Embraer SA (ERJ) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Fourth Quarter 2014 Results.

Thank you for standing by.

This conference call is being held during the Embraer Day in Brazil, with the presence of investors and market analysts.

At this time, the Company will present its fourth quarter 2014 results.

Afterwards we will conduct a question-and-session, and instructions to participate will be given at that time.

(Operator Instructions)

As a reminder, this conference in being recorded and webcasted at ri.embraer.com.br.

This conference call includes forward-looking statements or statements about events or circumstances which have not occurred.

Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.

These forward-looking statements are subject to risks, uncertainties, and assumptions including, amongst other things, general economic, political and business conditions in Brazil and in other markets where the Company is present.

The words believe, may, will, estimates, continues, anticipates, intends, expects and other similar words are intended to identify forward-looking statements.

Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events, or other factors.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call may not occur.

The Company's actual results could differ substantially from those anticipated in the forward-looking statements.

Participants on today's conference call are Mr. Frederico Curado, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; Mr. Luciano Froes and Mr. Eduardo Couto, Director of Investor Relations.

I would now like to turn the conference over to Mr. Jose Filippo.

Please go ahead, sir.

Okay.

Good afternoon for the ones here, and good morning for the Americans joining us.

We're going to go to our presentation of the conference call, and the conference call for the fourth quarter and 2014 results.

But before I go into the presentation, I'd like to take this opportunity to share with you some important announcements internally here.

We're happy to announce that organization announcement, which Luciano Froes that you know been dealing with you for quite time, I think for three years now, he is assuming new responsibilities in the Company.

He's taking over the position of marketing director for the executive jet business.

He's going to be moving to Florida.

He's going to be based in Melbourne, where we're developing our excellent center for executive jet business.

And starting next week, Luciano will take that responsibility.

So we're very happy with that opportunity.

It's the policy of the Company to really try to give opportunities, especially for talent like Luciano.

So we're very happy with that possibility.

At the same time, we are introducing Eduardo Couto, who is taking over the position of IR, new business development, and mergers and acquisitions.

Eduardo comes from Morgan Stanley.

He used to be an equity analyst.

So he know the dynamics of the market.

So he knows the Company.

He knows probably some of you.

So we're happy so to have this replacement.

So we understand that we'll continue to have high-level people dealing with the market representing Embraer.

So again, good luck Luciano.

Of course he'll be available we know.

And welcome to Eduardo.

So we're starting to take this.

I think it's a good opportunity that we have this event, as we can announce this, and do this transition.

So with that said, we'll start the presentation and go to page 3 for the ones that are remote.

Regarding the 2014 and the fourth quarter highlights, in terms of the corporate highlights, we had the celebration of the 45th Anniversary of Embraer last October.

We also remain committed with sustainability.

And we recognize by that, with the fifth consecutive year in the Dow Jones Sustainability Index, as well we're part of the ISE in Brazilian Stock Exchange.

In terms of management process and best practice, we were awarded the National Brazilian Award, which is the PNQ, very important recognition in the Brazilian industry, presented by the National Quality Foundation, the FNQ.

Also finalizing this page, there are several other recognitions related to people management, as we were ranked as best place to work in Brazil and abroad.

Moving to the next page, page 4, in terms of the commercial business highlights, first in the fourth quarter.

We had the delivery of 30 E-Jets in the last quarter, one of which was the E-Jet production number 1,100.

It was delivered to AeroMexico last year.

In terms of sales activity, we had the order for SkyWest for seven E175's, which represents actually an option conversion.

And related to the E2 program development, we had the first metal cut of the E2 program.

So we are in line with that development.

Next page, page 5, in the still commercial business now the highlights of the year.

We had the delivery 92 E-jets in 2014.

Also in terms of sales activity, we had 258 E-Jets sold in the year, concluding the-- only in the E2, 590 commitments.

This includes orders, options and LOIs.

As a confirmation of the E-Jet program success, at the end of 2014, we had over 1500 orders with customer base of 65 airlines in 45 countries.

