they are bringing back the Reintegra, does not give us any certainty about if it will be available and in which volume. The two depends on the budgets of the government every year. It will also depend, according to the Minister of Finance declaration, it will depend on the exchange rates. So, it's a mechanism which is there, but we do not know whether or not to be used and which amount year by year.

So, we fundamentally cannot use that in our planning. If it happens -- let's say in 2015, the Reintegra is 1%, fine. But at this stage, we really cannot use that, let's say, as an assured cost saving or tax reduction in our planning.

But this is really not getting any benefit? If there is something next year, it would be incrementally positive?

No, nothing really. I think some residual from last year, I guess. But this, no. The answer is, materially no.

Okay. Thank you, guys, and congrats.

Myles Walton, Deutsche Bank.

I was hoping to get a couple of questions in on the KC-390. And the first one is whether or not you'll get any type of cash advance of material size when that contract is signed? And the second part of that is whether, and to what extent, the first flight of the KC-390 is an important cash milestone and/or profit recognition event for you?

Myles, to the first, to the cash, yes. There is always some down payment. I don't think it's anything meaningful. I sincerely do not know. It's probably nothing which is meaningful. It's embedded in our planning anyway.

And as far as economic recognition first flight, no. No, meaning there will be not a bump in revenues or economic impact. The first flight, it's just a continuation of the development. We have been accruing the development costs, and therefore revenues -- I think almost monthly. Right? Is that monthly?

(inaudible)

Yes, monthly. So, it's just an event. It will not trigger anything large.

Okay. (multiple speakers)

(multiple speakers) It's an important event though, because with that we can really initiate the flight test campaign. So, that's much -- for the program, it's a very important event. For the cash flow of the program, it's part of the planning.

The first flight, I guess I was more thinking of it maybe as a risk in the sense of you're quickly coming up on when you probably should be [putting in] the final assembly together. Power on should be occurring probably in the next couple of months in prep for the first flight. So, I was more looking at it as a risk from any excess costs or delays. But it sounds like you're still looking at end of year?

Yes. Challenging, but the airplane is -- the fuselage is totally assembled now. We are starting to make the wings with the fuselage. And as you said, probably yes, in the next couple of months.

Do we have a rollout date for --?

(inaudible)

Yes, we do have a rollout, Myles, scheduled for end of October. So, it's tight but doable.

Okay. The other one I had was that you mentioned the lower development and research run rates versus your plan. And just curious, is that because you're getting larger risk-sharing than you anticipated? Or, is it because you're underspending? And just any color on that.

On the year -- and that was planned -- we have a higher concentration contribution the first half than the second half. Having said that, we are very unlikely that we're going to surpass, let's say, the $300 million number in development. So, probably, we [stay] south of $300 million. Maybe a little bit less in research, as well. And in CapEx, today the best figure we have is sticking to the $250 million.

So, overall, we're probably not going to reach the full $650 million. We're going to stay a little bit below, without of course jeopardizing the physical advancements of the program. It's just a question of better execution than what we planned.

Okay. Good enough. Thanks, guys. Good quarter.

Ron Epstein, Bank of America.

Just maybe a couple of quick follow-on questions, because I think most everything has been covered. But one thing we didn't talk about is the sales campaigns. And what should we think about for the second half of the year? We're coming off Farnborough which was -- congratulations -- a really good period for you guys. But what should we think about in the second half of the year?

We had to make sure that -- of what we have announced, some of still LOIs and some still require some final documents and approvals, or whatever. So, we have to make sure that we convert all that into firm. So, that's going to be a --.

This has not been recognized in our backlog. So, our backlog does not reflect yet all those sales which it's a priority for us in the second and in the next several weeks.

And we have campaigns literally all over the world. No fundamental change. Spot opportunities in Europe. Spot opportunities in Latin America. A little bit slower demand in Middle East, but it's not so much meaningful.

The 175 in service in the United States is doing really well. The airplane is being extremely well accepted by the airlines flying it. And so, that makes us more optimistic for new orders, which may not happen this year. But next year, we do expect some new orders in the United States.

So, it's a mixed bag and overall, as I said in a previous question, we are in a relatively comfortable situation as far as 2015 and the three years before the E2 is in service.

Okay. Great. And then, maybe just one more, a more detailed question. A little while back, you guys announced that you're doing a JV with Zodiac for aircraft interiors. And then, it's my understanding a piece of the interior on the new E2s, you guys are doing a wholly-owned subsidiary. Broadly speaking, what is the strategy with aircraft interiors now? And do you have any thought of actually selling aircraft interior components outside of Embraer?

