Embraer SA (ERJ) 2016 Q3 法說會逐字稿

Okay. Good morning, everyone, and welcome to the Embraer third quarter 2016 results. This conference call is being held during the Embraer 2016 in the US with the [presenters] and the investors and the market analysts here in Orlando. At this time, the Company will present its third quarter 2016.

Afterwards, we will conduct a question and answer section, and instructions to participate will be given at that time. (Conference instructions.) As a reminder, this conference is being recorded and webcasted at ir.embraer.com.br.

This conference includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based its 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 today are Mr. Paulo Cesar de Souza e Silva, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; and myself, Eduardo Couto, Director of Investor Relations.

Now I would like to pass to Filippo to start the presentation. Thank you.

Okay. Thank you, everybody, for joining us in this third quarter results conference. As we do, we'll start with the presentation and then we'll enter in the Q&A session.

So, with the presentation and starting on page three, the highlights, and starting with the commercial aviation business, we had, in terms of deliveries, the delivery of 29 E-Jets in the third quarter compared to 21 E-Jets in the same quarter of last year.

In terms of sales activities, two important information; Colorful Guizhou Airlines ordered for up to five E190 in China, and also the announcement that Aercap placed five E-Jets E2 with Borajet. This reflects what we are seeing, the successful placement of E2's by leasing companies with airlines.

Regarding certification, we had the approval for E170 and E175 for operation in Russia. We already had this approval for the 190 and 195.

Regarding -- in relation to the E2 development program, we had a third prototype of the E2 190 joining the flight campaign, and the status of the order activity with a backlog that reached 272 firm orders and a total of 670 commitments.

Moving to the next page in relation to the highlights of the executive jet business, starting with the delivery of 25 jets in the third quarter, broken by 13 lights and 12 large, a good mix between large and light. Also, regarding sales, Colorful Yunnan ordered two Phenom 300.

In relation to the programs, we launched the Phenom 100 EV with new avionics and modified engines. And in the Legacy 450 and 500 program, the first Legacy 450 assembled in Melbourne is now in flight tests.

As we used the information before, regarding the customer satisfaction we were ranked number one in both AIN and Pro Pilot Product Support Surveys for 2016. This is something very important for the bizjet.

Moving to the next page, the highlights of defense and security, starting with the KC-390 program, we had the flight test campaign that reached over 600 hours with now two prototypes. We concluded the delivery of the 20 aircraft to the US Air Force in the LAS program. Also, we delivered the first Legacy 500 for airport in-flight inspection to the Brazilian Air Force.

Regarding the development of the Brazilian satellite, the program is in final tests. And finalizing the highlights of defense and security, we got a new contract for environmental and monitoring of the Amazon region through the Atech subsidiary.

Moving to the next page and before we enter into financial results, we would like to touch briefly on the FCPA investigation case. So, the next page, as we already publicly announced, we reached the final agreement with the US and the Brazilian authorities for the settlement of the allegations of noncompliance on the US Foreign Corrupt Practice Act.

With that, we agreed to pay the amount of about $206 million to the US and Brazilian authorities. And also, the Department of Justice agreed to defer the prosecution for three years. Charges will be dismissed if the company does not violate terms of the deferred prosecution agreement. And also, we agreed to retain an external and independent monitorship for a period of up to three years to assess compliance with the final agreement.

The next page, we'd like to take the opportunity to say that the company embarked on a comprehensive effort to improve and expand its compliance program worldwide. Some key enhancements include the creation of a compliance department with the appointment of a Chief Compliance Officer; the development of a program to analyze the engagement and the payments for third parties; the improvement of policies, procedures, and controls; and the enhancement of anonymous and other reporting channels, among other initiatives.

Some examples of such activities are the numbers that we're showing here, the 20,000 people trained through -- as of the end of 2015, and also over 7,700 certifications of third parties in the due diligence program.

Our next page, now entering the financial results, and we go directly to page 10 where we show our firm backlog. And it reached $21.4 billion at the end of September despite the deliveries in the quarter, and we had a decrease of $500 million when compared to June 2016.