And with that, we maintained our leadership in commercial jets in the segment of 70 to 130 seats.

The next page, moving on to executive jet business, in the fourth quarter we had the delivery of 52 executive jets, broken by 38 light 14 large jets.

In terms of sales, we had the conversion of 10 Phenom 300 options to firm order from NetJets.

And also an important milestone in our Legacy 500 program, we delivered the first three aircraft in the end of the year.

The highlights of executive jets, the next page, for the year 2014, total delivery of 116 airplanes, 92 light and 24 large jets.

Still in relation to the Legacy 500 program, we had achieved certification in Brazil, in the US, in Europe and Australia.

Another important achievement in the executive jet business was that for the second consecutive year the Phenom 300 was the most-delivered executive jet in the market, 73 units.

And as a result of our commitment to customer satisfaction, we are ranked as number one in AIN annual survey.

Moving to next page, page 8 and the highlights for Defense and Security business, fourth quarter we signed the firm order for the first 28 KC-390 to the Brazilian Air Force.

Regarding the Brazilian fighter program, we confirmed our participation with the signing of an MOU with SAAB for the development.

And regarding the LAS program in the US, we remain on track and we delivered the first four aircraft to the US Air Force.

Next page, page 9, still in Defense and Security for the year, we reached annual revenues of $1.5 billion, up more than 20% when compared to 2013.

Also an important milestone of Embraer, the KC-390 program was that last month we had the first flight of that product.

And regarding the programs in our controlled subsidiaries, we continue to advance on the SISFRON project through Savis.

We had important contracts of supply of radars and equipment through the Brazilian government.

On Bradar, the Brazilian's satellite program was an important step, which was the critical design review of the program.

And finalizing the highlights on defense, we signed a contract to supply newer traffic management systems for Brazilian and Indian government.

The next page, now returning to the overview of the financial results, we can move to page 11, starting with the backlog.

We saw important growth on our backlog throughout the year of 2014, reaching in the end of the third quarter our all-time high level.

In the end of the year, we had almost $21 billion in backlog, which were broken by 65% on Commercial Aviation, 26% on Defense and Security, and 9% in Executive Aviation.

The next page, in terms of aircraft deliveries, in Commercial Aviation, the left side, we delivered 92 aircraft, in the lower end of the guidance range.

Of which the great majority were the 175 models.

In terms of executive jet business, we surpassed our light jet guidance range with 92 delivered, but had a reduction on the large jet deliveries with 24.

We had a range of 25 to 30 in the large.

The next page, in terms of revenues, net revenues as a result of those deliveries and the revenues with defense, we ended the year with almost $6.3 billion in terms of revenues, within the guidance range of $6 billion to $6.5 billion.

The next page, page 14, the breakdown of the revenues was consistent with our expectations.

In the left side, in terms of business, we saw a relative reduction in Commercial Aviation related to the growth of defense.

Commercial Aviation from 2013, it went from 53% to 50%.

But we saw Defense growing from 19% to 23%.

Executive jet business almost remained the same in terms of 27% in the previous year to 26% now.

When we see these revenues broken by region, on the right side, the highlight for the American market, especially because of the deliveries in the Commercial Aviation.

And the second, participation of Brazil, which was more related to the Defense activities.

Next page, page 15, we see the same information now broken in a quarterly view.

As we mentioned, we confirm that we had a more balanced year.

Remember that last year we had a concentration in the last quarter.

This year, although we still see that the last quarter is the strongest, we saw more balanced revenues throughout the year.

So we had this $6.3 billion, and the BRL14.9 billion in terms of net revenues.

On page 16, in terms of SG&A, our ongoing focus on the cost control reflected a reduction in the (inaudible) dollar.

And not only in dollar terms, but also in the percentage of revenues.

We saw in 2014 the total of $628 million, compared to $665 million in 2013.

And the percentage of revenues coming down from 11% to 10% in 2014.

In terms of EBIT operating results, page 18, here we show before we go into the details of this chart, just call attention about the information that we have in 2013.

