Embraer SA (ERJ) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's fourth quarter 2015 results, 2015 annual results, and 2016 guidance.

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 2015 results, 2015 annual results, and 2016 guidance.

(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 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," "estimates," "continues," "anticipates," "intends," "expects," and 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 might 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; and Mr. Eduardo Couto, Director of Investor Relations.

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

Please go ahead, sir.

Thank you.

Good morning and afternoon.

Welcome to Embraer's financial results call.

As usual, we're going to go through the presentation, and after that we'll be open to questions from the audience here and also from people outside.

So, I'd like to start with the presentation, page 3, with the financial highlights for the year.

We had, as we anticipated in some quarters before, our record-ever backlog of $22.5 billion in the end of the year; a free cash flow generation year of $178 million; a net cash position as of December of $7.2 million; and revenues of $5.9 billion.

Also, we had an important non-recurring event, which was the filing of Republic Airways Chapter 11, which led us to record a provision of $101 million that impacted the results.

We'll do more details during the presentation, and we show the figures also with and without that impact.

In terms of result, we reported an EBIT of $332 million, with margin of 5.6%.

Adjusted for the Republic impact, it would be $432 million and a 7.3% margin.

In terms of net income, reported $69.2 million of profit; and without the Republic, $372 million.

Moving to next page, starting the highlights for each business unit.

First, commercial aviation for the year 2015.

We had a delivery of 101 E-Jets and net firm orders for 155 airplanes in 2015.

This returns into a book-to-bill ratio of 1.5, very important for the Company as a big highlight for this business.

We added new operators in 2015.

And also, in the end of the year we reached the mark of over 1,700 aircraft delivered in the E-Jet program.

Also, an important milestone of the E2 development program was the rollout of the first E190, which happened last week.

Next page, still in commercial aviation but more focused on the fourth quarter, we had the delivery of 33 jets in the quarter, including the delivery of the aircraft number 1,200 for Azul.

Regarding new orders, we had the Skywest order for 19 E175 that will fly for Delta and the two options confirmed by KLM Cityhopper, which will be -- were actually confirmed in the last quarter.

We also -- finalizing the highlights of the commercial aviation, another information related to the E2 development was the successfully started of the flight test of the new engines.

Moving to next page, highlights for executive jets in the year.

In 2015, we delivered 120 executive jets, broken by 82 light and 38 large jets.

And as also we had in the commercial aviation, the book-to-bill ratio was very positive as well there.

We had a 1.1 ratio in 2015 book-to-bill for executive jets.

Regarding our programs, the Phenom 300 was again the most delivered aircraft in executive jets business in the year.

This is now three years in a row of that performance.

Finalizing the highlights for executive jets, the program of the Legacy 500 and 450, we had the certification entry into service of the Legacy 450 in the end of 2015, which we delivered three last year.

Next page, in terms of the fourth quarter, we had a delivery of 45 executive jets: 25 light and 20 large.

In terms of commercial activities, we had the order for Emirates flight training academy for up to 10 Phenom 100 and also the delivery of two Lineage 1000 in the US market.

Also in the fourth quarter, as we mentioned, the Legacy 450 entered into service, and we would deliver three aircraft in that quarter.

Next page, defense for 2015.

Regarding the KC-390 program, first flight of the KC-390 happened in the early last year.

It was in February.

And now, this plane is in certification process, over 100 hours of flight in this process.

In terms of commercial activities, we reached 15 deliveries of the total of the 20 orders for the US air force; 11 of those delivered last year.

Regarding the Gripen program, we already started the works in Brazil and Sweden, and we now have 46 engineers working in Sweden in the preparation of the program.

Finalizing the defense highlights, the Sisfron project advanced and reached over 50% of execution.

Next page, fourth quarter for defense.

An important order of six Super Tucanos for the Lebanese air force.

And in relation to the defense programs, Atech completed its first phase of air traffic management system to be implemented in India.

And the Brazilian geostationary satellite began the integration and testing phase.

Concluding the highlights, the UK armed forces selected the Phenom 100 to train their crew.

Okay.

Now, with that, we close the highlights and we enter in the financial results, starting in page 11 with the backlog.

As we already mentioned, we have a $22.5 billion in the end of December, a record ever for the Company in a year-end position.

