Corporate Governance

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Nicholas Henry
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1 Corporate Governance

2 Embraer Voting Capital Ordinary Shares: 242,544,448 (34.0%) Bovespa 19.2% Brazilian Govt.* 0.8% European Group 20% Controlling Shareholders 60% 0.8% Brazilian Govt.* 20% European Group Dassault Aviation 5.67% 19.2% Bovespa * Includes one golden share Thales 5.67% EADS 5.67% Snecma 3% 60% Controlling Shareholders PREVI (Banco do Brasil Pension Fund) 20% SISTEL (Former Telebrás Pension Fund) 20% Bozano Group 20% October, 2005

3 Embraer Preferred Shares Preferred Shares: 478,290,684 (66.0%) BNDES 9.0% Bovespa 31.2% NYSE 59.8% October, 2005

4 Corporate Governance Active Board of Directors & Permanent Fiscal Board acting as an Audit Commitee. Board of Directors Composition: Six representatives indicated by the Controlling Shareholders, plus the CEO; Two representatives indicated by the Employees; Two representatives of the minority shareholders; Two governament representatives.

5 Corporate Governance Audit Comitee Conselho Fiscal Composed of five independent members including one financial expert Elected in a annual general shareholders meeting Makes financial reporting recommendations to management and the board Responsible for handling whistleblower complains Oversees the relationship between managers and external auditors

6 Corporate Governance Corporate Governance Actions Trading policy Disclosure Policy Risk management Code of Ethics & Conduct Disclosure Comitee Accountability Brazilian Gaap & US Gaap Simultaneously

7 Dividends US$ Million 54% 50% 47% % M05 Dividends Pay-Out Ratio Yield (Gross)

8 Differences between Brazilian GAAP & US GAAP

9 Revenue Recognition BR Gaap & US Gaap Commercial Airline & Corporate Segments Revenues are generally recognized as deliveries are made Defense Defense segment operates in a business environment that differs from the Airline and Business Jet market segments. The main differences are: Long-term contracts Products are customized according to customer needs Quantities and selling prices are generally fixed at the beginning of the program Revenues are recognized under percentage-ofcompletion method.

10 Cost Recognition BR Gaap & US Gaap Commercial Aircraft & Executive Aircraft Segments BR GAAP R&D capitalized as a deferred asset Amortization based on total serial production US GAAP No program accounting Cost as incurred

11 Defense Revenue and Costs Defense contract accounting Long-term contract accounting requires management to estimate the total contract cost. These costs consist of designing, engineering, manufacturing and entry into service. Total estimated contractcosts include: Raw material Supplier components Direct Labor, including engineering Manufacturing overhead Estimated total percent of complete x price = Revenue to be recognized to date Revenue to be - Revenue recognized = Current period Recognized to date in prior periods revenue

12 Defense Revenue and Costs Defense contract accounting Contract monitoring and related adjustments: Physical progress Review is made on a quartely basis As part of these reviews, additional revenues arising from change order requests and additional cost from over spending are identified and reflected in a revised contract margin. The effect of any revision is accounted for by way of a cumulative catch-up adjustment to margin Percent of complete = Costs incurred to date Most recent estimate of total cost

13 Translation Effects (R$ x US$) BR GAAP Non monetary items no longer indexed by the UFIR (adjusted to current purchasing power) There is no functional currency concept US GAAP Functional Currency is the US$ (SFAS 52) Non Monetary items (Assets and Liabilities) are accounted in historical US$ values

14 PP&E BR GAAP Assets revaluation at market value is allowed Since 1996 interest capitalization is not accounted US GAAP Interest capitalization over Long-term assets construction (SFAS 34) Capitalization of assets acquired through capital leases (SFAS 13)

15 Deferred Assets BR GAAP Capitalization of expenses will be amortized over future fiscal years Deferral of pre-operation costs US GAAP R&D expense accounted as incurred in the income statement Pre-operation costs are not deferred