You remember that we had this positive impact of the reversal of provisions from the American, as American recovered from the Chapter 11 position.

We recovered provisions that we had.

So we are taking that information out here to have the fair comparison.

So when we see what we had in the year, we reached $543 million in 2014, within the guidance range from $540 million to $620 million.

So in terms of margin, we had 8.6%, a little bit lower than the guidance range.

And the main drivers of that were basically coming from the lower end of the deliveries, and also the higher-than-expected mix of the E-Jet deliveries, the 175 concentration.

Next page, page 19, information broken by quarter.

You see that actually the fourth quarter of 2014 was below the previous year, even excluding the non-recurring effect.

Again, basically because of the mix in both commercial and executive jet business.

Next page, EBITDA, page 20.

We had a total of $830 million, with a 13.2% margin, within our guidance range for the year.

We see on the next page, the EBITDA broken by quarter, the same comments as the previous one.

In a quarterly basis, increased in the last quarter, but not as strong as we had in 2013.

The next page, the net income, we had a total of $335 million of net income, and a margin of 5.3%.

Just remember that this number is impacted by the deferred income tax, which is impacted by the FX fluctuation.

Next page is net income broken by quarter.

We see here that, especially in the end, in the last two quarters of the year, the lower amount was basically reflected by the effect I just mentioned, the deferred income tax, because of the dollar increase against the real.

In page 24, the earnings per ADS and payout, as a consequence of the net income, the earnings per ADS was $1.82.

And the payout was 27%, which complies with the Brazilian corporate law, and also reflects our anticipation that we pay, we've been paying every quarter.

Continuing to the next page, inventories, we ended the year with a total of $2.4 billion, which was an increase compared to the previous year, as we prepare for the 2015 deliveries.

Going forward in terms of investment, we had a total of $430 million into 2014, broken by $47 million in research, $230 million development, and $153 million in CapEx.

In terms of R&D, the depreciation of the real along with the good execution, allowed us to end the year below our outlook.

And as far as CapEx, we managed also our cash disbursement, trying to avoid pressure on cash.

So we ended up with the $430 million, as we gave an outlook of $650 million at the beginning of the year.

Going forward next page, free cash flow, as we previously announced earlier this year and revising our guidance, our cash flow was negative $404 million.

As I already indicated, the main drivers of this figure, the main driver actually was the high working capital requirements, mainly due to the accounts receivable increase, the inventories, and also advances from customers.

This was of course partially offset by the reduction in investments we just mentioned in the previous sheet.

Finalizing the results before getting to the outlook, our capital structure, debt profile remains in line with our business cycle needs.

We have 5.4 years in terms of average terms.

And also only 4% of the debt maturing in the short term, in the next 12 months.

In relation to net debt position, as a result of the negative free cash flow generation, we reported a slight negative debt of $85 million at the end of the year.

Okay, with that we conclude the financial results highlights, and getting into the 2015 outlook.

As we published in our earnings release, the outlook will be as follows.

On page 30, a consolidated outlook, net revenues for the year from $6.1 billion to $6.6 billion.

EBIT from $490 million to $560 million, with margin from 8% to 8.5%.

EBITDA from $730 million to $860 million, margin from 12% to 13%.

In terms of free cash flow, we forecast that there will be a use of no more than $100 million.

This number does not consider the recovery of accounts receivable impact that we experienced last year.

Going forward next page by business unit, in terms of Commercial Aviation we forecast the deliveries of between 95 to 100 E-Jets, and net revenues from $3.2 billion to $3.4 billion.

In executive jet business deliveries from 80 to 90 light jets, and 35 to 40 large jets, which will return revenues in the range of $1.7 billion to $1.85 billion.

In terms of Defense, the guidance range for revenues between $1.1 billion to $1.25 billion.

And to balance the total consolidation we showed before, we had forecast $100 million for other business revenues.

The last page, finalizing this part of the presentation, in terms of investment outlook, we forecast to invest $650 million in 2015, broken by $50 million in research, $300 million in development, and another $300 million in CapEx.