The next page, regarding deliveries, starting from the left of this page in terms of commercial aviation, the delivery of 29 E-Jets in the third quarter and accumulated of 76 deliveries in the year.

On the right side of the page, executive jet delivery. We had the delivery of 25 E-Jets -- sorry, 25 bizjets in the quarter, broken by 13 light jets and 12 large jets. The total accumulated in the year was 74 planes, broken by 48 light jets and 26 large jets.

We take this opportunity to confirm our guidance for 2016, which is in the range of 105 to 110 E-Jets and 105 to 125 executive jets, broken by 35 to 45 light jets and 72 to 80 light jets, 35 to 45 large, 70 to 80 light.

The next page, page 12, in terms of net revenues, we had a total of $1.5 billion in the third quarter, higher than the same quarter of last year due to the increase in deliveries. As of September 2016, the accumulated net revenues reached almost $4.2 billion. For the full year, we are estimating revenues in the range of $5.8 billion to $6.2 billion.

The next page in terms of net revenue by segment, starting from the right top, commercial aviation recorded $927 million in revenues in the third quarter, accumulated of $2.5 billion in the year.

Down right in terms of defense, the revenues were $216 million in the third quarter, accumulated of $0.61 billion in the year so far. And in terms of executive jets, on the bottom left, the quarter revenues were $367 million with accumulated worth $1.06 billion in 2016.

For all business units, we are expecting to meet the guidance range of net revenues in the full year of 2016.

The next page, in terms of selling and general and administrative expenses, we reported a total of $120 million in the third quarter and accumulated of $407 million in 2016. When compared to the same quarter of last year, we see higher selling expenses due to the number of deliveries, compensated by lower G&A, which reflects the company focus on cost reduction.

The next page, related to EBIT we show here the adjusted EBIT, which actually takes into consideration several nonrecurring items that had been impacting the previous quarters. To help the comparison, we have a small table on the top -- on the bottom right which explains what are those.

Those are basically the provisions made to Republic restructuring, Chapter 11 in the fourth quarter of last year. Then we have the contingency of FCPA penalty, which was the recording of the provision that we made in the second quarter and the final adjustments made in the third quarter, and also some provisions related to the voluntary dismissal program, which was in the third quarter of this year.

If we don't consider those events, we had the EBIT for the third quarter of 2016 positive in $95 million with a 6.3% margin, split by commercial business 10.8% margin, executive jets negative 1.9%, and defense was 0%. So, those three combined account for the blended 6.3% that we are showing there. On an accumulated basis, the adjusted EBIT was $254 million for 2016 with a 6% margin.

We are maintaining our guidance range of $405 million to $500 million for the adjusted EBIT in 2016.

The next page, regarding EBITDA, we had the total of $187 million in the third quarter with the EBITDA margin of 12.4%. The same calculation was made excluding the nonrecurring items for the EBIT that we just showed. Accumulated in 2016, EBITDA was $507 million with a 12.1% margin.

Also for EBITDA, we are confirming our expectation to meet the guidance range for 2016 in the range of $735 million to $840 million.

The next page, as far as net income, excluding extraordinary items the net income in the third quarter of 2016 was $90 million with a 5.9% margin. Accumulated in 2016, net income was a negative of $29 million if we consider all the items. But on the recurring basis, it was positive $294 million.

The next page, page 18, in terms of investment we had a total accumulated in 2016 of $423 million, broken by $29 million for research, $244 million for development, and $150 million of CapEx. We estimate the total of $650 million for investments in 2016.

The next page, regarding free cash flow, we had in the third quarter of 2016 a consumption of $38 million. The development of the E2 program was partially offset by a positive cash generation by operating activities, mainly due to the level of deliveries in the third quarter and a positive working capital recognition.

The accumulated free cash flow in 2016 is a consumption of $693 million. For the full year, our estimate is to have a consumption of $400 million or better.