16 Operating Lease for capital goods BR GAAP Operating leases are accounted as rent US GAAP Operating lease concept explained by SFAS 13

17 Derivatives BR GAAP No CVM or IBRACON specific rule Accounted by the accrual method US GAAP SFAS 133 in use since 2001 Gains and losses recognized during the period Fair value of derivatives is mandatory

18 Effective Tax Rate BR GAAP Differences between accounting and fiscal records US GAAP All BR GAAP and US GAAP accounting diferences are considered to calculate the deferred income tax Effective Tax Rates M05 BR GAAP 24.2% 30.6% 26.6% 29.8% 20.8% 27.4% US GAAP 26.8% 40.3% 45.6% 25.8% 22.7% 13.8%

19 Effective Tax Rate BR GAAP R$ thousands 9M05 Income before taxes 685,828 Nominal expense 34% tax rate 233,182 Permanent additions 64,879 Permanent exclusions (1,526) Interest on Shareholders Equity (34%) (112,817) Other items 3,863 Total expenses 187,581 Effective tax rate 27,4%

20 Effective Tax Rate US GAAP US$ thousands 9M05 Income before taxes 344,678 Nominal expense 34% tax rate 117,191 Permanent additions 1,660 Permanent exclusions (1,123) Interest on Shareholders Equity (34%) (47,362) Other items (22,836) Total expenses 47,530 Effective tax rate 13,8%

21 Reconciliation between BR & USGAAP Shareholders Equity (09/30/05) US$ Million Period end exchange rate 2,500 2,000 1,500 2, ,508 1, BR GAAP Translation Effects Inventories Deferred Assets (R&D) Derivatives fair Value Fin 45 Operacional Lease Adjusments Deferred Income Taxes Others USGAAP

22 Reconciliation between BR & USGAAP Average exchange rate Net Income (9M05) US$ Million BR GAAP Exchanges rate effect Translation Effects Inventories Deferred Assets (R&D) Derivatives fair Value Deferred Income Taxes Others USGAAP

23 Financial Guarantees BR GAAP No specific rule applies Disclosure under notes to consolidated financial statements is mandatory US GAAP Since 01/01/2003 guarantees given to third parties are measured at fair value and recognized on income (FIN 45) In both Gaaps, IBNR (incurred but not reported) accounts for problable losses through the ECC Insurance

24 SPEs Consolidation Some of the sales transactions are structured financings through which an SPE purchases the aircraft, pays the full purchase price on delivery or at the conclusion of the sales financing structure, and leases the related aircraft to the ultimate customer. BR GAAP New CVM 408/2004 rule to beapplied in 2004 Standartization towards IASB international rules and FIN 46 US GAAP Accounted as collateralized accounts receivable and non-recourse and recourse debt Starting in 2004 FIN 46 and FIN 46R becomes effective and basic consolidation conditions were maintained Before 2004 other rules were used for SPE consolidation Source: 20 F note 8

25 Off-Balance Sheet Exposure

26 Off Balance Sheet Exposure The maximum potential payments represent the worst-case scenario, and do not necessarily reflect the expected results by the Company. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets the Company could liquidate or receive from other parties to offset its payments under guarantees. RVGs US$ million Maximum Financial Guarantees Mutually Exclusive Exposure* Provisions & Liabilities Recorded Off Balance Sheet Exposure Estimated proceeds from performance guarantees and underlying assets , (392) (67) 1,397 1,650 Source: 20 F note , (418) (98) 2,030 2,038 *The residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered and therefore have not been combined to calculate the maximum exposure

27 Off Balance Sheet Exposure Repurchase Options (Put Options) Provide the customer with the right to sell the aircraft back to the Company in the future according to defined pricing rules. These put options may become exercisable at various times Can be exercised at the customer s sole discretion. The put price per aircraft is less than the original sales price of the aircraft and less than management s estimation for the future market value of the aircraft during the exercise period as assessed at the date of sale. Put obligations: As of December 2003 As of September 30, 2005 US$ 500 million US$ 0 million

28 Off Balance Sheet Exposure Trade-in options Provide a customer with the right to trade-in existing aircraft upon the purchase of a new aircraft. The trade in price per aircraft is less than the original sales price of the aircraft and less than management s estimation for the future market value of the relevant aircraft. 6 Commercial jets are subject to trade-in Of the total 898 firm orders and 228 options signed for the ERJ 145 family since 1996, only 7 were trade-ins of EMB 120s (Brasilia). Of the total 412 firm orders and 373 options signed for the EMBRAER 170/190 family since 1999, only 6 included trade-in options.