Primarily those investments will be related to the E2 development program.

Okay.

With that, we finish the presentation.

So now we open for questions.

(Operator Instructions) Cai von Rumohr, Cowen and Company

Yes.

Thank you very much, gentlemen.

So your guide of 35 to 40 large jets I think is a little bit less than many of us were looking for.

Could you give us some color there in terms of what that assumes about Legacy 500 and 450s, how they're doing, and what that implies for your other larger biz jets?

Thanks.

Yes.

Thank you, Cai.

This is Fred.

Fundamentally we are seeing a relatively stable Legacy 650 and Lineage.

We have a background noise here.

So Legacy 650 and Lineage 1000 relatively stable activity, and the addition being the Legacy 500s.

Probably we will have a couple of deliveries of Legacy 450.

Can you guys hear the background noise or is it just me?

Can you fix this please?

Cai, do you hear background noise or is it okay for you?

It's cutting in and out.

Okay.

So the addition to our last year numbers, they are coming from the Legacy 500s.

And one could argue that we should be seeing larger numbers, larger numbers of Legacy 500s.

So this is-- we really want to make sure that we have a smooth entry into service.

We also have to acknowledge that the market is not booming.

In the sense that we have a very strong backlog yet.

But it is building up nicely.

And so the combination of market demand-- yes, it's much better now-- market demand and assuring a smooth entry into service.

Okay.

Thank you very much.

And then your margin in the fourth quarter looked a little bit lighter, given the very strong volume that you displayed.

Could you comment?

Were there any negative adjustments?

And secondly, maybe give us some color in terms of where the margins for each of the business groups were, and maybe some trend as we go into 2015.

There was a cell phone on.

I apologize.

Not mine.

Thank you.

Okay, Cai.

Let me give you the detail.

I think that in terms of the margin for the last quarter, we didn't have any specific adjustment that could impact.

I was more related to the margins of each business and the lower end of the guidance range and the mix that like we mentioned, in terms of Commercial Aviation, and also the mix in the executive jets.

And Cai, giving you a little more color, Luciano speaker here.

Gross margins for Commercial Aviation and executive jets were right around the range of 18.5% to 19%.

And Defense and Security was closer to 10%.

And so for the quarter total, around 17.5%.

You should talk about the adjustment.

Why was that so low, the adjustment for Defense.

And it's important to mention that for Defense, as we've explained the past, it's best to look at an annual basis, rather than a quarterly basis.

There's factors that can influence that in terms of quarterly performance, such as the stage and the programs in which we are, the composition of the revenue within that quarter from the various programs, as well as potential FX variations.

So we can see, for example, in the first quarter of this year as a reference, we had a bit of a deviated effect as well to the upside.

So looking at an annual basis, the margin came in pretty much as expected for the Defense and Security segment, and higher year on year.

This is Derek, RBS Capital Markets.

The CapEx or the free cash flow guide of 2015.

That doesn't include the recovery of accounts receivable.

Is that correct?

It does not.

So technically that could be a lot higher.

How confident are you that you would recover this year the Brazilian accounts receivables?

You mean regarding this fiscal year or previous year's?

This fiscal, 2015.

Well, I think nobody in Brazil at this stage can say that we are comfortable with any receivables, because of course the situation is of public knowledge.

Having said that, the KC-390 is a priority program for Brazil.

It's part of the [pack] which is that selected group of projects which have the highest priority in the government.

And it is above all, a real need for the Brazilian Air Force going forward.

So taking all of that into account, and also taking into account that we are on time and on budget, below receivables but on budget.

So we are performing.

We have to believe that we are--we'll be one of the projects which probably will have the highest consideration as far as receivables.

So we are in discussions with the customer, in particular, with the Brazilian Air Force to make sure that we do not incur an increasing accounts receivable as we go forward.

That may or may not result in a [re-shelving] of the program.

Too early to tell.

But we are not just blindly going forward.

Although we are at this stage maintaining the rhythm of the program.

That's great.