The next page, in terms of our capital structure we had a net debt of $653 million at the end of September. But regarding our debt, we had a total of $382 million at the end of September with maturity terms of 5.5 years, totally adapted to the need of the company in a long term investment.

The next page, we'd like to give you an overview on the status of our cost reduction plan. As we already mentioned to the market, we launched a program to reduce the recurring costs in $200 million per year. And if you see on page 22, we show the details.

The program was launched in September and is anchored in a labor adjustment, which should represent about $130 million of reduction. The balance should come from a reduction of other expenses like travel expenses, consultancy fees, and others.

And that's why we're working today on that. We have been working with the leadership to that. There's commitment to that plan that's been under details for each of them, and we are in a way to get the situation where we -- again, we plan to have a full $200 million range reduction on a recurrent basis.

On page 23, we have the details of that, which -- we had the voluntary dismissal plan, which about 1,600 employees already signed for it. And we recognized in this quarter, like we indicated, the provision for the payment of this termination of these employees. Also, the program includes a reduction in the 2017 budget, which are in areas of expenditure.

For your next two pages, we show our guidance for 2016, for which we are confirming our expectation for 2016. So, we are maintaining our expectation in the numbers that were being developed.

Okay. On page 26, before we go into the Q&A session and have some words from Paulo to us, we'd like to recall some of the Embraer short and midterm opportunities.

In terms of those opportunities, we tried to show here what would be the opportunities for revenues, for margins, for free cash flow. And we have, for example, in terms of opportunities for revenues, the E-2 entry into service. The program is developing well, and we have the opportunity of accessing, of course, the E-Jet base. Also, the E-Jet brings some opportunities today in Asia and the US market.

Super Tucano sales; a lot of interest on this equipment. And we're showing a lot of new orders and interest, growing interest for this product. The development of the KC-390; under schedule, as we expected, to get into service in 2018, certification at the end of 2017. And also, in the bizjets, the new customers for Legacy 500 and 450; and the growth, in terms of revenue, services in all of the business units.

In terms of margins, the cost reduction plan is an important way of achieving those improvements; also the ramp up of the Legacy 500 and 450, which are now in a moment where we can see better results for that.

In terms of discipline in costs and price, as we indicated recently for the bizjets; also some industrial optimization in Florida. We eliminated some overlaps between Brazil and the US. I think we've come to a moment where this can be better captured.

And also, the streamlining of subsidiaries and service centers; there's a coordination of that that could lead us to have better improvements and an increase in terms of revenues and margins coming from services.

Regarding free cash flow, of course everything in terms of margins brings better cash flow. And we will probably be able to achieve higher EBITDA generation.

Level of investment as we enter a new phase; although we have still the following years to finalize the E-2 program, but after that will be an opportunity for us to reduce the level of investment in a program like that. And also, some working capital gains in terms of managing better inventories and accounts receivable.

Just like some points of highlights that we -- can be explored. And we are working very hard on this to see how can we improve the results of the Company, how we can have a better -- in terms of revenues, in terms of margins, and also consequently in cash.

Okay. With that, I finalize this presentation, and we're ready for next moment of Q&A. But before we get there, I would like to have Paulo with some words for us.

Thanks, Filippo. Hello, guys. Good morning. So, thanks for coming here to hear us.

So, I think we are facing a very special moment at Embraer. So, you'll remember now our call in July, so we had a couple of announcements that were very important to Embraer. So, the first was the provision on the FCPA and the second was the revision on the guidance, especially for business jets.

And I think at that moment we started to adjust the company for the environment that we are seeing in all three business units. And also, regarding the FCPA, that was the beginning of the settlement on our case.

So, let me elaborate a little bit on this because, of course, this is a high profile case for us. I think this is over now. We have to turn this page. So, the company unfortunately made that mistake years ago. The company is responsible for that. So, I think we have already wrote in our press release everything about that.

Internally, also we had a few meetings with the leadership explaining what happened. And now we really have to turn this page and look forward and look into our operations and how we will develop further Embraer going forward.