29 Financial Guarantees & RVGs Provisioning of financial guarantees and RVGs In order to cover the exposure related to financial guarantees, a provision is recorded at the time of the delivery. Use of sophisticated models to measure the provision: External appraisals of expected aircraft value Credit ratings of the airlines companies Current and future market outlook Aircraft expected availability level in the market

30 Sales Finance

31 Aircraft Financing A Complex and Time Consuming Operation Deposits Down-payment 5%$ 5%$ 5%$ m Firm Order 12m 6m $ Financing $ $ $ Delivery Time < months > < years (average) > Airlines order aircraft in advance and take deliveries over several years. Option Contract: Customer has the right to exercise option and is not required to purchase aircraft. Options may be exercised up to 18 months prior to delivery.

32 Financing Source (1995 3Q 2005) Amount Exported: US$ billion Amount Financed by BNDES: US$ 7.67 billion Regional Aircraft Delivered: 1039* BNDES 43% Market 57% * Including Executive and Defense Market: EMB 120: 55 ERJ 145 Family: 832 Legacy 600: 49 Defense: 12 EMBRAER 170/190 Family: 91

33 Financing Methods Total Regional Aircraft Delivered: 1039 (up to 3Q 2005) Tax Lease 46% Bridge 2% At Sight 6% Finance Lease 5% Operating Lease 5% Straight Finance 36%

34 Type of financing Operating Lease (True Lease): It is a rental for a pre-settled period of time Purchase Option must be at market value at the end of the lease term It is an off-balance sheet transaction to Lessee Commonly used by start-up and/or weak credit companies. Finance Lease (Capital Lease): It is a finance transaction (full pay-out structure) The purchase option is a guaranteed residual value It is an on-balance sheet transaction to Lessee (USGAAP) Straight Loan: Financing provided by the lender direct to the airline

35 Type of financing Leveraged Lease (Tax Lease) Involves at least three parties: Lessor, Lessee, Lender Non-recourse debt against lessor Equity investor contributes 20% of a/c value Transfer of fiscal benefits to the lessee, resulting in lower monthly payments Equity Investor benefits from 100% accelerated depreciation and deduction of interest expense

36 Type of financing Capital Markets EETC Enhanced Equipment Trust Certificate Type of financing used by airlines to capture resources by issuing bonds backed by the aircraft Bonds are issued in tranches (A, B, C...); Each tranche has a specific Loan to value, and different liquidation guarantees (aircraft) in case of default Tranches B, C...have higher interest rates and carry on more risk Bonds are backed by the aircraft EETC s give airlines with lower credit rates an opportunity to capture resources at lower cost EETC s can be optmimized and combined with other financing structures such as leveraged leases

37 EETC Annual volume of new issues (1994~2005) Amount US$ Billion 8,13 10,37 US Airlines Non-US Airlines 5,01 3,72 3,28 3,25 0,76 0,99 1,61 2,69 1,31 1,28 0,51 0,47 0,49 0,31 0,75 Source: Citigroup FONTE: Citigroup F EETC issuance increased steadily from the first transaction in 1994 through the peak in 2001 before dropping off in 2002 & 2003

38 Risk Management

39 EMBRAER Capital (ECC) - Structure EMBRAER S.A. (Brazil) Manufacturer Embraer Spain Holding Co. SL (Spain) Holding ECC Leasing Co. Ltd. (Ireland) Leasing ECC Investiment Switzerland, AG (Switzerland) Holding ECC Insurance & Financial Co. Ltd. (Cayman Islands) Captive Insurance EFL Embraer Financial Limited. (Cayman Islands)