And on follow on, from a CapEx perspective, are your new programs falling relatively in line with your planned budget when you launch them?

Are they tracking ahead or better?

And where do you see CapEx over the next few years trending?

Okay, so that's-- if I may I'll split the answer in two.

But the [PND] part of it has a strong contents in reais.

So we are tracking that in dollars, and we are relatively okay.

I mean actually we're a little bit below budget.

And we do have some tailwinds in that respect going forward.

That's a question which I'm going to anticipate the answer probably some of you will ask.

But we are referenced in our planning, and the basis for this outlook is a FX of 2.8.

So we do not know where the currency will stabilize.

But there may be some headwind there.

So in the most recent programs, in the Legacy 450 and 500, we are above budget, because we had, you may remember, delay in the program.

So if you take the overall program since the launch in 2008 to the very end, there will be a little bit of an overshoot in the budget.

The issue, the 175 plus, the new one 175 was actually below budget.

And the issue is a little bit better or lower than budget.

So I think the quality of planning and control of costs is improving as we speak.

And the 450, particularly our 450 piece, is actually below budget as well.

CapEx side of the (inaudible), talk about machines and tooling and the hardware side, which is mostly denominated in US dollars.

We are right there.

The lower number that you saw in 2014 was much more a postponement of investments, which did not impact the critical path of the programs, rather than better performance.

Probably there will be some improvement there as far as a lower cost, better negotiation, et cetera.

But that's mostly dollar-denominated.

So it's really a question of managing the cash flow, obviously without impact in the critical path of the program.

I hope I have answered it.

Thanks.

Myles Walton, Deutsche Bank.

I think Cai had asked about the margin trends in 2015.

And I'm not sure I got the margin trends by segment into 2015, if you could do that.

It does sound like you said 2.80 was your peg.

So it seems like there's some margin opportunity on the upside there, if the current FX rates held.

So could you just give a detail by segment kind of what you're looking for, for margin trends, please?

Yes, sure Myles.

You didn't get them because we didn?t give them.

I'm a little slow.

Yes.

So thank you for the gentle way of asking.

But this year in 2015, probably you will see a much homogeneous margin, so in the band of 8% to 8.5%.

The business will probably vary, maybe plus or minus 0.5% to 1% each extreme of the band.

So as far as gross margin, as to give you a-- it will be between 18.5% and 20%.

So we're going to see margins-- and as far as operating margins, it will be something between 7% and 7.5% and 9%.

So pretty much-- or 8.5%-9%.

So it will be very homogenous going forward.

That's how we see it.

And the other questions was--?

It just sounds like, number one FX, where we spot it today, would be a tailwind to your margin projection if you said 2.80.

If it stays at (inaudible), it's a headwind for the Defense business, but it's a tailwind for the other two businesses.

Yes, and it's a tailwind for the cash flow, mainly for the cash flow.

Because all of our PND which is very high, you don't see that in the P&L.

But you do see it in the cash flow.

And just one other one, as you look to the mix in Commercial Aviation, is this the worst of the mix?

It looks like it's maybe close to 80%, 75%.

(Inaudible) is this year.

Is this the peak of the worst?

Well, this is all relative.

Because you have, of course, bigger aircraft tend to have higher prices, but not necessarily.

So it's hard to say it's worse.

I think it's fair to comment that we did not-- last year Paulo mentioned a year ago in New York, we were seeing a pressure on pricing side, and the mix.

Price not only in the lower tag price, but also in the competition of about 200 basis points, 2%.

And so we are seeing further pressure on pricing also, and of course that's associated with this mix.

It gives us a little bit more complicated outcome.

That's why you saw a, call it tepid, margins for 2015.

FX, and of course, even a stronger push on the cost side, but there is that much we can do about cost.

But that we will try to of course to recover, to recover that.

But there's clearly a pressure on the top line.

[Joe Moore] from Merrill Lynch.

I have two quick questions.

First, still on the margin levels.

I know that you said that it's better to look on an annual basis.