That can be broken by: 70% of that amount related to commercial aviation; 21% related to defense; and 9% for executive jets.

Next page.

As far as deliveries, we had already mentioned the 101 deliveries for E-Jets in the year and 120 aircraft delivered in executive jets, broken by 82 light and 38 large.

Next page.

Net revenues reached a total of $5.9 billion in 2015, within our guidance range.

In your next page, it's probably a little bit more details on the revenues, breakdown by segment and region.

In terms of segment, the reduction in defense revenues was related to the dollar appreciation in 2015 and now represented -- last year, actually -- 13% of the revenues, from 23% in 2014.

We saw participation of 56% of commercial and 30% of executive jets in terms of the revenue breakdown.

When you go to the right side of this page, by region, the highlight, you see 65% delivered to the North American market, [basically] related to the orders and deliveries to United States.

Next page, revenues by segment.

All business reported revenues within the guidance range.

But the negative highlight was the defense revenues, as we mentioned before, due to the weaker Brazilian real that reduced its participation here.

Basically, this is the breakdown by segment.

Next page, just to SG&A expenses.

SG&A expenses, page 16.

A positive reduction reported in 2015 in both US amount and percentage of net revenue, reaching 9% of revenues in 2015.

And that confirms our focus and commitment to really reduce the costs and take the opportunity as we can in terms of adding value and creating positive results for the result in terms of expenses and costs.

Next page, page 17.

Just information broken by quarter, the SG&A expenses, and we see how it looked.

It's almost the same trend throughout the year in Brazilian reais and US dollars.

Next page, page 18.

And here's to elaborate a little bit more because of the impacts that we had here.

We reported a total of $332 million, with a margin of 5.6%.

This number was negatively impacted by a non-recurring event of the mentioned Chapter 11 of Republic Airways.

And excluding that amount, the EBIT would have been $432 million, with a margin of 7.3%.

But also, as we've been indicating and we mentioned that when we reported the third quarter results, there were risks that could prevent us to reach the guidance range by year-end.

Already in that moment we indicated that we will be targeting the lower end of the range.

And in fact, those negatives impact actually happened, which were the impairment of used aircraft, coupled with the cost base revision in defense due to the devaluation of the real in the end of the quarter, especially in the middle of the last quarter of last year.

If we take those effects out in a pro forma basis, we would have been reporting EBIT of $494 million and a 8.3% margin in 2015.

Next page, in terms of EBITDA.

The reported amount of $648 million, with a 10.9% margin.

Excluding the non-recurring Republic effect, that amount would have been $749 million, with a 12.8% margin.

In terms of net income -- next page, page 20 -- we reported a $69 million net income, with a 1.2% margin.

Here, the two important effects that we would like to detail and adjust on the calculation.

The first event was the Republic effect, as we already mentioned.

And the other was the devaluation of the real that caused us to have deferred income tax.

While we had that in previous quarters, but in this quarter we also had.

And the combination of everything returning into the year impact.

So, if we return to those non-recurring effects, the net income would be $272 million, with a 4.6% of margin.

Next page, earnings per ADR reported $0.38 per ADR, with a 49% payout, as we've been anticipating by quarter dividends.

Because of the adjustment in the end of the year for the Republic effect, it returned for a higher payout, which was 49%.

But if we adjust for the Republic non-recurring effect, the earnings per ADR would be $1.49.

Next page, page 22.

In relation to investments, we had a total of $518 million in 2015, broken by: $42 million research, $288 million development, and $188 million in CapEx.

The weaker real was the main reason for the reduction compared to our guidance, as we already continued the programs and investment phase of the programs as we expected.

Next page, 23, free cash flow.

We had a positive free cash flow of $178 million in 2015, primarily due to the strong cash generated in the last quarter as a consequence of lower investment and working capital reduction.

So, that allowed us to have in the total year $178 million, which $895 million generated by operating activities, $290 million negative of additions to PP&E, and $428 million intangible assets additional negative due to the investment in the programs or development of our programs.

Next page, before we talk about the guidance 2016, our capital structure.

We reported a net cash of $7 million in December of 2015, coming from net debt in previous quarters.

In relation to our debt, it's still very comfortable in debt to our profile, which has a maturity average of 6.2 years.

