Embraer SA (ERJ) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's first quarter 2015 results.

Thank you for standing by.

(Operator Instructions)

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

This conference call includes forward-looking statements or statements about the 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, among other things, general economic, political, and business conditions in Brazil and in other markets where the Company is present.

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

Embraer undertakes no obligation 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 statements and circumstances discussed on this conference call might not occur.

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

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

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

Please go ahead, sir.

Thank you.

Good morning, everybody, and thank you for joining Embraer's first quarter 2015 results.

As we usually do, we'll go through the presentation, and then we'll be ready for questions in the session.

So, starting on page 3, in the highlights of the business for the quarter, starting with the commercial aviation business, we had a delivery of 20 E-Jets in the first quarter of this year, and including in that number the first E175 related to the direct order of American Airlines out of the 60 in that order.

Now, in terms of orders, we had the KLM/Air France order for up to 34 E-Jets, including 17 firms and 17 options, which includes the current generation of the E-Jet 175 and 190.

Also, continuing orders, the Republic Airways ordered additional five E175.

As far as our customer base, we had inclusion of Kalstar Aviation, which became our first E-Jet operation in Indonesia.

And finally, in relation to the E2 program, we received an important award, which was the Crystal Cabin Award related to our larger bin and individual seats in first class.

Now, in slide 4, moving to executive aviation highlights, we had the delivery of 12 executive jets in the first quarter of this year, split by 10 light jets and two large.

And in relation to our Legacy 450 program, we continue to advance and we expect to enter into service in the fourth quarter of 2015.

And related to the Legacy 500 programs, we had the additional three important recognitions by the "Aviation Week" magazine, the National Aeronautic Association, and also "Flying" magazine.

Moving to next page, defense and security highlights, starting with an important milestone of the KC-390 program, which was the first flight.

That happened early-February this year.

In terms of the LAS program development, we had the delivery of two aircraft in this quarter.

And now, five are already delivered.

Regarding Brazilian fighter program, we signed the partnership contract with SAAB in the middle of this month.

And in relation to the Brazilian satellite program, it was concluded the critical design review report this quarter.

Now, moving into the financial results, starting with page 7, firm order backlog reaching $20.4 billion in the end of March, more than $1 billion over the same period of last year.

Page 8, next page, in relation to deliveries, we had in commercial aviation the delivery of 20 E-Jets in the quarter; and regarding the executive jet business, delivered 12 aircraft in the first quarter, broken by 10 light jets and two large jets.

With that information, we are maintaining our guidance figure for the year in the range of 95 to 100 E-Jets and 35 to 40 executive large jets and 80 to 90 executive light jets.

Next page, page 9, the revenues by segment.

The total, in the high-left chart, we had a total of almost $1.1 billion of revenues in the first quarter.

And when we break these revenues by business, moving to the right side, the commercial aviation business, a total of $662 million in the first quarter; the executive jet business, of $167 million; and defense, for $213 million in the first quarter of this year.

In the next page, the consolidated figures.

As we indicated, $1.1 billion turned to almost BRL3.1 billion.

But important here is that we already mentioned that we are maintaining and confirming our 2015 revenue guidance between $6.1 billion and $6.6 billion.

Moving to next page, now talking about SG&A expenses, we reported a total of $129 million in the first quarter of this year, including $43 million in G&A and $86 million selling expenses.

We remain focused on keeping those expenses under control and monitoring them.

Moving to next page, page 12, as far as operating results, reported a total of $80 million in the first quarter of 2015, with a 7.5% margin, in line with the margin of the first quarter of last year.

We are maintaining our guidance for 2015 for the amount range of $490 million to $560 million and 8% to 8.5% margin.

Next page, page 13, in terms of EBITDA, we had a total of $149 million in the first quarter, with a margin of 14.1%.

Our outlook for the year remains unchanged, with a range of $730 million to $850 million and a margin of 12% to 13%.