But if you look specifically to the segments this quarter, margins were very different from what we've seen in the previous nine months.

If you could please give us some details on why it was that?

And second question on backlog.

If you could elaborate on what growth, what could we expect for 2015, it would be great?

Thank you.

So as far the quarter, I mean the main drivers here, Commercial Aviation, certainly the mix.

I mean we saw, especially compared with the fourth quarter of 2013, we saw a higher concentration from the E175 model.

So that was one of the main drivers.

And in executive jets, we did not deliver as many of the large aircraft as we did in the prior year as a comp.

So of course the mix composition there again was a little bit of an effect.

And for Defense and Security, obviously it relates to the same programs that we have in the segment there, programs such as KC or India or some of the modernization programs.

But again, it's more related to where we are in stages of those programs than anything else.

And as far as backlog or sales outlook, we don't provide any guidance specifically about sales outlook going forward.

We're looking forward.

We probably will achieve at least 1-to-1 book-to-bill ratio of 1, probably higher than that in Commercial Aviation.

So Paulo has some activity going on which we hope to be successful in the not-too-distant future.

That offsets a little bit that pricing, let's say, headwind that I mentioned about.

On business jets, definitely we're trying to get a book-to-bill of at least 1. We have to build up a stronger backlog in business aviation.

So the industry is not very healthy enough.

But as we have a better portfolio, we should, and we work for to assure at least a 1-to-1 book-to-bill ratio in business aviation as well.

Defense, it will depend a lot on exports.

I think the situation on our largest customer in Defense, which is the Brazilian government, I'm more frankly more concerned about managing the accounts receivable and making sure that we have our ongoing programs on time and on track, and being properly paid.

And there may new opportunities, yes.

But I don't think-- I think that's probably second in priority at this stage for the government, and therefore for ourselves.

Exports may be a nice surprise.

Because we have now a second product to offer, not immediately but longer term, which is the KC-390, along with the Super Tucano.

So having products in our portfolio that helps.

So we may have some nice surprises in the exports.

Turan Quettawala, from Scotiabank.

Fred, can you give us a bit of a sense on the biz jet side.

What kind of pricing assumptions are you using?

Are you expecting some pricing improvement in 2015 when you provide your guidance for the year?

And also, do you have any Whitetail sort of buildup at the end of year in 2014 here, maybe on the Legacy side?

Pricing-wise, (inaudible), when we closed the call, and then we had the presentation, Marco can elaborate a little bit more.

Stability is at a fair assumption, I think stability.

But I mean we are not seeing price relief as we expected.

There is some-- the used aircraft market is not getting getting worse.

But it's not getting much better either, I mean for to sell new aircraft.

So there is strong competition out there, and the demand is not that robust yet.

So pricing is an issue going forward.

But I don't think it's going to deteriorate further.

But Marco can elaborate a little bit more.

Are you seeing any benefit from Learjet at all, or from the (inaudible)?

It's hard to say.

I mean the Phenom is doing quite well, as you saw.

And the 500s I think, my friend to my side here, will have a beautiful case to show.

But I think we have to market the aircraft better.

I had the chance to fly the aircraft yesterday, personally.

And it is really a breakthrough.

I don't think we're getting the message across as efficiently as we could and should.

And just lastly on the Whitetail inventory, is there any Whitetail inventory?

Maybe a handful.

I don't know.

I think Whitetail is in the (inaudible).

Yes, so just so maybe there's more amount.

On the Legacy or on Phenom?

I think Phenom 100 right?

Demo aircraft, so nothing material.

I think.

But Marco again, can maybe give you a better, a more precise answer.

That's perfect.

Thank you.

Hey, guys.

It's Noah Poponak from Goldman.

Fred, I just wanted to make sure I understood what you were saying about pricing in commercial jets going forward.

I understood you to be saying it should be an incremental headwind for a few more years.

Because you'll be layering in incrementally more airplanes that came out of fairly difficult or aggressive competitions, and then presumably you would be-- you would need to potentially change price a little bit in the final years before you're bridging to E2.