With that, we finalize the results and we now get into the presentation of the 2016 outlook.

Page 26, outlook for revenues.

Consolidated revenues estimated in the range of $6 billion to $6.4 billion, which includes commercial aviation, $3.45 billion to $3.65 billion in 2015 (sic); executive jets, $1.75 billion to $1.9 billion; defense, $0.7 billion to $0.75 billion; and other revenues, $100 million.

That sums up to the $6 billion to $6.4 billion.

In terms of percentage, that represents 57% to commercial, 30% for executive, and 12% defense.

In terms of deliveries, for commercial aviation we estimate deliveries in the range of 105 to 110 E-Jets in 2015 (sic); and in terms of executive jets, 115 to 135 airplanes, broken by 75 to 85 light jets and 40 to 50 large jets.

The next page, operating results and investments.

Our forecast for EBIT the range of $480 million to $545 million, with an EBIT margin between 8% to 8.5%.

In terms of EBITDA, the range of $800 million to $870 million, with an EBITDA margin from 13.3% to 13.7%.

The free cash flow is expected to be a use of less than $100 million.

And regarding investment, a total of $650 million, broken by $50 million in research, $325 million in development, and $275 million in CapEx.

With that, we finalize the presentation, and now we're ready for the questions.

We will open now for the audience first, but the people outside they can also put their questions in and we're ready to answer.

Thank you.

Myles Walton, Deutsche Bank.

Could you touch on the margins in the fourth quarter by segment, in particular within the area that seemed to be the biggest surprise, business executive aviation?

And touch on what the effect is of any trade-ins and kind of what the underlying clean margin would have been in executive aviation?

In terms of margin in 2015, we had 10.4% in commercial, 3.4% executive, and negative 11.5% for defense.

It's good to recall that commercial aviation already is reflecting the impact of the Republic provisions.

So, without the Republic provision, commercial would report 13.4% margin.

So, the question was on the executive aviation at 3.4%.

And I imagine that means in the fourth quarter it was pretty low.

Can you touch on what's driving that in the fourth quarter?

In the fourth quarter, we had a situation where we had a number of trade-ins, larger than we normally have, that impacted, because some of those trade-ins were most of them not our aircraft.

So, we had that situation in that quarter.

So, when we sold those used aircraft and recorded also the impairment of them, that return in the end of the year a provision item there.

So, that's mostly what impacted the last quarter of executive aviation.

Myles, to your question, yes, we had this glut of used aircraft.

Many of them were not Embraer-made.

We prioritized reduction of inventory and cash generation.

Operating margin, Eduardo, I think it's close to zero in the executive aviation in the fourth quarter?

0.5%.

Just to clarify the margins per business for the quarter, we had 6.3% margin in commercial aviation.

That includes the Republic impact.

If we exclude the Republic impact, EBIT margin for commercial was 15.3%.

On business jets, the margins were 0.5% in the fourth quarter.

On defense and security, minus 5.5%.

Consolidated margins, 3.2%; excluding Republic, 8%.

Okay.

Just to wrap up that line of questioning, what's left in your glut of non-Embraer aircraft in inventory that you have to liquidate?

And what's implied in your 2016 guidance for the business jet margin profile?

I think we pretty much got rid of -- if I may use this term -- used aircraft.

I would not know by heart how many airplanes we have in inventory, but it's much, much lower than what we had.

Because as we concentrated the deliveries in the fourth quarter, we had this concentration also of the trade-ins, and we decided to move them quickly.

Looking forwards, looking towards 2016, our guidance, we have historically resisted market share versus margin.

So, we always favored margin and cash generation vis-a-vis market share.

So, implicit in our forecast for next year we probably could think about also a little bit higher volume.

We believe the volume that we are setting is more adequate to resist the pricing pressure, which there is out in the market.

So, a combination of better organized ramp-up, a relatively lower than what could be volume -- it's going to be higher than 2015 anyway, but maybe somebody could argue it could be a higher volume.

That would give us pricing power.

That would give us more resilience against the pricing pressure.

And also trade-ins, which, in the end, historically the last several months have shown the secondary market to be a little bit depressed.

I would just add that we still are positive on the US market, which is the market which fundamentally is demanding executive jets right now.

