Embraer S.A. ADR Earnings Call Nuggets: CFO Situation, Biz Jet Demand

On Friday, Embraer S.A. ADR (NYSE:ERJ) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

CFO Situation

Noah Poponak – Goldman Sachs: Fred, I wondered if you could talk about what happened with your CFO, seemed a little odd to see him come on and weave in that shorter period of time, and what the plan is for the next person in the position?

Frederico Pinheiro Fleury Curado – President and CEO: Noah, he got – he fundamentally got an unrefusable proposal, that’s the best way to put it. He got, as we may remind, he came from Usiminas, had his whole career – I mean, not his whole career, but a long time career there, as lately CFO, then he left the company. Went to another steel mill company, came to Embraer, and he was invited — he’s taking office I believe today or to be yesterday it was – yesterday he took office as a Chairman of Usiminas, and I understand in a very, very attractive and aggressive package. So there is absolutely nothing, mom and pop markets aggressiveness in Brazil. There’s a good place to be as a CFO in Brazil by the way, I don’t know why.

Noah Poponak – Goldman Sachs: Plan for replacements…

Frederico Pinheiro Fleury Curado – President and CEO: Yeah, we are weeks away from announcing our new CFO who will be certainly somebody really very seasoned and will experience in both Brazil and U.S. market. We’re in a final stage of our search.

Noah Poponak – Goldman Sachs: On commercial orders, they have been relatively light year-to-date, can you just elaborate a little bit more on why that’s been the case and I guess more importantly why your expectation is for the remainder of 2012 for commercial orders.

Frederico Pinheiro Fleury Curado – President and CEO: There is some softness in the market clearly, not to the point that it gives us let say major concern, we do see china with strong prospect, Asia is kind of resilience either obviously is very soft but option activity is small ones and twos here and there, we by the way just had just one airplane from BA, but no large growth coming from there. Some slowdown in Latin America, although we still have some growth. I think Azul story art in Brazil relatively speaking is a good story. So we just had another 10 airplanes for Azul. I think we can be a little bit more optimistic about the U.S. and so overall, we are at this stage, we’re sticking to our view that it is feasible that we maintain a one-to-one book-to-bill ratio and let’s see how the U.S. market unfolds. Of course, you know, U.S. – there is activity tends to be large, but full year we are cautiously optimistic. We are parallel, we have a stable – I think a reasonably view of what’s going to happen through the year.

Noah Poponak – Goldman Sachs: Do you now need one of the larger binary U.S. scope clause driven orders to have book-to-bill of one in 2012 or can you get to that one times level without any of those larger one-time U.S. orders?

Frederico Pinheiro Fleury Curado – President and CEO: So it is just to answer – let me put it this way. At this stage, I would not say that and if there is such – if there is a large order like that we’re going to – let me answer you in a different way. If we have one of those large orders, it certainly is going to pass. We are going to take this beyond the one-to-one. So we have not given up yet, ex-U.S. as far as our ability to keep up the (demand) growing, I mean, 1,000 jobs is no concern and we are sustaining obviously the revenues in our guidance. But, if you expand your quest for the next three years, maybe.

Noah Poponak – Goldman Sachs: Great. Then last one for me, the tax cut benefit from this Brazil stimulus package, clearly positively impacts you. Can you talk about the degree to which that does or does not help you in the year 2012, and then can you quantify what the annualized impact is, whenever it’s going to be the case that it impacts you for a full year?

Frederico Pinheiro Fleury Curado – President and CEO: We do have some positive impact this year. I don’t think there is going to be let’s say, huge things from announcement to implementation, takes a while in this country. There is a lot of regulation in the way the things happen. So (indiscernible) announcement, when the real accounting of those results, there is not only delay, but some time there is some heat lost in the system. On a stable – I can actually – would like to say for next year, if everything remains the same as announced, probably it’s like $100 million of earnings. This year it will be something between zero and less than that, certainly much less than that, because some of the measure will not impact our costs and (indiscernible) second half in some, not even until in the last quarter. So it’s – in the next few months, we will have a more clear picture. But, let’s keep in mind, that those things are there, to try to offset some of the headwinds that we have. so — which I mean, we’re working very hard as you know, to keep our efficiency and productivity and competitiveness. So this is, I think this is – I think is old to us, it’s not something which is really like a gift. So it helps a lot. Last year, as you know, a 10% increase in pay rate, it’s difficult to keep going like that. So it’s refreshing that there is some concern and awareness in Brazilian government, that the Brazilian industry needs some more level playing field in whatever form, which is possible.

Biz Jet Demand

Cai von Rumohr – Cowen & Company: Fred, if you could update us on the tone of biz jet demand and kind of your thoughts about anything you might do, if Hawker or parts of Hawker become available?

Frederico Pinheiro Fleury Curado – President and CEO: Well biz jets we’ve seen some of the – we are taking more calls in the United States now. So we will have to hope at this stage, I think we are hoping in belief, but we are hoping that there is some revamp in activity. We’re busier in that respect. So I think again, I think we are at this stage speaking to our guidances. As far as Hawker, we are following up the situation. We are evaluating how this thing is going to unfold. Obviously, their financial situation is difficult. Maybe some assets could be of interest to Embraer. We just have to see how that develops, but there is a possibility that some assets becomes available pre or post bankruptcy. We would certainly take a serious look in how that could leverage our ramp up of our own executive jet business. For example the infrastructure support that something we keep investing. So the fair value should see energy there, and at the product line we have to see whether there is some synergies we could be complemented, the biggest would be let see our view, it’s not a target in itself, it something which may or may not become an interesting opportunity.

Cai von Rumohr – Cowen & Company: Going back to Noah’s question on the stimulus, could you give us a little more specific kind of, it’s obviously very small this year, but maybe some help in terms of the rollout as we go through the air in terms of selling and G&A expense, you’ve kind of still told us we’re doing R&D about $100 million, but should we just continue the rate of selling and G&A in absolute sense or do they tend to trend up as they did last year?

Frederico Pinheiro Fleury Curado – President and CEO: No, definitely not. We have to continue. This is bringing us – our attention. Last year we had a step function in our SG&A, some of it is good, some of it reflects no increase in commercial activity as we investing for example more flight demonstrator and we’ve tried to see — more sale. On the overheard side, it has to be – as it has been a wholly war against overhead costs, so I think this slight reduction of the last quarter and in this quarter shows a trend. I mean it is – in worst case scenario has to be a flat number in worst case scenario and that’s something we’re going to keep combating very seriously inside the company.

Cai von Rumohr – Cowen & Company: If you just say, you mentioned as we get to 2013 that we should see about $100 million from stimulus and yet if you kind of take the formula of that 14% of parts is real based and most of research and 18% of G&A and so on and you apply the 16%, 17%, you come up with a number on paper of $200 million. Is that the better number or is it a smaller number because you reinvest some of it, how should we think about that?

Frederico Pinheiro Fleury Curado – President and CEO: Can I ask the support of Andre here.

Andre Gaia – IR: Cai, I think the numbers you are referring is first to the total labor cost and the benefit of 20% goes over just to the payroll itself. So you have to take this number, divide it by the 1.8 approximately and then apply to 20% benefit, so then you get closer to this $100 million that Fred mentioned.

Cai von Rumohr – Cowen & Company: Very good and on your question on SG&A, just so unclear, does that mean we should be looking at about a rate of close to $180 million in the next couple of quarters in that ballpark?

Frederico Pinheiro Fleury Curado – President and CEO: I think that’s a fair assumption.