So, having said that, and immediately -- or in concurrence with the FCPA case, say with the settlement of the case, we are announced this cost reduction program. It is highly necessary. So, we had -- we still have inefficiency in the company, and so it is very much due. We estimated that at $200 million.

And the orientation was that we have to get $200 million cost reduction until end of this year. So, I think you would appreciate that this is quite aggressive. So, we are talking about a 14% reduction in the costs in a few months only, so since August until end of this year. So, we will start January with $200 million less cost in the company.

Of course, some of this cost will be offset by a cost increase that we were to have anyway, which refers to the labor salary increase due to inflation in Brazil, which is under negotiations now. So, we don't know yet what the index will be, okay? And also, it is also impacted by the dollar/real rate, which we don't know also how this -- the behavior of the rate will be next year.

However, what is important is that we are now adjusted for this environment, right? And a lot of these $200 million, the bulk of that will be in our results for sure.

So, another important element here, I think for sure, is that we will monetize, so we will have to consolidate our investments in the company made in the last years. So, of course, we have to finalize the E-2 investment, which will go until 2018; the KC-390 until 2018.

These two developments are going very well, so we are very pleased with the results of these programs. So, so far, it's excellent results. Jackson and John Slattery will talk more about that. So, we are set to be on the market in 2018.

So, two amazing products. The KC-390 will bring Embraer on a more global basis in defense. The agreement with Boeing is very important. Jackson will talk more about that as well. So, we are very bullish on this aircraft. KC-390 will be a success, no matter what.

So, it is going to be a huge success in the market, and the same for the E2. So, we have the best family of aircraft in the market. Each aircraft is optimized for its size. So, John Slattery will talk more on that.

On business jet, we have the best products in the market in the segment. We have invested heavily in the last years. So, we are set now to monetize these investments so we are adjusting the cost of the business jet unit. We will make further adjustments there. So, I'm sure that from next year on we will start to generate a good result in that unit.

So, we had announced also in July on the call that we have to understand the dynamics of this market. We will not fight for market share, so we have to be more disciplined in terms of number of aircraft manufactured and sold.

So, it means that we could potentially reduce a little bit the revenue going forward. However, we are favoring margins, so yields in the unit. So, it's not a good strategy to fight for market share. Why? We have a depressed market, right? So, we have to really be careful on that.

So, all in all, I think we are really set to have a good moment going forward, so I'm very positive. So, the team, the whole leadership team at Embraer is reacting very well for these adjustments. So, this is important, very important, because we do need the leadership to understand the moment of the company and identify the opportunities to be more efficient. And so, we are doing that.

So, with that, guys, this is my final comment here. For the next years, we will be looking also how to grow revenue in other areas. And one of the areas that we would like to go deeply, because we see more opportunities there, is on services, okay?

So, we will be developing our plans going forward to take more opportunities in services. I believe it's an integral part of our business. We already have a good part of our revenue in services, around 18%. But we see a lot of opportunities to further develop this business, so areas where we are not yet in and where we are already are, so opportunities to further the development.

And as you know, services is a very important part of the business because it does provide a more recurrent revenue, and also margins are slightly better than by the aircraft themselves. So, this is where we will be looking.

With that, I thank you very much again for being here. And I will turn it back to Eduardo Couto.

Okay. Paulo, thank you. I think now we enter the Q&A session. We'll start with the audience here. We have support from the microphone. So, if you want to ask a question, please raise your hand and they will be sending the microphone to you.

Good morning. Pete Skibitski, Drexel Hamilton. So, Paulo, you said that it sounds like -- the bulk of the cost takeout will stay in your results, I think is what you said. So, is it fair to conclude that adjusted operating margins will rise in 2017? And also, I'm very curious about if that implies that cash flow will turn to positive in 2017.

Well, yes, margins should be better the next year, right? So, that's the plan. Of course, we have an execution risk here, but we have to be focused on execution. On the commercial aviation, it's already more or less set, so it's more on the business jet. But we are bullish on the business jet, as I mentioned.