On page 14, next page, regarding net income -- actually, net result -- we reported a net loss of $62 million in the first quarter, mainly due to the recognition of $110 million of deferred income taxes.

This already happened before when we have an appreciation of the dollar against the real.

We had to do some considerations in terms of income tax, but the provision is not a cash impact.

It's a deferred income tax.

And that impacted our results in this quarter.

Excluding this specific effect, we would have a gain of $48 million in this quarter.

The next page, in terms of inventory, we end the quarter with a total of $2.7 billion, an increase of $291 million from the end of the year, reflecting the preparation of higher deliveries in the coming quarters.

Next page, page 16, in terms of cash flow, we reported a negative cash flow of $440 million in the first quarter of 2015, compared to a negative $404 million in the same period of last year, confirming the seasonality of the business.

The main reason of this negative figure was the increase of inventories, as indicated before, coupled with a slightly higher accounts receivable primarily related to defense and security segment.

Despite the cash consumption in the quarter, we are maintaining our outlook for 2015 of a use of less than $100 million in the year.

Next page, as far as investments, we had a total of $106 million in the first quarter, broken by: $7 million in research, $27 million in development, and $72 million in CapEx.

We are maintaining our indication of $650 million as total investments for the year 2015.

Next page, page 18, finalizing the presentation before the Q&A session, our capital structure, we ended the quarter with a net debt figure of $581 million, reflecting the cash consumption in the quarter.

In relation to our debt, we remain with a comfortable profile, with an average terms of 5.3 years maturity and 85% (sic - see slide 18, "89%") portion in the long term.

With that, we'll conclude this part of the call, which was the presentation, and now ready for the questions.

(Operator Instructions) Pete Skibitski, Drexel Hamilton.

I want to ask you, I'm guessing that you didn't collect on the large KC-390 receivable from last year during the quarter.

Can you update us on your expectations for collecting that?

And is there any contemplation to slowing the program down?

Pete, actually this program goes as we expected.

As we indicated before, we are focused on maintaining and avoid to increase this accounts receivable.

So, that's basically the pattern that we have for the first quarter.

We had actually a little bit increase in the accounts receivable for the quarter, which was actually the snapshot of that in the end of March.

But we received a portion, about $50 million, in the beginning of April, which returned back to the level of the end of the year.

So, basically, that's the profile of that account.

Okay.

Understood.

And just one follow-one.

Can you give us a sense of how the segment operating margins trended in the first quarter?

It's Eduardo, here.

We have a consolidated operating margin of 7.5% in the first quarter.

Commercial aviation was around 12%; business jets, around 6%; and defense and security was around negative 9%.

Okay.

Just on that defense, that's the lowest I recall for defense in a while.

Any particular one-timer impact that?

Yes, Pete.

Actually, the defense, as it has its revenues or its contracts more exposed to the real, we have to do an adjustment of FX base every quarter.

We usually do this -- we do this every quarter, but in this quarter, as we had an appreciation of the dollar, which is actually about 20%, that impacted negatively.

But it's a non-recurring effect.

It shouldn't be repeated, going forward.

Okay.

Great.

Turan Quettawala, Scotiabank.

I guess maybe just a follow-on there, could you give us a sense of what that non-recurring item was, how big it was?

What non-recurrent?

On the D&S business.

You said there was an adjustment on FX that was non-recurring?

About $30 million.

Okay.

That's helpful.

Okay.

And I guess my next question, just when I look at the longer-term strategy of the Company, I guess, if I look back two to three years, your defense business was supposed to be, I guess, the growth leg here.

E-Jets were kind of getting into a bit of a holding pattern.

And obviously, that seems to have come true, here, with E-Jets kind of flattening out a little bit.

But obviously, the defense business is coming in a little bit weaker.

So, my question, I guess, is, are there any other levers that you can pull here?

The biz jet seems to be getting a little bit better, but certainly not as strong as maybe you would have liked.