What we have seen in these first 60 days of the year is due to the volatility of the markets we have seen a delay in decisions of acquisition of executive jets aircraft.

Is that something -- is that a trend?

Maybe not, not necessarily.

But

(technical difficulty)

I can tell that it was better than what we had last year.

[But in the fundamentals, there is] for us to have a better 2016 in the business aircraft market.

[Josh Myerberg], from Morgan Stanley.

[I was also hoping you could give] your perspective on what the future holds for Republic and what the larger implications of its Chapter 11 could be for the overall regional low-cost market in the US?

One [main] concern that we have is that potential part of its existing fleet of (inaudible) could eventually make it to the market.

[Any impression?]

You mean the E-Jets or the 145s?

E-Jets.

E-Jets.

Okay.

Paulo, you want to take this?

I can do that, but --.

We see the regional aviation market in the US very strong right now, of course after the changes in (inaudible) from 60-seaters to 70 seats and (inaudible) that happened in the last few years.

(technical difficulty) from the majors, especially American and Delta.

Then, you have smaller players being important players also, [TSA based in Saint Louis].

So, the major airlines, they do depend upon the regional airlines [otherwise] are flying.

So, I think it's definitely an important part of their business model that will buy CPAs from the regional airlines to fly smaller jets.

So, regional airlines fly regional jets, smaller jets, much more efficiently than the majors would do.

So, that is an integral important part of their business plans.

Regarding Republic, my take on Republic is that they are very important for American, for Delta, and for United.

Republic nowadays operate about 250 aircraft.

When we talked to the three major airlines, they like Republic.

They believe Republic played a very good service.

They have a cost structure which is okay.

Of course, now they'll have to renegotiate the CPA, given the pilots issue.

But the pilot issue, the pilots' requests for increased salaries.

So, this is not only on the regional airlines; this is across the board in the USA, given that airlines are making money right in the US now.

So, apart from that, Republic has a very good service, very good reliable service, and Republic is very important.

So, it has a meaningful business for these airlines.

So, I believe Republic will survive.

I believe -- I don't know exactly which format Republic will take, going forward.

But I believe Republic will be a survivor, given the importance of Republic in the system.

I also believe that some consolidation in the regional airlines in the US may be necessary, going forward.

We are seeing the majors very strong, very strong.

And we are seeing some regionals not very weak, but somehow a little bit in need of more muscle in order to negotiate -- be in a better position to negotiate with the majors.

Thanks very much.

A related question, just pertains to your mix on the commercial side.

You did have a very good evolution in terms of your 175s, but we saw a decline in your E190s and E195s.

And I was just -- could you give us some sense of, first off, what's built into your numbers, your forecasts, for 2016?

And when we might see a recovery in demand for the E190s and E195s?

For 2016, the bulk of our deliveries will be in the United States.

It's regarding the 175, of course.

There will be also some 190s and 195s outside the US, but by far the bulk will be in the US.

We are seeing a good demand for the 190 and 195 outside the US.

We are involved now in transactions that involves these [two types].

And we are -- for both, E1s and E2s.

So, when we look our sales last year, 176 aircraft were sold last year.

So, when we look at that, we see a very good combination of 190s, 190 family and the 175.

Also a good combination of E1s, E2s.

So, I think we are -- we continue to see a good market, of course a good market for our market size.

So, we are talking about a segment between 70 and 130 seats.

Turan Quettawala, from Scotiabank.

My question is on the D&S segment.

I'm just wondering what the total cost base revisions were in 2015 on that segment?

What the BRL assumption is for 2016?

And I guess, how do you expect the cost base revisions to flow through in 2016?

In terms of 2015, it was about $130 million impact.

As we said, it was not the only impact there.

This is one of the major, of course.

There were of course the revision of the programs that we had last year.

For this year, this [cost root] which is the devaluation of the Brazilian real.

Although still we cannot anticipate, but we don't see the volatility that we had last year.

So, maybe, this will still be something that we have to consider and to be aware of, but we don't expect to see in that situation that we had last year.

It's more now to really focus on the development of programs and costs in terms of discipline in terms of costs, and it's more like we see this year.

I think the programs are already adjusted for the pace that we agreed with the customer in that case.

Basically, that's what we expect to see this year in the same situation.