So, on the cash generation, we should be -- so, I don't know if I can give a --.

No.

Say that. But we already mentioned on our call in July that the cash this year is going to negative for a couple of reasons.

But one of the main reasons is that as we decided to manufacture business jets this year but not put pressure in selling and also deliver this year, right? So, we will go with our inventory of business jets for next year, around $200 million. So, this is one of the reasons that we are having this big cash negative, but next year it's going to be much better.

Yes, I think it's important to recall that we started the year, 2016, and our guidance was a negative $100 million or better. Then we changed that for the negative $400 million exactly when we announced that we were reducing our -- the level of deliveries in the bizjet, so we built some inventories. And we could expect 2017 that -- the opposite way, because those inventories will be sold but we already produced.

But don't forget that we still have the level of investments of these two still peaking in 2016 and 2017, so we say. So, it's still something that we have to face next year.

Myles Walton, Deutsche Bank. I'm just going to follow up on that for a second, the business jet unit. The margins were negative again. And Paulo, you talked about next year being a better year. Are we going to hit low single digit this year for the full year in business jets? Is that going to be profitable this year? And what is the target for business jet margins over the next couple of years?

Yes. Of course, there is -- the adjustments that we mentioned, they are under process. Some adjustments are to be made. There is a seasonality of the bizjets, where typically the first three quarters are not the best quarters. So, we expect to be profitable in 2016.

We don't give the guidance for the margin itself, but we mentioned that it will be like low single digit. That would be something that we would be expecting and we hope that we can get by 2016. That's what we target.

Okay. And your target for that business over the medium term?

The medium term, of course, as we adjusted the capacity of that in terms of focusing the price rather than the volumes, then the company will adjust itself as well. With those cost reduction measures, we will affect also bizjets. So, we expect to have profitable business in the following years. That's what we expect. I'm talking about bizjet specifically.

Yes, Cai von Rumohr from Cowen. So, Paulo, you have up there one of the points being that there would be lower investment after the E2. While Embraer has done a terrific job at developing products, one of the complaints investors have is that the cash flow has been not as consistent. If you look out to 2020, do you have any longer term targets for where you think margin should be and where you think cash flow should be as a percent of sales, or any sort of metric?

Well, in terms of margins, I think this business should generate double digit margins, right? So, somewhere between 11%, 13%. So, I do expect that going forward with the adjustments that we are making with enhancements like new products, so on and so forth, and of course we have to count a little bit also the improvement of the market, but I think we are set to have better margins going forward.

So, this is our, I would say, target, right? So, I believe investors will be happy if we can deliver that. So, hopefully we have to better understand also what is going on in this cycle now, in the commercial aviation cycle.

But it looks like we continue to have a strong market with pockets of softness in certain markets. However, overall speaking, it's still very good and we are receiving very good interest on the E2. So, John will talk more about that, on the opportunities. So, I think this is -- it's positive on margin.

On the cash generation, if we don't invest, of course, we will generate more cash, right? However, it's an industry that we can't afford not to invest. So, we will have to look at what will be our next move. So, we don't have yet anything decided.

We are looking, as always we do, to alternatives, so what's next for Embraer, what's next in business jet, what's next in commercial. But nothing at all has been decided, so we have to be careful. So, we have to -- first of all, I want to monetize these investments that we have made in the last years and look also into the services business and see which opportunities there will be there in order to grow our business.

Before we get the next question here, I'd just ask you to hold to give the opportunity for the ones that connected, for your questions. There's a list of people.

Yes, we're going to now shift to the phone. We're going to take a question -- before the next question from the audience, we are going to shift and take a question from the phone. Operator, can you help us?

Noah Poponak, Goldman Sachs.

Hey, good morning, everyone. Paulo, where do you think you can be next year in 2017 relative to that 11% to 13% EBIT margin that you just mentioned?