Or, have the cards certainly been dealt and I think you kind of have to just make the best of the situation here?

I'm just trying to figure out what kind of earnings levers you have over the next couple of years here?

This is Fred.

Commercial aircraft, it's doing good.

We have been able to sustain and actually increase quantity a little bit.

Also have been able, so far, to offset pricing pressures with efforts that lower costs and try to preserve margins as much as we can.

So, that's a sound business.

Business jets, we had a particularly weak quarter.

We missed a few deliveries.

So, that's why we are optimistic about increasing the numbers in the next few quarters and meeting the guidance, as far as deliveries and revenues in that business.

And again, that's also a growth engine for us, because we're still ramping up the Legacy 500 and we will have the Legacy 450 joining our portfolio at the end of the year.

So, there is growth in that segment for us.

In defense, we have of course a strong dependence of the Brazil's armed forces.

We have a lot of execution.

We have a lot of contracts which assures us a very stable outlook for the next few years; most importantly, the KC-390, of course.

But that's a financial concern.

We have payment problems.

We have to believe that this will be solved soon.

And we see Brazil in the next couple of years regaining traction, and we continue to be positive in the long term for Brazil.

And so, as the defense business is a long-term business, we are not really too much concerned about the long-term viability and [financial] of that business.

As soon as we introduce the KC-390 in the markets, then we will have another product for export.

So, that should be an add-on, step function in that business, as well.

Thank you for that clarity.

I guess, just one more question from my side.

I know it's still early, but there's been a bunch of changes here at Bombardier.

Just wondering if you've seen anything change from a competitive standpoint?

I know there has been a lot of aggressive pricing there, in a lot of your markets there, from them.

So, I'm just wondering if there's been any change there?

Well, they have been aggressive, very aggressive, for some time.

So, I would not have noticed, not personally, any significant change.

I think Alain is a capable guy, of course.

But direct answer to your question, we did not see any specific change in that regard.

Great.

Cai von Rumohr, Cowen and Company.

So, help me understand.

Your gross margin was a spectacularly good 23.7%, despite a pretty lean mix.

You didn't have any 190s, 195s.

So, you had all the lowest-margin commercial aircraft.

So, where do you expect gross margins to be for the year?

And while I understand the revenues may be under some pressure, do you feel that your EBIT margin number maybe has some opportunity?

Yes, I think we had a situation in the first quarter which shouldn't be the same for the rest of the year.

I think that we will have -- if you think about the whole year, it should be back to the level of, as we indicated, like, the high two-digit -- sorry, high teens, as we indicated before.

But we shouldn't be the same situation of first quarter.

I think there's a combination of things here.

If you take, like, executive jet business in this first quarter, we had the lower deliveries, with specific good margin on the models that we delivered, combined with a higher participation of the service and parts that led us to a just higher gross margin.

And also, services in commercial aviation also helped.

But we shouldn't consider that as a trend for the whole year.

We will be back to what we indicated before throughout the guidance that we sent out.

But basically, that's what you should work on.

Maybe help us understand --.

So, what you're talking about is the guidance of the EBIT margin, but maybe help us understand some of the pieces.

For example, the G&A was lower than it's been.

Presumably, that's helped by the real.

And where should we expect this gross margin?

Because just as we look at that quarter, the delivery mix is certainly going to get better as we go through the year.

So, is that gross margin going to be lower than the first quarter, even though the real is basically going the right direction and the mix looks like it's going the right direction?

Yes.

I think that the gross margin [should] be lower than what we have in the first quarter, like you said.

Definitely, the expenses are being positively affected by the exchange rate.

We said that before, that there is a potential benefit if the exchange rate remains in that higher level.

And that's what we expected.

But basically, I don't think that the margins of the first quarter should be something that should remain, when we take the whole year.

Again, we are still relying with our expectation that we indicated early this year when we released the guidance figures.

You mentioned -- this is the last one -- that service was a plus for both biz jets and commercial.