So, the cost base revision is zero in your guidance, implied in your guidance?

Yes.

Yes, that's -- we work on a flat exchange rate.

Thank you.

It's Steve Trent, from Citi.

Just one or two questions, if I may?

The first is, I was wondering in the commercial segment are you seeing any shift, so to speak, when you think about your competitors with respect to the amount or maybe the undue amount of help that some of your competitors are getting from their home governments?

And I'm wondering if you've noticed any difference in that over the last year?

That's my first question.

Some competitor?

One specific in the northern hemisphere.

Yes, of course we are watching that closely, following it up.

We do not have any other information other than what we read in the press.

It is of course a matter of concern that an artificial imbalance may be introduced in the marketplace.

We of course are not in a position to say that the state aid, it's being done in an adequate or inadequate way.

We have to wait and see.

If it is equity as we have seen, probably something which is within the framework of the WTO.

Brazilian government is obviously following up this development, and there has been great discipline since the [panels] in the last decade, which affected Brazil and Canada but also was followed by US; Japan also a signatory of the AES, too, the aircraft sector understanding.

So, we have not seen in the last several years -- probably a decade -- any disrespect to sales finance.

What we see now, a $2.5 billion investment, is something new.

We are watching.

And you may recall our last capital increase was back in the year 2000.

So, we have not increased our capital for the last 16 years.

We have fundamentally financed our development, our strong R&D, and CapEx with cash generation of the Company.

And that's how we plan to continue to do.

Great.

And just one other question for now.

When I think about the defense segment and what seems to be a very successful deployment of the A-29 program by the United States and Afghanistan, to what degree do you think there's possibility that other foreign militaries are maybe taking a look at the product?

I absolutely -- we are very bullish on the A-29.

A-29 is the Super Tucano.

Very bullish.

This aircraft has been, I think, very well specified.

The spec was very good, done by the Brazilian air force.

I think Embraer also did a good job in developing and producing a superior aircraft for that mission.

The US air force is a huge endorsement to the product.

The first collateral results of our 20 aircraft ordered for the US air force, out of which -- how many have we delivered, Jackson?

16?

-- 15.

And we have, I think, eight already in Afghanistan.

The Lebanon order.

So, that came as a result of that operation in Jacksonville.

The airplanes will be produced also in Jacksonville.

So, there is a second tranche, second batch, for the US air force which we hope will be confirmed.

We don't have that information yet, but that's our expectation.

And we believe that out of that facility, out of Jacksonville, we may actually have a strong export, for the wrong reasons.

Unfortunately, the world have more and more conflicts which are typical of requiring aircraft of that size and that agility and that low cost, also.

So, yes, we are bullish on the --.

Jackson, in his presentation, will detail how spread our customer base is becoming in the A-29.

Very helpful.

Pete Skibitski, Drexel Hamilton.

I'm just curious how conservative you feel your free cash flow guidance is for 2016?

If the real stays where it is, is there another opportunity to undercut on the development expenses?

And if you can manage working capital again, is there an opportunity to outperform on free cash?

I think that what we saw in 2015 was the phase of the investment was pretty much related to the labor, the engineering phase.

So, we benefited.

The exchange rate helped a lot without affecting the development capacity.

I think that this is still an opportunity that we may have.

However, now we enter in different phases of the development, more related to dollar-denominated costs of the development.

So, I don't think this will be something that could be very clear [there's going to be impact].

But you have to understand the difference between what we [phased] last year and this [year], following phases of the development.

Maybe just following up on that question, probably to the benefit of everyone, we have assumed a flat exchange rate of BRL3.9 per dollar.

So, the plan that you see in front of you has this assumption.

Is there any remaining cash payments on the KC-390 or other defense programs that you're still awaiting from the Brazilian government?

Or, is that customer caught up in all the payments that are expected?

Not all.

But we have -- as we said mid last year, we would make a strong effort not to let the accounts receivable increase.

And we did that.

Actually, I think there was a little bit of a decrease.

But it's still a large number there in our accounts receivable from the -- owed by the government.

So, these first 60 days we did receive payments regarding the KC-390.

We of course are aware of the increasing difficulties of the Brazilian budgets; a recent announcement of a further cut in the budget which we do not know whether or not it's going to affect our programs.