Noah, good morning. This is a tough question (laugher). I don't know. So, our plans, I mean, we are planning to be more efficient by all means so it gets extracted, the most value on our products and our business units and growing of our revenue.

So, where we are going to be next year is not clear yet, but higher than what we are today and probably less than what I said.

Okay. Can you quantify -- are you able to quantify, even if roughly, what you see as the labor inflation and FX headwinds next year against the $200 million?

Well, labor index, this isn't clear. The ask is about 9%. I do expect that we negotiate to be much lower than that because we are showing to our employees, to our people, that if we continue to keep growing salaries like this, as we did in the previous year, this is no longer sustainable. Max, I would say 9%, but I do expect that we will be less than that.

For the exchange rate, this is much harder to guess. So, I think nobody understands or can guess the exchange rate. So, we already saw many forecasts that were not valid at the end. I don't know.

We count -- I think the exchange rate can be around BRL3.20, BRL3.30 on average next year, right? So, now we are seeing BRL3.20. We had some real appreciation the last 30 days given the agreement between Brazilians with money outside Brazil.

So, they were clearing their investments outside Brazil and pay a fine for that and also taxes. So, a lot of money for the fines for the taxes went into Brazil, so that's one of the reasons that the real appreciated in the last 30 days. But today, which is the last day of this event, the real is back around BRL3.17, BRL3.18. So, I think from now on it's going to be between BRL3.20, BRL3.30.

And can you guys just re-base us on your total company EBIT FX sensitivity, just given it's kind of a moving target with the commercial and the defense pieces moving in the opposite direction?

Yes, it's [Ceto] here. Our sensitivity for the FX, it went down a little but it still remains around 10 to 15 basis points for each 10 cents weaker BRL against the dollar. So, if the BRL gets 10 cents weaker, we tend to expand margins by 10 to 15 basis points.

Okay. All right, I'll jump back in the queue. Thanks a lot.

Let's go back to the question, please -- the questions. Sorry for the interruption.

Good morning. Kristine Liwag from Bank of America Merrill Lynch. Post the E2, you guys are pretty clear that, for long term investors, that's where you'll get a lot of return, margins, and steady free cash flow. But when you look at the competitive dynamics in your market, so the selling into one jet seat market, you're getting a lot more competition out there.

You've got the MRJ. You've got the Sukhoi. The Chinese are trying to definitely build narrow body aircraft either in that segment or a little bit higher. When you think about the long term competitiveness of your portfolio, do you think that there would be a follow on to the E2 after the E2, or do you think -- is your product really that much better than competition that you don't need to invest right away? Can you give us a little bit more background of how you're thinking about that issue?

Thank you. This is a very good question. And so, of course we will have to look at the market as always. So, the market is very dynamic, so we have seen a big move now from the big manufacturers or the main manufacturers by investing in new products or the [re-engine] of the current products, like with Boeing and Airbus. So, they took a decision to re-engine their narrow bodies after Bombardier launched the C series. And with that, we also had to launch the E2.

So, at that moment when these decisions were made, oil price was $130.00, $140.00, and now it's $45.00, $50.00, right? So, I don't believe that all these new products would be launched if we would have to take a decision today, right? So, it just shows how the market is dynamic in this regard, right?

So, going forward now, I don't think that we will launch any new aircraft that will be larger than the E2 if Boeing and Airbus are still in the segment and where they are today. So, I think we have taken the right decision a few years ago when we decided not to go head to head with airbus and Boeing again.

So, we are that much able to do a very efficient narrow body. So, we have the knowhow, we have the people, we have the engineers, we have the experience, but we don't see a strong business case to compete head to head with Airbus and Boeing. So, if they decide to move up or to grow their aircraft into the 140, 150 seat jet and give up a little bit of this market, yes, at that moment it's different so we will look again.

So, going forward now, from 2018 we are going to have MRJ, we are going to have the Chinese with ARJ21 more in the market, and also Sukhoi. It's already in the market, so they are looking at a new version now of 100 seats.