Can you maybe give us a little bit of specifics, in terms of how much the service business was up year over year in the quarter and approximately where it would go for the remainder of the year?

Normally --.

Again, I mentioned that and, specifically, I think the higher impact was in the executive jet business.

Typically, 10% of the revenues are service and parts.

We had 24% in this quarter, and that brings a little bit the higher margin.

But I think it's so much specific for the quarter which, again, we shouldn't expect.

The seasonality of this business will probably be more into the deliveries itself, rather than service and parts, going forward.

It's just like the situation that we had in the first quarter.

Thank you very much.

Noah Poponak, Goldman Sachs.

Can you just talk about how you're able to not change the total revenue guidance, given what transpired in the defense business and the impact from FX there?

Noah, I think that the guidance for the revenues -- again, we are still maintaining that, with the expectation that the defense business should be affected from the exchange effects.

That already impacted the guidance if you compare to last year figures of defense.

But this first quarter is something that we made this adjustment, like we mentioned, that impacted the revenues.

That shouldn't be -- we don't expect to see that in the current quarter.

So, that's probably why you are seeing that.

But we are still keeping this projection that we indicated before.

Maybe I could add, Noah.

We are still under the assumption that the main program, the KC-390 -- there are three main programs: the (inaudible), KC-390, and the satellites.

One way or the other, they will be kept integral.

So, we are under that assumption.

We will, for sure, have a reduction in the base and maybe even the quantity of the modernization programs.

So, yes, that goes straight to your question.

So, there will be a reduced revenue there, but that's not the most important piece of it.

On the other hand, we have some prospects of exports of Super Tucano, which at this point we believe may offset any eventual reduction on the Brazilian side.

So, I think the best view that we have at this moment is to maintain the guidance, again with the big assumption of those three main programs being kept intact.

Okay.

And there's no change to your assumption for the real in the outlook.

Is that correct?

We still to -- we based, as we disclosed to you, at BRL2.8.

It springed all the way up to BRL3.2.

It's now back to BRL2.9, or something.

Right?

I didn't see it today.

Yes.

BRL2.99.

So, the forecasts in Brazil are all over the place, from BRL2.80 to BRL3.10.

So, we should be -- if we have any risk there, it's probably a little bit of an upside risk.

Okay.

And Fred, you mentioned that you missed a few executive jet deliveries in the quarter.

Can you just elaborate on that?

Is that just purely random timing?

Or, was that customer choice to defer?

Or, what happened there?

To be totally transparent, we had, I think, two or three airplanes with customer just kind of a few weeks deferral.

We also missed, I think, a couple of airplanes in production, believe it or not, which is not --.

It happened for probably some supply chain issue or something.

So, we should see probably four or five airplanes that what we missed in the quarter.

So, we're talking about $100 million/$120 million, more or less, which should be added on to the revenues of the first quarter.

So, that of course impacted negatively.

Okay.

So, will all of the Legacy 650, Phenom 300, and Phenom 100 have deliveries down this year?

And anything you could say about what you think those do next year?

Just kind of the legacy airplanes.

I'm not sure I get the question, Noah.

I guess, the executive jets excluding the 500 and 450, are they down this year?

And then, are they down or up next year?

We don't really disclose that in a forward way.

So, we really group them together, the four models -- the 450, 500, the 650 and the Lineage 1000s.

And we would prefer to stay as a block, large aircraft.

We never disclose and I don't think -- nobody does.

I don't think anybody does disclose model by model, as far as giving forecasts for deliveries.

Yes.

Okay.

Derek Spronck, RBC Capital Markets.

My first question is on the business jet side.

Are you seeing any improvement in the used business jet market, in terms of both pricing and inventory levels?

A little bit of a recovery in the US market, not substantial though.

And the rest of the world, no real change to our last report, which is of course China was a very important market which significantly slowed down.

And the Brazil, particularly for us, was also an important market which also slowed down.

So, what has been offsetting this is the US market, which has been growing.