So that would all suggest pricing is an incremental headwind sort of the next three or four years.

Is that fair, or is that inaccurate?

No.

I apologize.

I don't think I said that.

So thank you for the question is will it get worse, and I said, it's hard to say.

It got worse already.

So this outlook already reflects a worsened environment, so if it will get worse than it's hard to imagine that we can get much worse than that.

But we are working-- we'll be working on the cost side to brace for impact, whichever is the scenario.

But personally, today, I don't see getting worse.

I don't.

But we didn't see that coming either a year ago.

So--

Okay.

Can you talk about the margins, unit margins would look like in the first few years of E2?

Because typically a newer program can have lower margins for other reasons.

But it also sounds like pricing is probably a lot better.

So will margins be better or worse or the same as you transition?

All we have at this stage is planned figure.

And they look good in the sense that reasonably good pricing for launch orders.

And nothing tells us that our recurring cost and our learning curve would be worse than what we're predicting.

So pretty much the same picture we saw before.

The program is going nicely, as I said.

It's a little bit below budget.

And I do attribute this harder pricing environment now to a combination of issues.

Of course as we get closer to the E2, the E1 becomes less and less attractive.

And number two, the bulk of the demand is coming from the US, large orders.

And number three, there are competition very much starved for cash, which gets the whole equation more complicated.

So it's combination of issue.

I think Paulo is doing a really nice job in managing volume, volume and margins and then price in the margins.

And again, the cost variable is a relentless effort on our side.

And you saw the SG&A coming down and the [debt] will continue.

And of course as well as the recurring, the COGS side of it, to the extent that we can.

Okay.

And then just one other one on the cash flow statement.

Inventory was a source of cash, I think, for the second or third year in a row.

And you talked about that being because volume is going up.

But volume is pretty flat across the business.

Is there any way to do better on inventory going forward?

And then can you also elaborate on why advances are a source (inaudible)?

Let's switch to get less boring, just me speaking.

In terms of inventory.

Inventory I think was more the picture on the end.

I think in average terms we'll not be seeing that.

It's more like in the end of the year just to make the calculation that we had this year.

So we don't expect to see inventories necessarily going down.

But it's been a working capital requirement this year.

We mentioned about the advance (inaudible).

Basically when you sell-- we had an amount of cash related to the advance of customers that were not replaced by new sales, especially in the executive jet business.

So that's why it was a source of cash.

Because it reduced, as we delivered, we compensated advance.

So we didn't generate the cash when we delivered.

And it was not replaced by new sales.

Okay.

Thank you.

Maybe as a suggestion, maybe take one or a couple more questions from the call.

Then we can end the call and then turn back to the audience here.

Yes, one to two.

I don't know how many people are in line.

From the call.

There are four questions on the call.

So let's take those four and close.

Okay?

(Operator Instructions) Alexandre Falcao, HSBC

Thanks, guys.

The line is really, really bad.

So I'm not really sure that you actually answered this or not, so please forgive me if this is already answered.

First, in what FX did you guys base your guidance for this year?

That's the first question.

And the second question is, can you run down on the defense programs, where you think-- which are the ones that should not be impacted by any budgets cuts.

What could be impacted, and I know that you're probably maintaining the same programs there.

But if you could give us some granularity on what are the ones that are basically not going to be touched, and the ones that could be delayed would be perfect.

Thank you.

Thank you, Alexandre.

And I apologize for the poor connection.

On the FX, the reference of our planning outlook is 2.8 reais per dollar.

And to your second question, we don't know.

I mean what we do expect is that the KC-390, which of course the most important program from our portfolio, enjoys priority within the government.

And it's part of the [pack].

So at this stage we don't know.

We have talked to the customers and frankly I don't think they know exactly how this whole thing will unfold, the whole thing by meaning the fiscal adjustment that the government is trying to perform.

So I think we feel good about the relative quality of our program vis-a-vis the other investments of the Brazilian government.

