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Monday, August 21, 2006

Embraer Profits Soar

Embraer (ERJ) is expecting "significant good news" in the near future concerning the ERJ 170/190 line, according to Chair Mauricio Botelho, who said the unexpectedly acute teething pains of the ERJ 190's service entry were largely resolved. He indicated the problems caused "significant expenditures" in the first half of the year, which should disappear in future quarters. Complications involved the aircraft's systems, and pilot and mechanic training.

Embraer also said its had pulled back wing production work for the 190/195 from Kawasaki Heavy Industries, because of poor quality work and the lack of timeliness of its deliveries. (RAN, June 12, p.6) Botelho indicated that Varig was considering the ERJ 190, although Embraer would hold no risk in such a sale for the carrier that recently avoided shutting down. He also said JetBlue's problems with the 190's introduction had been resolved for now but remained to be worked out over the long term. Regardless, he said, the aircraft's reliability had improved and no reduction or slowdown in deliveries for the airline were expected.

With respect to narrowbody replacements planned by Boeing and Airbus, Botelho indicated that Embraer was not interested in becoming a supplier to the two manufacturing behemoths but would consider partnering on such projects. However, any new narrowbody would need a "new, revolutionary engine" to be successful. "Without that, there is no reason to have a new narrowbody," he said, adding that composite fuselages garnered advantages on larger aircraft but only yielded small cost improvements on narrowbodies. "The strongest need is engine efficiency."

Embraer's strength in the marketplace rested with airlines such as Finnair, JetBlue and Air Canada honing in on operational efficiencies, said Botelho, emphasizing that Embraer has gone head-to-head with Boeing and Airbus to compete for business from those airlines, and won.

The ERJ 145 is sold out for this year, but still has a few slots open for 2007. The manufacturer is working on expanding its production and delivery speed, but any improvements would not come before the first quarter of 2008

With the completion of its capital restructuring, one of the most significant events since the company was privatized in 1994, Embraer reported net income jumped to $139.1 million in the second quarter, a significant increase over the $82 million in the year-ago period. The company also reported a stable backlog of aircraft of $10.2 billion, including $1.25 billion in firm executive jet orders, along with 235-plus orders for its recently launched Phenom 100 and 300 VLJs. Its order book for the Embraer 170/190 totaled 455 firm and 442 options.

Operating income increased 36.4 percent to $134.9 million, owing to the recognition of $57 million in research and development revenue related to assuming the 190 work from Kawasaki. Embraer's gross margin decreased from 31.4 percent to 28.1 percent, the result of 190/195's initial problems as well as appreciation of the Brazilian real. The 11.7 percent appreciation in the real impacted Embraer's gross margin by about 150 basis points. Operating margin increased from 12.2 percent to 13.2 percent. Net margin increased from 10.2 percent to 13.6 percent. It delivered 36 aircraft during the quarter, contributing to net revenue of $1,020.9 million compared to 30 aircraft and net revenue of $812.4 million in the year-ago quarter.

At the end of the quarter, it posted net cash of $527 million, up $224 million from the year-ago period.

In other news, Embraer and OGMA - Industria Aeronautica devPortugal, S.A., and the Portuguese Investment Agency (Agencia Portuguesa para o Investimento - API) signed a protocol of intent for strengthening industrial cooperation in the aeronautics industry. The agreement calls for studies aimed at cooperating with OGMA in developing its capabilities for designing and manufacturing aircraft as part of Portugal's industrial development program. OGMA offers services covering maintenance and repair of civil and military aircraft and engines, structural component production and engineering support. Current customers include TAP, British Midland, Alitalia, Luxair, Embraer and Rolls-Royce.

 

Net Sales by Segment (Unaudited)
  1Q06 2Q05 2Q06
  US$M US$M US$M
Commercial Aviation
504.2
62.4
537.8
66.2
739.9
72.5
Defense and Government
78.5
9.7
116.3
14.3
60.2
5.9
Executive Aviation
86.1
10.7
59.7
7.3
89.7
8.8
Customer Services and Others
139.5
17.3
98.6
12.1
131.1
12.8
Total
808.3
100.0
812.4
100.0
1,020.9
100.0
Backlog & Delivery Forecast
On June 30, 2006, Embraer presented the following firm order backlog:
Model Firm Orders Options Deliveries Firm Order Backlog
ERJ 135
108
2
108
-
ERJ 140
74
-
74
-
ERJ 145
682
157
676
6
EMBRAER 170
144
116
111
33
EMBRAER 175
22
-
19
3
EMBRAER 190
253
286
33
220
EMBRAER 195
36
40
-
36
Total
1,319
601
1,021
298
*Includes aircraft from the Defense and Government Market (Satena and TAME)

 

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