Embraer is being questioned at the WTO.

247_with information from AE - Embraer achieved a surge in the Brazilian stock market on Tuesday morning (3), after the release of its first quarter 2011 balance sheet. The company's net profit had a spectacular 295% increase with a result of R$ 174 million, compared to the same period last year.

The result was boosted by a tax credit due to the effect of exchange rate fluctuations on the calculation of the company's Income Tax and Social Contribution. In this quarter alone, the adjustment resulted in revenue of R$ 4,2 million for Embraer, while in the same period last year it generated an expense of R$ 88,1 million.

Tax incentives like this are being questioned by Japan at the WTO, the World Trade Organization. Japan is demanding explanations regarding the financing of Embraer jet exports, and once again, wealthy countries are questioning the country's industrial policy. The United States, Canada, Australia, and Japan want clarification on the legality of instruments such as the BNDES (Brazilian Development Bank), incentive programs, and tax exemptions.

The topic is on the WTO agenda this Tuesday, and Brazil's ambassador in Geneva, Roberto Azevedo, said that the Ministry of Foreign Affairs has already answered almost all the questions in writing before the meeting. Japan's questions, having been sent only ten days ago, are still being answered. The Japanese government wants to know, for example, how tax exemption programs, PIS/Cofins (social security contributions), and other industrial benefits have helped Embraer's exports.

Japan is preparing for an ambitious entry into the regional jet market, currently dominated by Brazil and Canada. By 2014, it plans to launch a jet with a capacity for 92 people. However, four years before entering service, it has already received 200 orders. One of the Japanese company's focuses is to capture a third of the Japanese market in the medium term, reducing Embraer's market share.

The Japanese request comes just months after Brazil questioned Japan's subsidies to the jet industry at the WTO. Brazil sent a questionnaire to Japan asking for an explanation of the money given by the government to Mitsubishi Regional Jet. The Brazilian government suspects that the government aid is not within WTO rules and will harm Embraer's exports.

Decline in operating cash flow

Despite Embraer's exceptional profit in the first quarter of the year, the company recorded lower operating cash flow of R$ 822,2 million. The explanation lies in the increase in inventories and accounts receivable.

Inventories increased by R$ 507,5 million, totaling R$ 4,170 billion, "due to the higher number of aircraft deliveries expected for the coming quarters of 2011," according to the company.

Due to day-to-day operational activities, there was an increase in short-term debt, raising indebtedness from R$ 2,390 billion in the last three months of 2010 to R$ 2,465 billion in the first quarter of 201.

The net revenue of the Brazilian aircraft manufacturer decreased. It fell to R$ 1,757 billion in the period, compared to R$ 1,783 billion in the first quarter of 2010.

Embraer delivered 20 commercial aircraft and eight executive jets (six light jets and two large jets) in the first quarter of 2011. During this period, the order backlog increased by US$400 million, totaling US$16 billion.