So, it's pretty much the same picture as we reported a few months ago.

Okay.

And the Legacy 500, how is that resonating with your customers?

And then, in particular, what regions are you finding the most interest on that product right now?

As far as a percentage, the US, for sure.

But the last week, we closed one in Brazil and one in Australia.

So, it's really getting traction.

And we are not --.

If you remember when we disclosed our guidance for the year, some people were a bit frustrated by the number.

They expected higher numbers.

We are really trying to have a very solid ramp-up and entering-into-service supports.

But frankly, it's all over the world.

But as far as the bulk of demand, it is also in the US.

And if I could, the Phenom product line has been very successful and you've sold quite a few.

And I guess the pricing reflected that, as well, in terms of getting the good value for your money and, as such, gathering quite a bit of market share over the past few years.

Is that the same sort of strategy you're going to roll out with the Legacy 500 and 450?

Or, are you going to try to be a little bit stickier on the pricing front?

That's a good question, Derek.

The Phenom 300 is the market leader in its segment, by far, and it is the most expensive airplane in the segment.

So, this is the perfect -- when you find the perfect sweet spot for a product.

It's a desired aircraft.

The 500, we see with the potential to become exactly the same in its segment.

We are, indeed, facing -- and I have commented on that before -- price aggressiveness from some competitors with larger aircraft than the 500s, coming down to, let's say, the 500 segment.

But we have been very disciplined to hold our pricing.

This is a brand new product.

It's probably the most updated, most modern aircraft out there today.

And so, we are really trying to hold our price, to develop the airplane.

We will not jeopardize an airplane which has decades of perspective for this short-term pressure.

But having said that, we are getting a very good resonance about the acceptance of the aircraft.

People see the value of the aircraft, and they are gradually coming to accept to pay what we think is the right price for it.

That's great color.

And if I could, just quickly on the regional -- the commercial side.

I know that the E190/195 doesn't compete directly with the CSeries, but there obviously would be some overlap in some of the tender activity out there for the airlines.

As the CSeries becomes more closer to launching into production, are you seeing airlines kind of shifting a little bit more positive towards that program?

Or, is it becoming more competitive?

And also, how is Bombardier positioning it from a pricing perspective?

Are they being as aggressive with the pricing as they have been with their CRJ lineup?

Well, if we separate just for a moment, let's say, the regional market, let's say, the typical regional market, the 70- to 80-seater, to the larger aircrafts.

So, there is activity going on for the E1, let's say -- our E1 -- and of course the CRJ.

There is activity going on.

We are optimistic with a few campaigns, and we see campaigns actually all over the world, not only in the US.

We had this great success at KLM announced -- it was last month, I think -- and we may have a couple of other contracts which we will be able to announce at some time, not in a distant future.

Boeing and Airbus, they have really been very successful in securing a long backlog for its [CO] and new versions, or current and max versions.

So, what we see is that the airlines, there's a huge commitment as far as narrow body for the next several years with Boeing and Airbus.

So, the impetus of looking into smaller planes such as our E2 or the Cseries, it's more or less on the -- maybe closer to the Boeing and Airbus than what we are.

So, I think that's the real issue.

There is a lot of capacity already taken by the A320 family and the 737 family.

And the airlines, they are still -- they don't need to make a strong move at this very moment.

So, that fits nicely for us, because we'll not be in the market until 2018, anyway.

But it's an uphill for anybody trying to get new orders from airlines which have their hands full with huge orders from Boeing and Airbus.

This is more or less how we see the competitive market.

That's great color.

Myles Walton, Deutsche Bank.

Fred, I was hoping to just follow up on that last comment you made around the campaigns in the near term.

It was good to see one non-US campaign hit, with KLM.

Are they also outside of the US?

And would they come as soon as Paris?

Well, hopefully --.

Myles, as you know, we cannot make --.

I probably said too much already.

But, yes, at least -- we are optimistic about that at least outside the US; maybe something in the US, as well.

