UPDATE 2-Stronger real may hurt Embraer margins, CEO says

* Cost reduction helped by lower labor costs — CEO

* Stronger currency could hamper margins this year

* Curado sees better landscape for commercial aviation

* Shares fall despite reporting stronger Q1 net income
(Adds details on products, analyst comments)

By Guillermo Parra-Bernal

SAO PAULO, April 30 (BestGrowthStock) – Embraer (EMBR3.SA: )
(ERJ.SA: ), the world’s third-largest aircraft maker, expects
gross margins to face “headwinds” this year due to a stronger
Brazilian currency that could boost some production costs,
Chief Executive Frederico Curado said on Friday.

The real’s 22 percent gain versus the dollar in the first
quarter compared with the year-earlier period could limit cost
savings and crimp revenue, Curado said on a conference call
with analysts. For now, the company is focused on reducing
expenses to offset a tumble in revenue.

“We have headwinds as far as currency goes … It is a very
uncomfortable level at this point,” Curado said. “It’s hard to
believe that this could get worse, but who knows? We are in an
election year.”

Curado’s comments indicate that Embraer’s ability to
control costs may be reaching its limit as the worst commercial
aviation market in decades hampers revenue. About 40 percent of
Embraer’s production costs, especially payroll, are denominated
in reais.

Embraer, based in Sao Jose dos Campos, reported late on
Thursday net income of $38 million, reversing a $23 million
loss in the year-ago period. Results missed an average estimate
of $45 million by six analysts in a Reuters poll.
[ID:nN29128100]

To weather the 14 percent tumble in net revenue, Embraer is
streamlining expenses and costs by such measures as opting not
to replace outgoing staff, Curado added. Some analysts have
voiced worries that this strategy may be running its course.

“Embraer announced a strong quarter with high gross
margins, but we have questions about sustainability,” Joe
Nadol, an analyst with JPMorgan Chase, wrote in a note to
clients.

Management protected profits by also trimming
administrative expenses amid a tumble in commercial plane
deliveries that has deteriorated Embraer’s sales mix,
executives said on the conference call.

Gross profit, or the excess of net revenue over costs of
goods sold, rose 2.7 percent in the first quarter to $215
million. Gross profits equaled 21.7 percent of total revenue,
compared with 18.2 percent in the year-earlier period.

Shares of Embraer fell as much as 2 percent to 10.19 reais
in Sao Paulo. Embraer’s American depositary receipts rose 0.1
percent to $24.17, erasing earlier losses of up to 2 percent.

SALES MIX

Embraer foresees a gradual recovery in sales of new
commercial aircraft, the priciest of all the different aircraft
it produces, partly because management has been implementing a
more aggressive sales pitching strategy, Chief Financial
Officer Luiz Carlos Aguiar said.

“Our perception is that it is improving gradually, slowly,
because of a greater number of sales campaigns,” Aguiar said in
a separate call. “Clients want to see prices and seal
business.”

Sales in the high-margin defense and services businesses
segments rose, partly offsetting a tumble in revenue from
commercial aircraft sales. That move helped boost gross margin
readings in the quarter, Curado said.

Nadol said the “contribution of these two segments to the
mix should decline in percentage terms as the year
progresses.”

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(Editing by Gerald E. McCormick, Derek Caney and Matthew
Lewis)

UPDATE 2-Stronger real may hurt Embraer margins, CEO says