Good question, Ron. We do have a JV with Zodiac. The company, its name is EZ. It's in Mexico. It's a 50/50 joint venture. And they provide interiors for the E-Jet. So, that's clearly one strategy.

And we also acquired a couple of years ago the control of a small company in California. It's called AST Interiors. They're more dedicated to seats, and we have been introducing those seats in some of our business jets. We are thinking about whether or not we could also use that company to make first class seats for the E-Jets.

So, if you ask, we have those two, let's say, actions or [tactics] in deployed.

Our vision today is much more that we want to have more and more vertical capabilities of seats and interiors at Embraer Air. We do not have the view to become an OEM of seats or OEM of interiors to provide to other companies. But we definitely are investing having more verticalization of those components in our aircraft over time.

Okay. Great. Thank you very much.

Stephen Trent, Citi.

(spoken in Portuguese)

(spoken in Portuguese)

(spoken in Portuguese)

(spoken in Portuguese)

Just one thing, looking at the movement that we've seen from the BRICS countries to create this big fund for the group. Are you seeing any kind of new potential opportunities there?

And then, related to that question, there's also been some recent controversial comments from some governing bodies regarding the conflict in Gaza, between Gaza and Israel. Have you seen any impact at all in your business or in your dealings with affiliates, like Elbit Systems, or anything like that? Or is it business as usual in the backdrop of these geopolitical waves?

I suppose you want me to answer in English, not in Portuguese? (laughter)

I'm going to say English for that and for the call.

Okay. And there's a contribution to your quasi-perfect Portuguese. (laughter)

No, the BRICS bank, we read about it in the press. No contact. I think we know as much as you, probably less than you, about that. And we are certainly not counting on anything. If there is in the future funds available for either research or whatever, fine. But it's not in our radar yet as far as anything to be included in our plans.

Gaza. Well, I did not complete seminary, but I did go to -- I have a little bit of knowledge about that region, as far as Biblical and pre-Biblical times. And it's a very, very complex issue. Unfortunately, it's 5,000 years of conflicts.

I think business is above that. We are -- to your question specifically, we have not seen any change whatsoever in our relationship with Israeli companies or airlines or Arab airlines which fly our aircraft. I think Brazil is very far from the region, and we are not a real part of that historical quest.

Great. Very helpful. Very helpful. And just a quick follow-up to Joe Nadal's question earlier, any chance you might be able to give us, at least broadly, the gross margins per segment for the quarter?

Yes. Just a second. So, commercial aviation, around 22%; and executive aviation, as well, a little bit higher than 22%; and defense and security is about 20%. So, overall, 21.9%.

Okay. Very helpful. I'll leave it at that. Thanks very much, guys.

Ravi Jain, HSBC.

I just had a couple of quick follow-ups. One is on your commercial jet segment. What is your expectation on orders from Europe, let's say, in the next six to 12 months, given that of course (inaudible) has recovered but still remains pretty sluggish there? And of course, the E-Jet mix is different. I think it's more in the 190 than 195s, but do you see also a similar trend in margins like we saw the margins of E175s in the US orders lately?

And the second question was just a little bit more color, if you could give us, on the cost-control initiatives and your outlook for the second half?

The first part of your first question, when you asked demand, from where? I couldn't get --.

(inaudible)

Oh, Europe. Well, spot opportunities. We have options. We have a very strong European base on the E-Jets. So, from time to time, we have opportunities of new orders or confirmation of options. So, it's good, in the sense that it's not dead. It's there. It's happening, not in big quantities, but from time to time we sell the one's and two's and three's. So, all over the continent. We have, as I said, a very strong European base.

Now, as far as mix, we are moving, since -- probably seeing a significant [away] from 190/195s into 175s. So, this year, the overall balance of the year is (multiple speakers).

(inaudible)

So, this year, Ravi, we should see something like two-thirds of 175s, [maybe] one-third of the 190s/195s, which is a significant shift from past few years. And that ramp-up will stay.

As far as cost controls, we are with the same stance that we have been adopting the last several years. Filippo mentioned our efforts in SG&A. So, it's a -- call it a war against SG&A. And we are, I think, so far winning this war, not letting it grow up. And all the efforts of course also in manufacturing, productivity, and quality. So, nothing significant, but this is an absolute focus of top management of the Company and it remains.

Thank you. That's helpful.

This concludes today's question-and-answer session. I would like to invite Mr. Frederico Curado to proceed with his closing statements. Please go ahead, sir.

Just to thank everyone for their attention and consideration, and talk to you in the next three months. Thank you. Have a nice day.

That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.