Embraer Releases Second Quarter 2010 Results in US GAAP

SAO JOSE DOS CAMPOS, Brazil, Aug. 2 /PRNewswire-FirstCall/ -- Embraer's (BM&FBOVESPA: EMBR3, NYSE: ERJ) operating and financial information is presented, except where otherwise stated, on a consolidated basis in United States dollars (US$) in accordance with US GAAP. The financial data presented in this document as of and for the quarters ended June 30, 2009 (2Q09), March 31, 2010 (1Q10) and June 30, 2010 (2Q10), are derived from the unaudited financial statements, except where otherwise stated. For 2Q10, Embraer is also posting its financial statements in IFRS in this earnings release.

HIGHLIGHTS:

• Embraer's jet deliveries totaled 69 aircraft in the 2nd quarter 2010 (2Q10). As a result, Net sales for the period were US$ 1,354.3 million and Gross margin reached 21.4%;
• 2Q10 EBIT(1) and EBITDA(2) margins were 9.3% and 10.2% respectively - surpassing the 6% EBIT margin guidance and 7.5% EBITDA margin projection;
• Positive operating cash generation of US$ 236.4 million in 2Q10 increased the Company's net cash(3) position to US$ 658.7 million;
• 2Q10 Net income attributable to Embraer and Earnings per ADS totaled US$ 70.3 million and US$ 0.3884, respectively, compared to US$ 67.8 million and US$ 0.3750 in 2Q09;
• Improvements seen in the commercial aviation market, resulting in new sales announcements during the month of July;

1) EBIT is a non-GAAP measure and is equal to the income from operations as presented in Embraer's Income Statement and EBIT margin is equal to EBIT divided by Net Sales

2) EBITDA is a non-GAAP measure. For a more detailed information please refer to page 8.

3) Net cash is equal to Cash and cash equivalents plus Temporary cash investments minus Loans short-term and long-term.

GUIDANCE REVISION

• The Company revised its 2010 Revenue Guidance from US$ 5 billion to US$ 5.25 billion;
• As a consequence, EBIT and EBIT margin were also revised to US$ 340 million and 6.5%, respectively

NET SALES AND GROSS MARGIN

Embraer delivered a total of 69 aircraft in 2Q10, for an accumulated total of 110 aircraft delivered during the first half of 2010 (1H10). As a result, Net sales for 1H10 totaled US$ 2,344.4 million. Considering the above, we believe Embraer is in line to meet its 2010 projected deliveries and Net sales revised guidance. The revenue mix of the first two quarters, in addition to the Company's ongoing efforts to improve productivity and efficiency positively impacted operational results. In this line, Embraer's Gross profit margin has been over 21% for both 1Q10 and 2Q10.

EBIT

The 2Q10 EBIT and EBIT margin were US$ 125.7 million and 9.3%, respectively. For 1H10, the accumulated Operating income margin was 7.8%, which is above the Company's guidance. A strong focus on expenses resulted in a reduction of over US$ 22 million in total operating expenses for 1H10 compared to 1H09, despite a stronger Real. It is important to mention that a portion of the operating expenses are Real denominated and the appreciation of the Real against the US dollar impacted those expenses. The average Real to dollar exchange rate of 1H10 appreciated 18%, when compared to the average exchange rate of 1H09.  R&D expenses totaled US$ 25.2 million for 2Q10, which coupled with the US$ 36.6 million R&D expense for 1Q10, total US$ 61.8 million for 1H10. While the company has been able to control R&D spending, all planned program development activities remain on track for the year. Selling expenses increased by 28.8% in 1H10 compared to 1H09. This increase is due mainly to the Company's efforts to take advantage of market improvements to generate sales, continued efforts to develop and strengthen Embraer's Customer support network for the Executive aviation market, as well as an increase in the total number of aircraft delivered. General & Administrative expenses totaled US$ 49.2 million for 2Q10 and was relatively stable when compared to the US$ 47.4 million in 2Q09, despite the appreciation of the Real.

NET INCOME

Net income attributable to Embraer and Earnings per ADS were US$ 70.3 million and US$ 0.3884, respectively for 2Q10. The Net margin achieved 5.2%, and was 0.5% higher than the Net margin for the same period of 2009.

MONETARY BALANCE SHEET ACCOUNTS AND OTHER MEASURES

Embraer had significant positive cash generation during 2Q10 and the Company's Net cash position for the period increased to US$ 658.7 million. Such cash generation comes mainly as a consequence of a strong financial result from operations, coupled with a reduction in inventories and an increase in Trade accounts payable.

Investments in capital expenditures totaled US$ 16.5 million in the quarter. 1H10 CAPEX investments totaled US$ 30.1 million. We expect this number to increase, as investments in this category will grow during the second semester of 2010, driven by the Legacy 450 & 500 development and investments in tooling and facilities to support these programs.