Timing, always depends on the customers.

But it is at a point that it makes us feel good about it.

Okay.

That's good.

And then, the other -- you mentioned about that the business jets missing a couple of deliveries.

The production maybe didn't click the way it was planned to this quarter on the supply chain.

Was that on the 500?

Or, was it on one of the more mature programs?

I don't know.

Does anyone know?

I think, Myles --.

Well, I probably should get you a more precise answer later on, but I think it was the Legacy and the Phenom, I think.

But it was a question of days or maybe a couple of weeks.

So, it's not a big deal.

I was just trying to be precise in what I was saying.

I appreciate the transparency, Fred.

And then, the last one was on the $30 million in D&S in the quarter that you called out as being kind of a true-up to the FX effect on your programs.

Just want to clarify that was revenue, not profit.

Correct?

[Yes, revenues].

So, what was the profit impact, or the EBIT impact?

No, the $30 million is profit.

It's profit.

Okay.

What was the --?

Okay.

So, was it a (inaudible) on both?

(inaudible)?

Actually, it reduces revenues and profits.

Okay.

But the amounts are very close, close to $30 million both.

Okay.

All right.

Ronald Epstein, Bank of America Merrill Lynch.

Ron is actually on an airplane right now.

So, this is Kristine Liwag calling in for him.

You have changed your voice, Ron.

(laughter)

So, the question we have is, the development work on the KC-390 rolls off this year.

And if all goes along to your schedule, development work on the E2 should also end by 2020.

With a very experienced engineering team, where do you think the opportunities will be next?

Is it large-cabin business jets?

Next-generation turboprop?

Small twin-aisle?

Small tactical fighter jet?

Where do you think future growth for the Company will come from?

That's a billion-dollar question.

That's an issue that my team and my Board are all, of course, thinking about.

So, we will see.

I really cannot tell you now.

We have, of course, ideas and we have plans and possibilities.

We really have to focus on execution.

We have a lot on our plates at this stage.

We have never done that many number of programs in parallel.

But be sure that it's top of my list what do we do with this capacity, going forward.

But we have -- I'll just benefit from your question to say, for example in business jets, maybe I can give you a little bit more color.

My real focus there for the short and mid term is really to consolidate the business, make sure that our Melbourne operation achieves its full potential.

As you know, we are also going to produce the 450 and 500 in Melbourne.

Consolidate our customer support infrastructure and, frankly, boost our cash generation from that business.

We have to have that cash generation to support our investments in the commercial jets.

So, that is as far as I can tell you.

But beyond 2017 and 2018, when we start to have some availability, that's something we have to sort out in the next, probably, 18 to 24 months.

Okay.

Great.

And then, on biz jets, when you look at the orders that you have right now in your book, what percent of that is in the US versus international?

And then, in terms of where you think orders will come from, is it also US -- well, what's the split between US and international?

I don't think we divulge a percent -- and I would not know anyways.

But as far as new orders, the US is the main source of new demand.

But a snapshot of our backlog today, I would not know.

Great.

Stephen Trent, Citi.

I guess, firstly, what is your view of commercial aircraft demand from the US airlines?

You already kind of touched on it, but in addition to the Republic order, do you see maybe, like, United Airlines getting interested?

Or, do you see the legacy carriers more looking at used planes instead of ordering new ones?

Do you have any color on this?

That's the first?

Yes.

Okay.

Bom dia, Steve.

Good morning.

I'm sorry.

This is Kevin, instead of Stephen Trent.

(multiple speakers)

I'm sorry, Kevin.

That's why I didn't address in Portuguese.

(laughter) Waiting for the usual "bom dia" in Portuguese.

I'm sorry.

Yes, we see a continuous activity in the US, definitely for the E1.

We cannot mention any names of course.

We announced those five for Republic recently, and there are an outstanding number of options there.

And the airlines, as soon as -- the faster they can replace their 50-seaters, the more they're going to order aircraft.

