Embraer SA (ERJ) 2017 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 2017 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 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 and 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. Paulo Cesar de Souza e Silva, President and CEO; Mr. José 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. José Filippo.

Please go ahead, sir.

Okay.

Thank you.

Good morning, everybody, and welcome to Embraer First Quarter 2017 Earnings Conference.

I would like to start with the presentation as usual, then I will have Paulo Silva with his initial comments, and then we will be open for Q&A session.

So with the presentation, starting on Page 3, with corporate highlights.

With information that last week Standard & Poor's published an update now rating -- reaffirming the investment-grade status.

Also in terms of Embraer liquidity situation, we issued in January a 10-year bond of $750 million with net debt -- our debt average maturity increased to 6.3 years from 5.3.

And closing the corporate highlights, the comment of the creation of Embraer Business Innovation Center to explore opportunities in the future of air transportation.

As part of that, we announced last week an agreement with Uber to explore the concept of potential development of small vertical takeoff and landing vehicles.

Next page, Page 4. Now starting the highlights of business units, starting with Commercial Aviation.

We delivered 18 E-Jets in the first quarter of 2017.

And as far as sales activities, we announced a new order of 4 E-175 to American Airlines.

And as already mentioned, the names of the launch operators for E2 generation, which were Wideroe with a large operator for E190-E2 and Azul with 195-E2.

In relation to the E2 development, the 190-E2 fourth prototype joined the first test campaign and the milestone of the first flight of the 195-E2, both are ahead of schedule.

Next page, moving to Executive Jets highlights.

We delivered 15 Executive Jets in the first quarter of 2017, being 11 light and 4 large aircraft, including on that was the first Phenom 100EV with new avionics and engine performance improvement.

Also in the deliveries were the -- of the quarter was the Phenom 300 #400 to a new customer, Elite Jets.

In terms of sales activities, as already mentioned, Phenom 300 was the best-selling Executive Jet across all segments in the fourth quarter -- fourth consecutive year of last year.

And finalizing the highlights of Executive Jets, in the first quarter, we appointed Michael Amalfitano as the new CEO of business units of Executive Jets.

Next page, Page 6, highlights for the sales and security, starting with information of the delivery of 2 Super Tucanos to the U.S. Air Force, which will commissioned to Lebanon.

In terms of the KC-390 development, it continues to advance with test of aerial refueling and cargo handling.

On service and support contracts, we signed new contracts with Panama, Mexico, Colombia and India for aircraft maintenance and parts.

In relation to our subsidiary activities, Atech inaugurated the Air Traffic Command and Control Center in India and Savis and Bradar announced a cooperation agreement with Rockwell Collins to evaluate business opportunities.

And finalizing highlights for the Defense & Security, the formation of the launch of the Brazilian satellite that was postponed to the second quarter and is now scheduled to happen later this week.

I will now disclose the highlights of corporate and business units and moving to financial results.

Now starting with Page 8. Our firm backlog in the end of the quarter that reached $19.2 billion, slightly below the end of last year.

Despite the decline, I would like to comment that Executive Jets business units had a book-to-bill of 1.5 in the first quarter of this year.

Next page, Page 9. Aircraft deliveries, starting with Commercial Aviation in the left side.

We delivered 18 aircraft in the first quarter of 2017, slightly below the same period of last year.

It is important to say that we are sold out for this year after the recent announcement of the American Airlines order.

Regarding Executive Jets, we delivered a total of 15 aircraft in the first quarter, broken by 11 light and 4 large aircraft.

Seasonally, the first quarter is the weakest quarter of the year.

And this year particularly, 3 planes [leaped] to the initial days of April.

For 2017, we are confirming our guidance of deliveries of 97 to 102 aircraft in Commercial Aviation and 105 to 125 in Executive Jets, broken by 70 to 80 light jets and 35 to 45 large jets.

Next page, Page 10.

In relation to net revenues, consolidated revenues reached $1 billion in the first quarter of 2017.

The reduction compared to the previous year's reflect the lower deliveries.

The amount of revenues is broken by $633 million in commercial, representing 62% of the total; $226 million in executive, representing 22%; and $156 million in defense, representing 15%.

The balance of 1% is related to other revenues.

In case of defense revenues, I would like to mention that we were frustrated by the postponement of the satellite launch, which would have added around a $100 million of revenues in that business.

For revenues, we are also maintaining our guidance for 2017.

In next page, regarding sales and general administrative expenses.

We reported a total of $114 million of sales and general administrative expenses in the first quarter of 2017 compared to $140 million in the previous year.

The slight increase in G&A expenses is related to this 20% stronger Real against the dollar when comparing both years.

In next page, Page 12.

As far as EBIT, we reported adjusted EBIT of $31 million in the first quarter of 2017 with 3% margin.