40 ECC Insurance Company EMBRAER S.A. (Brazil) Manufacturer Embraer Spain Holding Co. SL (Spain) Holding Mission: ECC Insurance & Financial Co. Ltd. (Cayman Islands) Captive Insurance Assures the payment of contingent losses that Embraer may face related to Embraer s financial guarantees; ECC Leasing Co. Ltd. (Ireland) Leasing ECC Investiment Switzerland, AG (Switzerland) Holding ECC Insurance & Financial Co. Ltd. (Cayman Islands) Captive Insurance Insurance Outline: IRB transaction approval: $ 406 MM premium payments over the next five years covering all financial guarantees associated with deliveries within such period Regulated by Cayman Islands Monetary Authority Initial Capital in Insurance $ 2,6 MM Insurance policy issued associated with aircraft deliveries up to Sept.05: $ MM premium payments for obligations $ 70,5 MM in IBNR losses New declarations and endorsements quarterly (new premiums)

41 ECC Leasing Company ECC Leasing Co. Ltd. (Ireland) Leasing EMBRAER S.A. (Brazil) Manufacturer Embraer Spain Holding Co. SL (Spain) Holding ECC Investiment Switzerland, AG (Switzerland) Holding ECC Insurance & Financial Co. Ltd. (Cayman Islands) Captive Insurance ECC Leasing Co. Ltd. (Ireland) Leasing Mission: Manage and remarket a portfolio of aircraft that Embraer acquires through trade-ins and exercised put options; Remarketing service provider for third-parties in connection with sales campaign. Embraer is NOT allowed to lease NEW aircraft without specific Board approval for such transactions; Business sense: any transaction has to accomplish a set of tests and rules, as follows: Gross margin test; Net margin test Cash flow test; and Title transfer rule.

42 ECC Leasing involvement in Embraer s transactions All new sale that may involve a TRADE-IN transaction in the Commercial and Executive Aviation sectors shall be driven through ECC Leasing/DAA for negotiations purposes. Prospective customers shall be jointly approached by Sales Team and ECC Leasing/DAA in order to construct a trustful relationship with Embraer and ECC Leasing.

43 ECC Leasing main goal Asset Management (DAA) is responsible for all administration and technical issues related to Embraer s portfolio of pre-owned aircraft. ECC Leasing Company Ltd (ECC Leasing) was incorporated in Dublin (Ireland) on September 19th, Main goal : Manage the asset of Embraer pre-owned aircraft. Acquire pre-owned aircraft in trade-in to support the new aircraft sales. Repossess pre-owned aircraft in events of default by Lessee. Manage remarketing obligations assumed by Embraer before lenders or leasing companies. Search for potential airlines on the market to acquire or lease the aircraft from ECC Leasing portfolio. Manage activities of appraisal, acquisition, leasing and remarketing of pre-owned aircraft.

44 General Directives from ECC Leasing Board The purchase price of a pre-owned aircraft ( trade-in ) shall not be higher than the gross margin amount of the new aircraft sold by Embraer. If there is any positive difference, it shall be carried by the new aircraft sales as an additional concession. It is prohibited cash flow shortage. New aircraft shall only be purchased by ECC Leasing/DAA if there is a substantive, specific and unanimous Board approval for such purchase or if such purchase is done through a third party company partnership. ECC Leasing/DAA can purchase pre-series aircraft, model EMBRAER 170, 175, 190 and 195 from Embraer for 70% its market price.