So, we are probably bullish about [see the] potential in the US and our ability to compete.

We believe we have a good product.

And the experiencing service of the recently delivered E175s with the improvements has been excellent.

So, everybody who is flying the airplane -- this new version of the airplane -- is really, really thrilled.

So, that creates a virtual circle, and hopefully it will keep us in the lead to satisfy that demand.

Okay.

Great.

And I guess just coming back to the KC-390 development program and all the other ones that you have on your plate, you said you've never really had as many projects all online at the same time in developing.

If the payments from Brazil's government continues to get delayed, do you have any options to continue funding the development?

Or, could you see something similar to what Bombardier had to do with the Learjet?

Well, in the KC-390, the KC-390 is a key program.

So, I definitely do not see Embraer funding the program.

So, let's say, the current -- the best picture we have today is the continuation of the program as planned -- or, close to as planned.

But also, we have to consider a less optimistic scenario where there is a slowdown and a stretch-out of the development phase.

That's a possibility, and we are discussing with the government very openly and fundamentally with the standpoint that either they are able to sustain the current pace of development or, if they are not, you really need to sit down and reprogram it.

We do not see any scenario where the airplane is dropped out.

It's just -- we are way down the road.

It would be really not very smart to stop this program at this stage, having the first prototype already in flight and almost the whole development done.

So, what is there is the flight test campaign, two more years to go.

And so, we do not see a scenario where we're going to just stop the program.

So, the worst case scenario in our perspective would be a slowdown and re-dimensioning of the program, which of course then we would adapt ourselves on the cost side to cope with that.

But that's not what it is there today.

Today, the discussion is still how to preserve the program as it is and how do we get the late payments, fundamentally.

Okay.

Okay.

Very helpful.

And then, finally, just circling back on, I guess, unit margin, you talked about, I think, the biz jet side.

On the commercial segment margin change year over year, do you know what portion came from higher production levels versus any FX effects on, like, SG&A and costs?

A combination of things, I think.

We had a couple of things.

We had the FX that helped us on commercial aviation.

We also had the higher delivers.

We delivered 20 E-Jets, versus 14 last year.

And also, we also had some efficiency gains, as we only delivered the E175s.

We have been mentioned that we increased the mix of E175s, even though it comes at a lower price.

We have efficiency to gain as far as productions, and that's what we are showing in the results.

So, I think it's a combination: FX, efficiency gains, and the higher delivers that we had in the quarter.

Okay.

And how much would you say it was from efficiency gains and how much was from FX?

We cannot disclose that.

We don't have that prepared.

But basically, it's like we said.

It's a combination of that.

It depends on the number on the specific period that we deliver.

So, it's all together.

That's how we approach that.

Okay.

Great.

Alexandre Falcao, HSBC.

My question is regarding if there's any delays in defense.

In terms of accounting, how are we going to actually see this flowing through results?

What I mean is, if we see some [sort of real] contingency in the government, does this mean that you guys are going to cut the revenues from this?

Or, going to maintain revenues and just book it as more receivables?

So, I'm just trying to see exactly, if there's any delays, specifically on the big programs, how we're going to see this flowing through results.

Alexandre, actually the way it works, those type of contracts, they are recorded as a percentage of completion.

So, normally, as you advance in the development of the program, you recognize the revenue.

So, the impact, if for some reason this program will [review] its schedule, for example, then it's going to be like lower deliveries because of the percentage of the advance of the program -- which we don't expect, as Fred mentioned, that should happen.

So, that's typically how it works.

It's not a question --.

We're not invoicing, for example.

It's just like more percentage of completion, advancing, then its recognized as revenues.

That's how it works.

Okay.

But would you stop the --?

Because I know you guys are in the final stages, almost flying this aircraft right now.

Would you continue the completion, even if you don't receive any money from the government?

Just I'm trying to understand if that is, because in the press, each and every day there is a news that the finance minister and the planning minister are going to announce a big budget cut, or at least a budget contingency.

