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Embraer Capital StructureOrdinary Shares: 740,317,965 Bovespa Other 17,0% União 0,3% BNDESPAR 5,0% NYSE Other 49,9% Grupo Bozano 8,7% Previ 13,9% Janus CapitalSharholders with more than 5% participation 5,2%October, 2007
Basic Principles PRESTAÇÃO DE Corporate RESPONSABILIDADETRANSPARÊNCIA Transparency EQÜIDADE Equity Accountability Responsibility CONTAS CORPORATIVA Flexibility Business Value Added to Perpetuation Shareholders
Governance Guideline • 100% of free float shares in single class with 100% of Tag-Along • Sarbanes-Oxley Certification • Negotiation Policy • Dividend Policy • Board of Directors with independent members • Fiscal Board / Audit Committee • Facts Communication and Publishing Policy • Periodic issuance of Results in US GAAP and BR GAAP
Board of Directors Composition BOARD OF DIRECTORS 11 MEMBERS 1 GOVERNMENT REPRESENTATIVE 2 REPRESENTATIVES INDICATED BY THE EMPLOYEES Human Executive Audit Resources Committee Committee Committee
Fiscal Board FISCAL BOARD 5 MEMBERS 1 ESPECIALIST MEMBER • Audit Committee Function • Monthly Ordinary Meetings • Independent Auditors Assessment and Supervision • Board Members and Administration Independency
Capital Reorganization Bovespa’s Board of Directors Shareholders 100% Approval Jan/06 Mar/06 Novo Mercado Approval Jun/06 • First large Brazilian Company with pulverized control • Shareholders vote limited on 5% of total Company’s capital • 100% Tag-Along • More flexibility to get Capital Market financing to new projects and growing programs • Golden Share rights preserved • Foreign capital vote limited to 40% on each subject
General Meeting 2007 • Announcement issued with an anticipation of 30 days including the notice call and the instructions to vote with the PROXY card for the foreign Shareholders with enough time to analyze an issue and answer • Shareholders’ participation of 75.3% • Approval for almost all the proposal subjects
Implementation Status SOX # 404 Annual CycleScope Risk Internal Testing External Remediation 20F and Identification Control Internal Auditors Plan ReportPlanning & Objectives Document. Controls Assessment CEO / CFOAudit CommitteeControllerRisk & Internal Control Control Responsible Independent Audit
SOX 2007 – Auditing Standard 5Proposed Auditing Standard (AS 5) – PCAOB release No. 2006-007PCAOB had already approvedDate: July 2007 went approved for SECMain Issues:• External Auditor do not need to evaluate “management assessment”• Accept more third parties work (ex: SAS70)• Review and clarify Materiality Criteria (Qualitative and Quantitative)• Possibility in using historical information• Multi-localization: Focalization on “Risk” instead of “Materiality”• “Risk Assessment”
Changing Mindset 2006 – Description of Process (AS2) Materiality Levels ($$) 2007 – Control Environment (AS5) Materiality Risks
Investment Grade MOODY’S Since Dec/05 Baa3 STANDARD & POOR’S Since Jan/06 BBB-
Risk Management RAW MATERIAL - COMMODITIES Strategic Risks CERTIFICATIONS SARBANES-OXLEY Financial Statements COMPLIANCE Risks INDEPENDENT AUDIT Economic and NATURAL HEDGE Financial Risks ASSETS X LIABILITIES PROPERTIES INSURANCES ASSETS Operational RESPONSABILITIES Risks OPERATION CONTINUITY PEOPLE BY LAW Legal Risks LEGISLATION CODE OF ETHICS
Dividends Policy• The mandatory distribution of the Brazilian Corporate Law is based on a percentage of adjusted net income, not lower than 25%, rather than a mixed monetary amount per share• The Company’s consolidated net profits is around 40 to 50% of net income
DividendsUS$ Million 54% 45% 42% 39% 204 187 152 129 R$ Million 62.7% 52.6% 54.7% 45.6% 2004 2005 2006 9M 2007 585 Dividends Pay-Out Ratio 445 327 243 2004 2005 2006 9M 2007 Dividends Pay-out Ratio
Market Communication • Issuance of Quarters Releases (BR e US GAAP) • Conference call to announce the results • Issuance of Quarters delivered aircraft and backlog • Analysts meeting held each Quarter in Brazil, USA and Europe • Embraer Day • Analysts and investors meeting • Road shows and banks conference participation • Investor Relations website
New Accounting PracticesThe Company has concluded that its sales activities for aircraft consists of fourdistinct deliverables: • (a) The Aircraft. • (b) Training Services – The Company provides initial training services for its customers for the operation of purchased aircraft. This training is part of the aircraft purchase price and can be sold separately. Therefore, the Company knows the fair value of training at the time an aircraft is delivered. • (c) Spare Parts Concession – The Company regularly sells spare parts to its customers for the maintenance of their aircraft. In accordance with industry practices, the Company provides its customers with spare parts concession for a specified period for the aircraft that was sold. Such concession amount is included in the aircraft purchase price and specifically negotiated with its customers. The individual price of each spare parts is referred in its list price. Therefore, the Company knows the fair value of each spare part at the time an aircraft is delivered. • (d) Technical Representative Assistance – The Company provides its customers with technical representative assistance services for operational support and include such services in the aircraft purchase price. These services can be sold separately and, therefore, the Company knows the fair value of such service at the time an aircraft is delivered.