Asset Management Remarketing Activities 7

in 2004/05 2 ex-bral ERJ 145 leased to TSA

in 2004 2 ex-indigo ERJ 135 converted into

45 Asset Management Remarketing Activities 7 ex-riosul EMB 120 sold to FAB based on FMV in 2004/05 2 ex-bral ERJ 145 leased to TSA based on FMV in Legacy 600 leased to Flight Options Based on FMV in ex-riosul ERJ 145 sold to FAB based on FMV in ex-indigo ERJ 135 converted into 37pax and leased to Chautauqua based on FMV in 2004

2 ERJ 145 Pre-Series leased to TSA based

46 Asset Management Remarketing Activities 2 ex-lot ERJ 145 leased to FlyAir based on FMV in EMBRAER 170 Pre-Series leased to Paramount based on FMV in ERJ 145 Pre-Series leased to TSA based on FMV in ex-riosul ERJ 145 On-going negotiations 1 ex-lot ERJ 145 Advanced negotiations with potential customers

47 Asset Management Remarketing Activities 5 ex-riosul ERJ 145 Leased to Aerolitoral based on FMV in ex-riosul ERJ 145 sold to FAB based on FMV in ex-riosul ERJ 145 sold to DPF based on FMV in 2005

48 Financial Results

49 Jet Deliveries Q04 4Q04 1Q05 2Q05 3Q05

50 Net Revenue by Segment 9M05 9M04 Business Jet Market 6% Customer Services and Others 10% Business Jet Market 4% Defense Aviation Customer Services and Others 7% Defense Aviation 12% 11% Airline Market 72% Airline Market 78%

51 Net Revenues and Gross Margin US GAAP US$ million 33.2% 37.6% % % % 1, % 1, % 32% ,762 40% 39% 2,927 2,526 38% 34% 3,441 2,144 2,640 31% 3Q04 4Q04 1Q05 2Q05 3Q M05

52 Net Revenues and Gross Margin BR GAAP R$ million 32.2% 33.5% 2,734 2, % 2, % 1, % 2,434 10, % 41.6% 7, % 6, % 31.1% 6,571 6, % 28.6% 5, % 3,347 1,570 3Q04 4Q04 1Q05 2Q05 3Q M05

53 Income from Operations- US GAAP US$ Million % % % % % % % % % % % 3Q04 4Q04 1Q05 2Q05 3Q M05

54 Income from Operations BR GAAP R$ million 16.9% 17.6% 16.1% 15.7% 18.7% 20.1% 28.0% 28.0% 18.9% 17.0% % % ,027 1,928 2,167 1,243 1, % 652 3Q04 4Q04 1Q05 2Q05 3Q M05

55 Income Statement - Currency Breakdown In US$ Millions 9M05 % of Sales % in US$* Net Sales 2,640 ~92% COGS 1,817 69% ~85% Gross Profit % Selling Expenses % ~80% SG&A % ~20% R&D 62 45% ~20% Other 18 29% ~20% * Approximate amounts

56 Exchange Rate Impact BR GAAP BR GAAP The 21.3% Brazilian real appreciation against the U.S. dolar YoY impacted revenues and costs of goods sold as 95% of net revenues and 85% of COGS are denominated in U.S. dolars. COGS US GAAP (R$ MM) NET REVENUE GROSS PROFIT US$ DIFFERENCE GROSS MARGIN 2T05 1,935 (1.423) ,4% Average US$/R$ (0.19) 3T04 2,734 (1,791) 943 Average US$/R$ (0.03) 34,6% 3T05 2,434 (1,980) 454 Average US$/R$ ;64 (0,32) 18.4% As only 15% of our COGS are denominated in reais and our functional currency is the US dolar, the impact of exchange rate fluctuations is much smaller.