But we are much more prepared to face the situation now than we were, let's say, 12 months ago when we were really hit without much advanced notice.

So, again, what we have presented represents a BRL3.9.

If the real further devaluates to BRL4-BRL4.5, of course that's going to impact the defense business again, but probably to a much lower extent than we had last year.

If I could sneak one last in, on segment margins in 2016, commercial seems to be doing really well even at a worse mix with the 175s.

I'm just wondering kind of what you're assuming in your EBIT margin guidance in biz jets and especially defense?

Are we assuming breakeven on defense in 2016?

I just wondered [about the calculus of that]?

I think probably we can think about commercial jets again pulling the average upwards, probably again low double digits for commercial.

Defense, from low- to mid-one-digits margin.

And executive jets, from mid- to high-single-digits margin.

That's roughly where we would expect, averaging out this 8.5% that we already presented.

Maybe if we have some questions from the broadcast?

(Operator Instructions)

Gustavo Gregori, from HSBC.

I have a quick question regarding the backlog.

Given everything that's going on with Republic, do you believe that there's any risk in terms, going forward, that we could end 2016 perhaps with a decrease in the backlog?

Or, do you not see any risk?

And furthermore, a second part of the question would be, is everything that's going on, does that create any risk in terms of deliveries, looking forward for 2017, while you're trying to bridge the gap [between E1 and E2]?

The first part of the question on Republic and deliveries backlog.

We have this year nine deliveries to Republic, from August to December, and we have 15 additional next year, all of them in connection to a contract, a CPA agreement, between Republic and United Airlines.

So, United has a big need for these aircraft.

So, it's been said already by United to us that they do need these aircraft.

So, being Republic or being other regional airline, we believe that we'll deliver these aircraft.

So, still a little bit early stage to say what will be the structure, the format, because the Chapter 11 was last Friday, but we are working on this now.

And as the next delivery is in August only, we have enough time to structure something.

But I'm very confident that these aircraft would be delivered, given the need that United has right on them.

I think it's fair also to add that Republic has already represented to us they do want the aircraft.

The question is whether or not -- which format we'll be able to deliver.

But I think that the first question was related to that.

We do not see airplanes exiting the Republic fleet.

Actually, we do not see them even waiving the deliveries they have in backlog.

So, we really believe those airplanes will be delivered, hopefully, to Republic.

But if not, I think other alternatives will show up, because the airplanes are meant -- they are packaged to fly for United; in this case, just United, but also American in other parts of the country.

Important to mention that Republic restructuring is all about the 50-seater.

So, it's not at all about the 76-seater.

So, they will be a single-aircraft operator, going forwards.

That's where they find that would be more already efficient going forward, now given the pilot issue.

So, flying a slightly bigger aircraft.

All right.

Now, we are going to take a question from the phone.

Cai von Rumohr, Cowen and Co.

Fred, you said you expect low-double-digit margins in commercial.

But looking at your guidance, it looks like the margin would be down in commercial from the 13.4% in 2015.

You had very good margins in the fourth quarter.

You look for higher deliveries.

And you say the mix is about the same.

Why are the margins down?

Are you assuming any residual value guarantees in there?

Or, why do they appear to be lower?

No, not RVG.

Probably mix.

We still had in 2015 some E190, E195 contracts which helped to boost the margin up.

So, I think it's fundamentally mix.

Paulo, any other specifics?

No, that's it.

It's basically about mix.

So, not only more 190s, 195s in 2016, but also it's very good margins in certain specific deliveries.

Excellent.

And then, the last one.

You talked a little bit more in your release about the FCPA investigation and your negotiations with the DOJ.

Is it your hope and expectation to kind of resolve that matter in this next calendar year?

We don't really have any specific comments.

Hope, yes.

Expectation, no.

We cannot have any expectation.

We have to abide by the disclosure that we have made.

So, only thing we can keep collaborating in full and waiting for the results.

Terrific.

Darryl Genovesi, UBS.

Just looking at your margin profile from 2015, I think you said excluding the used inventory charge and excluding the adjustment at the defense business, you did about 8.3% EBIT margins in 2015.

And your guidance overall would embed a relatively flat margin profile in 2016 from that level.

And just wondering if you're counting on a real at BRL3.9 per dollar, which is where we are today?