This number was adjusted to a $8 million of cost related to the final remaining employees' termination associated to the dismissal plan.

Reported adjusted margin by business units were commercial, 13%; executive, negative 10%; and defense, negative 20%.

If we had the launch of the satellite and the additional 3 planes that were delivered in early April, the combined EBIT margin would have increased from 3% to 5.5% in the quarter.

For EBIT, in terms of dollars and margin, we are confirming our outlook for 2017 of $450 million to $550 million and 8% to 9% margin.

Next page, Page 13, in relation to EBITDA.

We reported a total of $103 million in the first quarter of 2017 with a 10.1% margin.

Our EBITDA outlook in 2017, we are confirming the range of $770 million to $890 million and margins from 13.5% to 14.5%.

Next page, net income.

We reported adjusted net income of $23 million in the first quarter of 2017, with 2.3% net margin.

Adjusted net income excludes deferred income tax.

In Page 15, next page, in relation to investments.

We had total investments of $72 million during the first quarter of 2017, broken by $8 million in research, $31 million in development and $33 million in CapEx.

The total investments in the first quarter was mainly through affected by suppliers' contribution of $86 million.

For the year 2017, we are estimating the total of $650 million, broken by $50 million in research, 400 million in development and $200 million in CapEx.

Next page, Page 16, as far as free cash flow.

We reported a free cash flow consumption of $199 million in the first quarter of 2017.

The cash consumption of $48 million in operation activities is mostly related to the typical working capital requirements in the beginning of the year.

For 2017, we are estimating the cash consumption of $150 million or better.

Next page, Page 17, before moving to Q&A session and Paulo Cesar's comments, in relation to our cash and debt position, we closed the first quarter of 2017 with total debt of $4.3 million -- billion dollars.

In this amount, is included the recent 10-year bond issued of $750 million, which improved the debt profile to 6.3 years of average maturity.

In terms of our cash position, we had a total amount of $3.5 billion, which would turn to a net debt of $806 million as of March 31.

Okay, with that, we finalize the presentation.

I'd like to turn to Paulo for his initial comments before we turn to the Q&A session.

Thank you.

So thank you, Filippo, and good morning to all.

So thanks for joining us this morning.

A few comments I'd like to make.

As you have seen, so the results on the first quarter was a little bit disappointed.

However, we are not at all worried about that.

So we believe that it was -- it came a little bit weaker than expected.

But we are very confident to keep our guidance for 2018, and we already have seen certain deliveries of aircraft or events that happened just as we crossed it from the first quarter to the second quarter.

We continue to develop the E2 sometime, so no big issues.

Of course, we have regular, normal, [bright] topics to deal with but not at all any big issue.

And our plan is to deliver the first 190-E2 in the first half of 2018.

So the campaign, certification campaign is moving very nicely, according to the plan.

So the same for the KC-390.

So both programs -- so we are very pleased with the development.

We continue to focus on costs, either by reducing cost or looking ways to gain more efficiency in the company.

This is something that I outlined to you when I took over last year, and we implemented -- we are implementing our $200 million mission.

A bigger part of it is already done, which was the dismissal of 1,600 people to the [PDV].

And as the budgets for 2017 is being implemented, so we are achieving the targets that we defined last year.

And we will not stop here.

So we are already looking into new initiatives to continue.

It is right.

So we believe -- we do believe that there are still good opportunities to become more efficient in general.

As far as the business units are concerned and markets, we are seeing a good activity in Commercial Aviation.

Our teams are very, very busy globally.

So we are quite positive that we can see a demand that will bring those additional opportunities.

Of course, it is not -- I'm not guaranteeing that we are going to close these deals.

However, it's very good -- very positive to see the level of activity that we are engaged in nowadays.

Of course, 2018 is always -- whenever we have a transition from one aircraft program to the other, so I always -- there is a more challenge because of the ramp-up of the new programs.

So we are working on that, and we may see some lower margins in 2018 or maybe a little bit of less aircraft to be delivered in '18.

But still early to say what's going to happen.

So we still have to wait a little bit more in terms of jet deliveries.

However, in terms of margins, I think we should expect lower margins in the Commercial Aviation in '18 versus 2017, which is being -- it's still a very good margin.

So double-digit, and we'll continue to have these strong margins in Commercial Aviation.

On business Jets, Michael came on board.

Michael Amalfitano, the new CEO.

He came on board on March 1. And he is already implementing certain actions that I'm sure will bring better margins while going forward and also, cash for the unit going forward.

I do expect that, in the second quarter or max in the third quarter, we are going to see already the different numbers that will reflect more of this strategy.

We are really looking even more with higher focus to reduce cost on business jet unit.

And our market approach is being to look more at the value that we are offering to our clients than going for market share.