Total cash position at 2Q10 was US$ 2,175.8 million. Consistent with the Company's strategy to pay short-term debt at maturity, Embraer paid off a portion of its short-term loans during 2Q10 and consequently Total loans decreased 16.8%, to US$ 1,517.1 million. The payment of such loans contributed to an improvement in the Company's indebtedness profile and the average loan maturity increased by 9 months, to 5.8 years. Due to the increase in the average loan maturity, the cost of US$ denominated loans increased from 4.33% to 5% per year. On the other hand, the cost of Reals denominated loans decreased from 7.04% to 3.99% per year. As of the end of 2Q10, 15.8% of Total loans were denominated in Reals.

Maintaining a strong focus on its financial strategy has allowed the Company to continue achieving positive financial results during 2Q10. During this period, the financial results generated by such strategies totaled US$ 5.5 million, which when coupled with the US$ 8.7 million for 1Q10, total US$ 14.2 million for 1H10.

Cash allocation management continues to be one of the main tools to mitigate risks related to exchange rate fluctuation. In other words, by balancing the amount of cash allocated in Real denominated assets, the Company aims to neutralize, to a large extent, the exposures related to exchange rate. Of the current Total cash, in 2Q10, 45% was allocated in Real denominated assets, when compared to 48% during 1Q10.

OPERATIONAL BALANCE SHEET ACCOUNTS

Through adjustments made to the supply chain over the last 18 months, Embraer has consistently reduced its inventories and for 2Q10 an additional 4.8% reduction was achieved when compared to 1Q10 levels. Trade accounts payable grew to US$ 751.1 million in 2Q10, as the Company continues to optimize its supply chain and procurement activities, targeting inventory cycle reductions.

Due to a lower level of actual sales throughout the first semester of 2010, Advances from customers experienced a slight decrease and reached US$ 1,183.7 million for 2Q10. Other accounts, including Property, plant and equipment, Trade accounts receivable and Customer and commercial financing remained relatively stable.

SEGMENT RESULTS

The Net sales mix by segment varied slightly from 1Q10, with a higher participation from the Commercial and Executive aviation segments, representing 60.9% and 14.4% of Net sales, respectively. This increase was compensated by a decrease in Net sales for the Defense, Others and Aviation Services segments, which, combined, represented 24.7% of Net sales in 2Q10, down from 35.4% in 1Q10. As mentioned during 1Q10, we expect Net sales for the Executive aviation segment to increase in participation for the second half of 2010, as the Company ramps up the production of the Phenom 300 and commences deliveries of the Legacy 650.

COMMERCIAL AVIATION

Considering that there were 50 commercial aircraft delivered during 1H10, the Company is on target to meet its annual deliveries projections in this segment. In terms of aircraft demand, the effects of the recovery can also be perceived from the total number of Embraer's on-going sales campaigns, which is considerably higher than in the last quarter of 2009, and, to some extent, have already materialized into concrete sales results, which were announced during this year's Farnborough Airshow. As Paulo Cesar de Souza e Silva, Embraer's Executive Vice President for Commercial Aviation, said, "Based on Embraer's recent announcements and our ongoing discussions with customers, we are cautiously optimistic and in our view we can say that signs of a recovery are becoming more consistent for the Airline market."

The recent firm orders announced during the month of July, for 35 EMBRAER 175s for Flybe and 2 EMBRAER 190s for Trip will be added to the backlog on the next quarter's revision. The order announced for Brazilian airline Azul for 5 EMBRAER 195s was already included in the Company's backlog as an undisclosed customer and therefore will not impact next quarter's revision.

EXECUTIVE AVIATION

Executive aviation deliveries in 2Q10 totaled 40 aircraft, among which 35 Phenom 100s, 4 Phenom 300s and 1 Lineage 1000. The increase in number of deliveries is primarily driven by the Phenom 100 aircraft, as well as the ramp up of the Phenom 300 production. The sales environment continues to be weak despite a consistent, but slow, recovery of the market.  The number of aircraft with less than 10 years of operation that are available for sale in the marketplace continues to be over 850 units. This number has been slowly decreasing, off its peak of over 1,000 aircraft in 1Q09 and, as this decrease in available units continues, new aircraft sales are expected to recover.  

The Legacy 450 and 500 development program continues on track. In April the Company performed the first metal cut for the Legacy 500 prototype (a component which is part of the forward fuselage). As Luis Carlos Affonso, Embraer Executive Vice President, Executive Jets, said, "The first metal cut for the Legacy 500 executive jet is an important milestone in the program's progress." Currently, there are over 650 employees fully engaged in the development of these two new aircraft. The first flight of the Legacy 500 is planned for the second half of 2011.

The Company's 2010 Net revenues guidance for the Executive aviation segment is US$ 1.1 billion. Embraer reinforces its plan to meet this guidance, as through the second half of 2010 deliveries for the Phenom 300 continue to ramp up and Legacy 650 deliveries also commence.

DEFENSE

The defense market continues to present a favorable scenario for growth, with a series of campaigns underway for various applications including transportation of officials & authorities; training and light attack; intelligence, surveillance and reconnaissance systems; aircraft modernization; military transportation; and control systems and services. The segment continues to grow its share in the Company's Net sales, going from 6.9% in 2Q09 to 13% in 2Q10.