That still embeds a 15% to 20% weakening relative to the average level from 2015.

And just wondering why we're not seeing any incremental margin upside as a result of that?

Well, there's a combination of variables.

Defense, for example, we are having a further reduction in activity.

And of course, the more we reduce income in the revenues, the harder it is to absorb the fixed costs.

We just explained also about a slight reduction in the commercial jets of those robust two-digit margins.

And we hope to have some recovery on business jets.

So, I think the effect of the real is more pronounced in the cash flow, specifically on the R&D, on the, let's say, engineering part of R&D expenses.

But as Filippo said that also in 2016 we will have a higher dollar-denominated expense portfolio because of the (inaudible), tooling, et cetera.

So, I guess it's a combination of several different things.

Thanks for that, Fred.

Just as a follow up, it may be a little bit bigger question on roughly the same topic.

Historically, we've seen a very high degree of correlation between your EBIT margin that you reported and the real-dollar exchange rate.

But that correlation seems to have broken down this cycle, not just in 2016 but basically since kind of 2008-2009.

Should we still think of you longer term as a beneficiary of a weaker real?

Or, does the downside at the defense business essentially offset any gain that you get at the commercial and executive jets business?

We really tend to look at exchange rate as a tailwind or as a headwind, not as a definition of our competitiveness.

We are, for example, moving the whole assembly line of Phenoms to the United States, to a higher-cost labor cost environment, because we believe this makes all sense: strategic sense, supply chain logistic sense, risk, et cetera.

So, we see our business as a global one.

We see Embraer and its endeavor to become more and more a global company.

And it's not by arbitrating labor costs which, as everyone knows, is not a significant part of the costs.

The supply chain, the equipments, these is the significant portion of our COGS, of any OEM COGS.

So, that's how we see it.

So, yes, the weakened real, it's a tailwind.

It's welcome.

It is not what defines our competitiveness.

We have to be competitive regardless of a stronger or a weak real.

We were in an upside situation three or four years ago and we were competitive, and we are now.

But we have benefited, yes, from this devaluation.

Great.

We'll come back to the audience here, a question.

Okay.

So, with that, I think it's time to finish this piece of the event today.

So, we'll be ready now to go to the presentation of each business unit.

I don't know if I have to turn back to the phone there?

Not yet?

Are we done with the conference call?

We may have time for one more question.

Yes.

Maybe we'll take a final question and conclude the Q&A.

If there is one.

Derek Spronck, RBC Capital Markets.

When we consider your CapEx spend levels over the next few years, would you consider 2016 as the high point of your annual CapEx spend?

The Legacy 450 and 500 are now launched, and should we start to think about it coming down in 2017 and beyond?

With the current programs, probably.

Maybe 2016 and maybe 2017 will still be significant.

But probably right.

Probably right, under the existing programs.

Okay.

And just quickly, on the KC-390, are you seeing any increase in international demand for that program?

We've seen a lot of interest, many air forces visiting and taking questions and getting acquainted with the product.

The second prototype will join the flight test campaign very soon.

The airplane is flying really well.

I think Jackson is going to talk about it in a minute.

So, we are all set to go to have this airplane certified by end of next year and start delivering units in 2018.

So, so far, so good.

Okay.

I think we have the last question here in the audience.

[Daniel Fontanel, from SBVE].

If you could talk about the cash flow generation in 4Q?

You have sort of a positive number, and you said that you reduced CapEx maybe at by $100 million.

Was there any other effect that you could see?

Basically, the fourth quarter is the most active quarter, where we have a lot of activity, commercial activity, and deliveries are concentrated if you take the split by quarters.

So, that is exactly what happened last year again.

But that, combined with -- there's a combination of that with a lower investment, not that we didn't invest in terms of the advance of the programs.

This is more like an opportunity because of the exchange rate that affected positively there.

There was a working capital gains, as well, that we realized there in terms of an advance from customers because of the sales increase.

And we were able to reduce (inaudible) inventory if you compare to the end of 2014.

So, this was a good combination that we had, but basically it didn't change in terms of the pattern that we see, which is more activity in the last quarter of the year.

That's basically why you see a cash generation positive in the last quarter.

Thank you.

Thank you.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation.

Have a good day.