But at this stage, we're maintaining our base in the program, but we are indeed in conversations with the Air Force to make sure that if there is a-- let's say an affirmative trend to reduce the rhythm of the program, we have to adapt, and of course we will.

But that's premature at this stage to make any assumptions in that regard.

Okay.

And just a follow-up on that specifically on the KC.

I'm assuming that you've already had your first flight.

Development is basically done.

We're talking about more or less, at least in our calculations, a neighborhood of around $500 million that are needed to finish the project.

And then you enter production.

Is that really the case?

Is this pretty much developed (inaudible), something like that?

And if there's a delay there, you're not going to be able to do your first delivery in 2016.

Thank you.

Well, far as what's left to invest, you know, I can comment on the physical terms.

We have the whole flight test campaign ahead of it, which is significant.

Since (inaudible) not, we should probably take this question off line.

About the 500, I don't know.

I sincerely don't know, and we can address that offline later.

But we had the flight test campaign, and most of the tooling is already there.

But we're talking about something in the range of 2,000 hours, and that's a big deal.

And the second prototype by the way also, so we are building the second prototype.

If there is a-- the program is very, very tight.

So we launched the program in 2008, and said we would fly this aircraft by the end of 2014.

And we were like 40 days late.

So very tight.

And quite frankly, our performance has been amazingly on time.

So there is no slack in planning.

So if there is a delay, if there's a reduction in pace of development, there's absolutely no way we can get the airplane certified by the end of 2016.

So this is all part of the discussion.

Fantastic.

Thanks so much.

Kevin [Cavinta], Citigroup

Hey, guys.

Yes.

I'm also not really getting great quality on this side-- a lot of cutting out.

But I guess one of the questions that we'd have, does your 2015 margin guidance assume any payroll tax or (inaudible) export help getting eliminated?

I mean I don't know if anybody addressed that yet.

No.

That's actually a new question for everybody.

And I think that that's about $20 million negative for us, those latest changes.

Which, as you may or may not know, Congress has sent back to the executive branch.

So assuming it's going to be approved by Congress, that's going to be a minus $20 million negative for us.

Sorry.

And this is already incorporated into the guidance.

So if it's not there, we should have a better-- $20 million.

It's a relatively a low impact, either way.

Okay, very helpful.

Very helpful.

And also could you maybe talk a little bit about what happened on the Tianjin Airlines order that you announced in July for jets and why it hasn't been carried in the backlog yet?

We are still waiting fundamentally for the final approvals of the Chinese government.

We had, Paulo, may have more.

Paulo, (inaudible) just a second.

I'm sorry.

You cut out.

Yes.

There is nothing, and it's fundamentally awaiting on the approvals of the customer, it's awaiting the final approval from the Chinese government.

There has been a recent state-to-state, a Brazil-to-China discussion or forum.

And this item was on the agenda.

And the Brazilian officials got the assurance from the Chinese officials that they should not be concerned.

The order will be confirmed this year.

But we are fundamentally waiting.

And of course pushing the delivery dates as we wait, so we're not building Whitetails for Tianjin.

But we are very confident that that's going to happen

Okay.

That's awesome.

Very helpful.

And then finally, can you elaborate on any potential order activity from any of the US carriers this year, like SkyWest has a bunch of conditional orders, but only confirmed seven?

Or like Alaska Air, do you see any others getting done?

And what kind of activity do you see for Embraer for Asia?

Yes.

We expect to have something done for the US.

We are engaged in a few campaigns.

And we're optimistic that we're going to capture some opportunities which are out there, probably not in the distant future.

And there's also another order in Europe, which we are also optimistic that we can bag.

So Paulo has been very active.

So we have several campaigns, of course, but more short term, we feel better about this one in the US and this one in Europe.

Okay, great.

Thank you very much.

I'll let somebody else ask a question.

Thank you.

And that does conclude today's Q&A session for today's conference.

I'll turn the call back over to Jose Filippo for any further remarks.

Okay.

So thanks, the ones that joined through the conference.

And we're still available for further questions as we do, through the IR Team.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation, and have a good day.