So, we believe that we are in a strong position. So, we have a very good products, so the most efficient family of aircraft in the segment. We are market share leaders. We have incumbency. We have -- I mean we are, with the E-Jet, in 70 countries. Sorry, in more than 50 countries, almost 100 operators. So, it's a huge incumbency.

So, we have to continue to do our homework to continue to be efficient in the product and customer support and do more of what we are doing with some enhancements. So, with that, I believe that we will continue to have success in commercial aviation.

Great. That's very good color. And if I could squeeze one more on that margin question, I mean, if I look at the $200 million that you plan to save that you announced in September 2016, do we expect that all to flow through your numbers in 2017? Because if you do the math there, it looks like you're pretty much close to double digits in 2017 if that's the case.

It should be half of that in 2017.

Great. Thank you.

Okay, great. Thank you. Derek Spronck at RBC Capital Markets. In commercial, you had a nice pick up in deliveries for the third quarter. Is that sustainable accounting for seasonality into 2017?

Well, our plan for next year is to deliver more or less the same number of aircraft as we did this year in commercial aviation, so we don't know exactly the numbers. So, I'll give the guidance next year in January, February, but we can anticipate that it's going to be more or less in the same order of magnitude for the full year of 2017.

Okay. And have the US carriers started converting on any of their options of some of the orders that you won with the ERJ 175 the last few years? And have any of the options passed without any of the carriers converting?

Let me ask you to wait a little bit. I'm going to ask John Slattery to elaborate on this in his presentation. Is that okay?

Yes, that works. And then just finally, you have about two months left remaining in the year. I'd say that you have a fairly wide range for your EBIT and EBITDA margins. Are you tracking closer towards the top end of your guidance range in 2016?

Yes, we're still in the middle, not top. I think that middle will be fair to expect, and we are on our way to get there.

Okay. And just finally, on the settlement with the Brazilian and US governments, with compliance of the settlement, are there reoccurring costs as you continue to comply with the settlement that you reached with those two countries?

No, regarding the settlement itself it's done. The company has its program of improving its processes and everything. I already mentioned that. This is part of the ongoing business. There's no specific cost that will be expected related to the agreement. The agreement is already set.

Okay. Thanks.

Okay. Now we are going to take another question from the phone. Operator, can you help us?

Turan Quettawala, Scotiabank.

Yes, hi. Good morning. I guess maybe in terms of the margin targets for next year, you provided some really good color on the cost savings there. Is there -- can you give us any sense of maybe where pricing is trending, I guess more on the executive aviation side? I'm wondering if that can chew away some of that improvement that you're looking at in terms of cost. Hello?

Yes. Well, it's no secret that the margins on business jet are under pressure. So, we are seeing the market -- it is what it is. So, we have five manufacturers manufacturing around 650, 700 aircraft this year coming from a market that, in 2008, was at peak 1,300.

So, it's a lot of pressure on this market, a lot of used inventory still. So, it's a pressure on this market. So, we count on improving margins next year by reducing our cost on the business jet unit.

There are inefficiencies still in business jet, because we are manufacturing aircraft in Brazil and we are manufacturing aircraft in the US. And as we transfer 100% of the business aviation into the US, Melbourne, there will be, of course, less cost associated to that. And this cost reduction plan here also will be in place from January 1.

In addition to that, we believe that we have products that merit a premium. And we are seeing the market with the Phenom 300 and the Legacy 450 and the Legacy 500's coming as well. So, as we consolidate these products, especially the Legacy 450 and 500 in the market, we believe that we will be able to gain some margins as well. So, this is our forecast. This is our view for next year.

Okay, great. Thank you. And I guess just one quick one here also on the cash payments. It's about $225 million, I guess, in terms of both the voluntary retirement and the DOJ payments. All of that is going to go through in Q4, correct, on the cash side?

No. On a cash basis, we can post it as -- $80 million will be made next year.

Out of that $225 million?

Yes.

Thank you.