As for the modernization programs, the test campaigns of the first prototype of the AMX, for the A-1M modernization program, are on-going. The first A-4 fighter from the Brazilian Navy Modernization Project is being modified at Embraer's facilities in Gaviao Peixoto and is running on schedule. The AEW India program is moving ahead as contracted and, in June, the second of three aircraft purchased had its fuselage joining performed.

The remaining five aircraft from the contract of 12 Super Tucano with the Chilean Air Force were delivered in the second quarter, finalizing the deliveries for this South American customer. Other airplanes were delivered to the Brazilian and Ecuadorian Air Forces during this quarter.

The KC-390 development program is moving ahead as planned and the preliminary studies phase has been successfully completed. As Embraer's Executive Vice President for Defense Market, Orlando Jose Ferreira Neto, said, "The KC-390 development continues on track, with first flight scheduled for 2014. The most relevant wind tunnel test campaigns have been concluded and we are very pleased with the achievements to date." In July, the Brazilian Air Force announced its intention of making a future purchase of 28 KC-390 aircraft.

AVIATION SERVICES AND OTHER BUSINESSES

As Embraer's worldwide fleet continues to grow, especially considering the large number of executive aircraft being delivered, the focus on strengthening and further developing the Company's Global Services footprint remains a priority. In May, Embraer's Services coverage in Europe expanded when RUAG Aviation, an Embraer authorized service center, transferred its operations from Zurich Airport to two new locations: one in Oberpfaffenhofen, near Munich, Germany and the other in Geneva, Switzerland. These service centers will support the Legacy 600 scheduled and unscheduled maintenance activities. Embraer also named TAP Maintenance & Engineering as an authorized service center in Brazil, supporting the Company's growing ERJ 145 family and E-jets fleet in the country. Furthermore, in June, Embraer also enhanced customer support activities in Asia Pacific. With this strategic decision, all parts and logistics support for the Company's commercial and executive jets in the region will be managed from the Regional Distribution Center in Singapore. Enhancements include larger facilities for parts storage and offices, as well as additional capabilities to manage the growing fleet of executive jets in the region.

TOTAL BACKLOG

During 2Q10, Embraer delivered a total of 69 jets, and therefore the Company's firm order backlog totaled US$ 15.2 billion at the end of 2Q10, equating to 3 years of current annual revenues.

2010 GUIDANCE REVISION

As previously mentioned, initial signs of a recovery have been observed since earlier this year and have continued through the first half of 2010. Certain specific market opportunities have presented themselves, particularly in the commercial aviation segment, and Embraer has been able to take advantage of some of these opportunities. Through the second half of 2010, Embraer expects that its delivery product mix will include aircraft that are in earlier stages of the learning curve, particularly the Phenom 300 and Legacy 650. Considering the above, the Company is revising its revenues projections for the year from US$ 5 billion to US$ 5.25 billion. Since overhead expenses are not expected to increase due to this additional revenue, EBIT margin guidance is also being revised from 6% to 6.5%. Hence, the revised EBIT guidance is US$ 340 million. Furthermore, EBITDA projection is also being revised from 7.5% to 8%. Capital investments and R&D expenditures projections remain unchanged at US$ 140 million and US$ 160 million respectively.

INVESTOR RELATIONS

Andre Gaia, Caio Pinez, Claudio Massuda, Juliana Villarinho, Luciano Froes and Paulo Ferreira.(+55 12) 3927-4404, [email protected]

CONFERENCE CALL INFORMATION

Embraer will host a conference call to present its 2Q10 Results in US GAAP on August 03, 2010. The conference call will also be broadcast live over the web at www.embraer.com/ir

ABOUT EMBRAER

Embraer (Empresa Brasileira de Aeronautica S.A. -NYSE: ERJ; BM&FBovespa: EMBR3) is the world's largest manufacturer of commercial jets up to 120 seats, and one of Brazil's leading exporters. Embraer's headquarters are located in Sao Jose dos Campos, Sao Paulo, and it has offices, industrial operations and customer service facilities in Brazil, China, France, Portugal, Singapore, and the United States. Founded in 1969, the Company designs, develops, manufactures and sells aircraft for the commercial aviation, executive aviation, and defense segments. The Company also provides after sales support and services to customers worldwide. On June 30, 2010, Embraer had a workforce of 16,781 employees – not counting the employees of its partly owned subsidiaries – and its firm order backlog totaled US$ 15.2 billion.

This document may contain projections, statements and estimates regarding circumstances or events yet to take place. Those projections and estimates are based largely on current expectations, forecasts on future events and financial tendencies that affect Embraer's businesses. Those estimates are subject to risks, uncertainties and suppositions that include, among others: general economic, political and trade conditions in Brazil and in those markets where Embraer does business; expectations on industry trends; the company's investment plans; its capacity to develop and deliver products on the dates previously agreed upon, and existing and future governmental regulations. The words "believe," "may," "is able," "will be able," "intend," "continue," "anticipate," "expect" and other similar terms are supposed to identify potentialities. Embraer does not feel compelled to publish updates nor to revise any estimates due to new information, future events or any other facts. In view of the inherent risks and uncertainties, such estimates, events and circumstances may not take place. The actual results can therefore differ substantially from those previously published as Embraer expectations.

SOURCE Embraer

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