New Accounting Practices• Considering that each deliverable has a stand-alone value to the customer and its fair value is known, the Company has concluded, that each such deliverable should have been accounted for separately- in accordance with EITF 00-21 (“Revenue arrangements with multiple deliverables”).• As a result the Company deferred revenue recognition of the separate deliverables discussed from b to c above. The Company also restated (i) the balances of its trade accounts receivable, net, (ii) other assets (iii) other payables and accrued liabilities (iv) unearned income. These corrections also resulted in the restatement of certain line items of its statement of cash flows to reflect the corresponding changes in the variation of the balances of affected operating assets and liabilities.• The Company will recognize the deferred revenue of separate deliverables when the service or product is provided to the customer.
New Accounting Practices• Commercial Concessions - The Company offers contractual concessions that provide its customers with a reduction in the amount paid its aircraft. The contractual concessions granted by us to its customers may be partially or fully recovered through an export incentive program of the Brazilian Government. The Company previously recorded these contractual concessions as “Selling Expenses” because the Company believed that the contractual concessions were part of the sales efforts for its aircraft. The amount of contractual concessions recovered by us through the export incentive program was previously recorded as financial income, because the Company received the incentive through the issuance of Brazilian treasury bonds under the program. However, the Brazilian Government is not one of its supplier and does not participate in the sale process of the aircraft, and accordingly, EITF 02-16 (“Accounting by a Customer (including a reseller) for Certain Consideration Received from vendors as revenue”) does not apply.• In its reassessment of its accounting practices, the Company has concluded that such concessions should have been recorded as “Sales Deduction” in accordance with EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer” because the concessions represented a reduction of sales price. In addition, the recovery of the concessions through the export incentive program should be recognized as revenue associated with the sale and export of the aircraft, and, therefore, should be recorded as Net Sales (“Revenue”). The Company reflected these modifications in its restated financial statements for the years 2004, 2005 and 2006.• As a consequence the Company decided to proceed a restatement of its annual report 20F-A
Net Revenue by Segment 3Q06 3Q07 Serviços Serviços Outros Clientes Outros 4.3% Clientes 1.6% 9.8% 10.9% Aviação Executiva 14.7% AviaçãoExecutiva 21.2% Defesa e Aviação Governo 4.1% Comercial Aviação Defesa e 63.2% Comercial 68.7% Governo 1.5%
Net Cash (Debt) PositionUS$ Million 507 450 416 217 128 3Q06 4Q06 1Q07 2Q07 3Q07 R$ Million 1,102 877 810 432 228 3T06 4T06 1T07 2T07 3T07
Loans Total Debt of US$ 1,803.2 Million Foreign Brazilian Currency Short Currency 54% Term 46% 39% Long Term 61% • Average cost in R$ = 7.9 % p/a Loans Average Maturity: 3 year and 8 months • Average cost in US$ = Libor + 1.63% p/a
Loans MaturityUS$ Million 706 1.803 346 66 109 33 543 Total Short- 2008 2009 2010 2011 after term 2011
Research & Development ForecastUS$ MillionR&D Previous New 2007 2008 2007 2008 2009Commercial Aviation 51 22 45 48 55Executive Aviation 127 90 129 123 127Technology Development 59 61 59 72 70 TOTAL 237 173 233 243 252Defense & Government 32 48 21 54 102 Defense & Government R&D are funded by their contracts and are included as Cost of sales and services
PP&EUS$ MillionPP&E Previous New 2007 2008 2007 2008 2009 TOTAL 194 117 113 250 190* Total includes Productivity, Customer Support, Training Centers and Flight Simulators, Executive Aviation Service Centers and Embraer 170/190 and Phenom 100/300 Rump Up
Contributions from Risk Sharing Partners US$ Million 246 14 1 108 - 55 42 17 20 Total 2001 2002 2003 2004 2005 2006E 2007E 2008/2010E