Thank you, gentlemen, and good morning. Steve Trent from Citi; just two question for me. The first is, when you think about the -- your order campaigns for the E2, any thoughts as to what is your base case thinking with respect to whether your Canadian rival gets additional help from its federal government? And the -- or should I say help, as the Feds haven't helped yet?

And the second question just on the military side, when you think about the Super Tucano, any color on potential new demand for that, whether it's coming from foreign governments or whether it could come from the eventual retirement of the A-10 in the United States?

Thanks, Steve. On your first question, I think the E2 program is going very well in both, technical and also sales/commercial. So, if you look at that, we had launched this program in 2013. And three years after, we are basically with 280 firm orders and 600 plus when you consider LOIs and other agreements. So, I believe this is quite solid.

John Slattery will elaborate a little bit more on the market. So, we are seeing tremendous potential going forward. There are new events. There is new information that's important to share with you, and John will do that.

On the Super Tucano, yes, there are more opportunities. And I will also hold on my comments here because I don't want to jeopardize Jackson's presentation, okay?

Very helpful. Thank you very much, Paulo.

Hi. Alexandre Falcao, HSBC. I have two questions, first one on the gap between E1 and E2. If I'm not mistaken, you still have 35 -- 30 to 40 airplanes to fill up the gap. When -- as we're entering 2017, when is a date that we should see those? And can you spend the whole year of 2017 without those gaps? And second, where are you willing to go on margins to fill that gap? That's the first question. Thank you.

So, thank you, Falcao. If you allow me just to go back to Steve's question, because a part of his question I did not answer regarding Bombardier in Canada, and this is a very important one.

So, I think we were already very vocal on this topic, and we will continue to be. So, we can't afford to have in this industry government supports that dis-balance the game and put in jeopardy the level playing field.

So, what Bombardier did, of course, is not good and maybe destroy the dynamics of the market because they offer their product at below cost no matter what. I don't know, you guys, if I asked here what was the price, maybe some of you will say $23 million or others will say $21 million and $22 million. So, whatever the price is below $27 million, $28 million, this is below cost, okay?

And so, government of Canada, Quebec in this case, is banking this gap. And we are very close to our government, and our government is taking actions in the sense of talking to the authorities in Canada to show that this is something that must stop. Recently also the United States government interfered as well, I think last week, and also started to be more vocal also on this program.

So, we do count -- we do believe that the federal government of Canada will not place this additional investment of $1 billion. If they do, of course we will be very disappointed and going to WTO.

It's not Embraer, of course. It's Brazil that would go to WTO. It's a possibility. However, it's not efficient, right? So, going to WTO is going to take six, eight years. We will have a big dispute there. But what is important is what happens in the market meanwhile, right? So, we are looking to that. So, we are focused on that, and hopefully there will be no need for that.

So, Falcao, for your question, you'll repeat is, please, again? Sorry.

Yes, on the gap between E1 and E2.

Oh, yes, the gap. Yes. Yes, we still have a gap. We still have a gap but we are seeing solid activities, and John will talk more about that.

So, I believe we have until third quarter of next year to close sales enough to place us in a better position in 2018. So, it still is not bad, 2018, but we still need more. But we are very positive that being -- orders coming from the United States for the 76 seater or 190, 195 from the other countries, we will get there.

Okay. And just a final question. How much of the Legacy family -- or how much of the margin increase on the bizjets depends on the Legacies, the 450 and the 500? How much do you need to sell of that to come to your target, or at least to have this improvement in margins going forward?

You mean for next year?

Yes, or -- and going forward, yes.

I don't know how to answer this, Falcao. So, I think we will have to look at that and get back to you.

Okay, perfect. Thank you.

Okay. I think we still have a lot of questions, but we're still going to have our individual presentations for the business units. So, I think with that, we concluded our third quarter 2016 conference call.

Thank you very much for all that are connect through the phone. Filippo, do you have any final words? Okay.

So, that's it. We conclude our third Q 2016 conference call. Thank you. Have a good day.