57 Net Income US GAAP US$ Million 17% 12.1% 12.6% % % % % % 223 6% 11% % Q04 4Q04 1Q05 2Q05 3Q M05

58 Net Income BR GAAP R$ million 14.5% 10.7% 11.5% 12.3% 12.6% 16.0% 15.2% 12.3% % % % ,101 1, % % 402 3Q04 4Q04 1Q05 2Q05 3Q M05

59 Balance Sheet

60 Accounts Receivable Breakdown US GAAP BR GAAP US$ Million R$ million ,477 1,444 1,584 1,451 1, Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05 Outros Mercado de Aviação Comercial Others Commercial Airline Market

61 Inventories US GAAP BR GAAP US$ Million R$ Million 1,390 1,428 1,570 1,736 1,601 4,373 4,588 4,155 4,070 4,053 3Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05

62 Net Cash (Debt) Position US GAAP BR GAAP US$ Million R$ Million Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05

63 Loans Total Debt of US$ 1,700.6 Million Long Term 66% Short Term 34% Brazilian Currency 11% Foreign Currency 89% Average cost in R$ = 12.3%p/a Average cost in US$ =5.5% p/a Long-Term Loan Average Maturity: 3 years and 3 months

64 Loans Maturity US$ million 1, Total Short Term Beyond 2010

65 IFC Syndicated Loan US$ 180 million Syndicated Loan Proceeds to complete the end-stage launch program of the EMBRAER 170/190 family. A Loan: Final Maturity: Tranche B1: Final Maturity: Tranche B2: Final Maturity: Total B Loan: US$35 million 12 years US$ 60 million 10 years US$ 85 million 8 years US$ 145 million 5 years and 5 months average maturity 6M libor + 2.9% weighted interest rate

66 Hedging Strategy Firm backlog of US$10.4 billion 92% revenues in US$ 80% of R&D and PP&E investments in R$ 37% of total cash disbursements in R$ Main Objective of the Hedging Strategy Optimize the Natural Hedge of the Cash Flow

67 Balance Sheet US GAAP 82% 78% 82% 85% 84% 81% 86% 81% 18% 22% 18% 15% 16% 19% 14% 19% Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities 12/31/ /31/ /30/ /30/2005 R$ US$

68 Balance Sheet US GAAP Includes Derivatives 82% 78% 82% 85% 84% 82% 86% 81% 18% 22% 18% 15% 16% 18% 14% 19% Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities 12/31/ /31/ /30/ /30/2005 R$ Other Currencies

69 Investments

70 Investment Forecast In US$ Millions 2005E 2006E 2007E New Previous New Previous New R&D Total Commercial Aviation Executive Aviation Others Defense Productivity and PP&E Defense investments are funded by their contracts and are not included in R&D expenses but in Cost of Sales and Services.

71 PP&E and R&D Cash Flow US$ Million E 2006E 2007E PP&E R&D Gross R&D amounts

72 Contributions from Risk Sharing Partners US$ million /2010E 2007E 2006E 2005E Total

73 Attachments

74 Financial Guarantees Provided in the form of guarantees of lease payments, to mitigate default-related losses. Mainly issued for the benefit of the customers financing agent. Exercised when customers do not meet their payment obligations during the term of the financing. Collateralized by the aircraft. Upon an event of default, the Company usually is the agent for the guaranteed party for the refurbishment and remarketing of the underlying aircraft. The Company may be entitled to a fee for such remarketing services. Typically a claim under the guarantee shall be made only upon surrender of the underlying aircraft for remarketing

75 Financial Guarantee A/C VALUE / Remaining Balance (1 - % FLD) x Remaining Balance Debt or forecasted loss Risk Exposure Aircraft Value BACK

76 Financial Guarantees & RVGs Residual Value Guarantees (RVGs) Provide a third party with a specific guaranteed asset value at the end of the financing agreement In the event of a decrease in market value of the aircraft, the Company shall bear the difference between the specific guaranteed amount and the actual fair market value In order to benefit from the guarantee, the guaranteed party has to make the aircraft meet tight specific return conditions Financial Guarantees & RVGs In the event both guarantees are issued for the same aircraft, the residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered, and therefore, are mutually exclusive.

77 RVG Risk Aircraft Market Value Aircraft Value % RVG x Aircraft Value RVG Exposure Time Exercise window

Abril S.A. and subsidiaries

(A free translation of the original in Portuguese) Abril S.A. Abril S.A. and subsidiaries FINANCIAL STATEMENTS at December 31, 2012 and Independent Auditor's Report (A free translation of the original