So, I just wanted to see how this, if any -- if there's going to be any impact in the P&L here.

Well, the answer is, no, we will not continue without the applicable payments.

There is a delay, of course.

When they stopped paying us, we did not stop the activities for a few months.

So, we have not stopped so far, under the belief that they will resume their payments and eventually normalize that very unfortunate situation.

If the cuts are permanent, we have no other option than to stop it.

But again, I don't think this is the likely scenario.

It would not be -- that's not a very smart place to cut, frankly, because this is a needed airplane.

It's a potential source for exports.

But theoretically, if that happens, yes, we will not fund -- we cannot fund the rest of the development by ourselves.

We will not do that.

Okay.

George Ferguson, Bloomberg Intelligence.

As I look at the backlog for the E2 program, it doesn't look like there's been any successful campaigns in the last two, three quarters.

I was wondering if you could catch us up with how campaigns are going for the E2 program right now?

Okay.

That's a fair question.

There's a lot of activity, and I just refer back to a previous question.

We had a very good start at the launch of the program, with bulk of the launch orders.

And the airlines, as we are still relatively far from first delivery -- three years from first deliveries -- the airlines having a lot of orders for Boeing and Airbus products, they are comfortable in waiting a little bit more.

So, that's kind of the background.

Having said that, we do have a lot of activity.

We have several campaigns going on around the world at different stages.

But we are not particularly anxious about the very short term because, first, we have this bulk of launch orders which take [several slots] from the initial delivers and, second, because we understand that there is this outstanding backlog for Boeing and Airbus which reduces the appetite for the airlines for short-term commitments.

Okay.

Is there a time frame we should think about where we would start to see E2 orders be re-energized here?

Is it a couple of years out?

Or, how should we think about the time frame?

As we approach the entry into service, which is 2018, of the first model, probably it's reasonable to see some more activity within the 24 months before delivery.

So, sometime next year, probably.

That's sounds right.

And are you seeing your airline customers change any of their thinking around new-generation technology versus older, less fuel efficient technology?

Do you see any sort of shift there?

How is that affecting things, do you think?

That's a point, actually, that I failed to remark.

With the recent decrease in oil prices, that has also, let's say, slowed down the urge for replacing aircraft.

I don't think we can call it a trend, yet.

It's a very short-term effect, very short-term development.

But the airlines, everybody -- I think the industry is kind of in a wait-and-see mode to see where oil will go.

If oil stays at current levels, there will be of course less impetus from the airlines to race and change aircraft.

But in the mid to long term, I think it's an absolute certainty that the new airplanes, the new engines, the new generation of aircraft will dominate the picture.

Okay.

Bruno Amorim, Santander.

I'd like to know if in your opinion the 13% EBIT margin in commercial aviation could be seen as a floor for the full year?

Because you said that what helped in this quarter was FX, higher deliveries, and efficiency gains.

FX is still at BRL3.

You're going to deliver even more aircraft on a quarterly basis in the upcoming quarters according to your guidance.

And I guess efficiency gains will still be there.

That's my question.

Bruno, I think that this is not a floor.

I don't think we should consider that.

That should be considered that the important is the whole year.

This is a combination of things that affect.

FX is also always important; dilution, like we mentioned before; and some efficiency gains.

Sometimes you can benefit more or less on that, depending on the activity on the quarter.

So, I don't think that could be considered necessarily something that should replicate, going forward.

I think that you should consider that back to the guidance range that we indicated in terms of revenues I think will be the best way of --.

Okay.

I'm showing no further questions at this time.

I'd like to hand now the call back over to Jose Filippo for any closing remarks.

Okay.

Again, I'd like to thank everybody to join us.

And of course, our IR team is always available.

So, if you want to go forward into some questions, we'll be ready to attend you.

Thank you very much, and have a good day.

This concludes today's question-and-answer session.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation.

Have a good day.