And we are already seeing it slightly improved in the margins for business jets.

On the new business units, servicing and support.

So we are taking the necessary actions to implement the unit.

So we have almost finalized the organization of this new business unit.

And as we move into the second quarter, so we will implement it.

So as we have anticipated, when we announced the launch of this new BU, so there's a lot of synergies that we can have gains there by having only one unit built into that.

So synergies -- people synergies in warehouses, in inventory.

So I'm sure that we will extract a good value from this new business unit.

So all in all, I think we are set for a good year in 2017.

So we are on schedule on everything and keeping our guidance.

So looking forward to have a new call with you guys in July, when we analyze the second quarter results.

Thank you.

(Operator Instructions) Our first question comes from Myles Walton with Deutsche Bank.

Our next question comes from Pete Skibitski with Drexel Hamilton.

I guess just on the satellite launch, I think you said it would happen this week.

Should we conclude that, just on your comments, so that, Filippo, that the second quarter will be your highest-revenue quarter for the year in defense?

Is that a fair assumption?

Pete, not necessarily.

I don't think we should consider exactly that it would be enough to get the best quarter because it depends on some schedules and really on some other things.

But yes, it's confirmed that it's scheduled for May 4. So 2 days from now, so far.

Until we have anything new, that's the original schedule and we are confident that this will happen.

And definitely, I agree with you that, it's going to be impacting the second quarter in about $100 million.

That's the milestone in the contract we first established.

But I think we're not guiding that this will be exactly a reason for second quarter will be the best.

I think we should now retain on the $100 million revenues for the satellite launch for the second quarter.

And again, it's scheduled for this week.

So we -- so far, there's nothing that indicates that, that's not going to happen.

Okay, okay.

Fair enough.

I guess one for you, Paulo.

Your comments on the services and support unit.

There just seems to be a real parallel with Boeing here in terms of creating a stand-alone services unit.

They have put out a revenue target, sort of a notional revenue target.

And so 2 questions for you on that.

I guess, number one, would you guys consider putting out a revenue target for that unit as sort of a notional long-term target?

And number two, are you guys considering M&A to build that services unit?

Or will it be just all-organic type of a focus?

Well, no.

We are not giving an external guidance, right, targets for that.

We have internal or a right number that is being already disclosed at the head of the unit last week in Orlando in the MRO conference.

I mentioned about that.

So nowadays, we have about 15 of our revenue -- about 15% is coming from the services and support across the 3 BUs.

And we want to bring this after 1 quarter of our revenue in the next 4 years.

So this is, let's say, is our first target -- internal target.

As far as the -- how I want to grow on the BU.

Initially, so we are targeting to look into more scope in terms of work that we can do.

We believe that we cannot only enlarge in terms of client base, the services and support that we provide, but also we can increase the number of parts that we touch in the aircraft and do more than what we have been doing.

So this is a first initiative.

So we can grow in our MROs in Nashville and OGMA and especially in components repair.

So we can do much more.

And thirdly, if there's an opportunity through an acquisition, a small one, that can enhance the new business units, so we will be looking to that as well.

Our next question comes from Cai Von Rumohr with Cowen and Company.

So maybe give us a little bit more color on commercial demand because you really have not gotten much in the way of orders so far.

What geographies?

What models?

And give us some help.

You mentioned the potential of lower deliveries next year.

What percent of your delivery slots -- how many delivery slots of, maybe a better way to put it, are sold out for next year?

And how many would you have to sell to get to about a flat year?

Okay, on commercialization markets, I think the activity we are seeing is really global, including the U.S. So there is a good activity there for the 76-seater with major airlines and also regional airlines.

The 190, 195 also elsewhere.

So there's really very, I'll say, good activity that we are engaged.

So I cannot provide comments more than that, but we are pleased with the opportunities that we are seeing.

For 2018, we don't know yet.

I think it's too early to mention anything here, so we would have to wait a little bit more in order to elaborate on how 2018 could be, right?

So however, in terms of margins, so we can see that our EBITDA will have a weaker margin in commercial because of the transition from E1 to E2.

And whenever you have a transition like this, you have more inefficiencies, right, in the process?

The ramp-up will [be search that] at the beginning brings a lower margin to us.

But we're not concerned on that because, from 2019 and on, we are already anticipating that the margins will improve again.

But for a number of deliveries next year, I'd prefer to wait a little more.

Okay.

And then maybe if you could give us some color on biz jet demand and your production rate, given that you've entered the year with some wide tails.

Have you pulled that production rate back to get rid of the wide tails?

And at what point might you start to pick production up again?

On the business jet market, it's still weak, under pressure.

Last year, total delivery was around 650.

I believe this year it's going to be about flat.

However, I think that we can have a slightly improve on margins as we work with the new models and with the services attached to it, so we believe that we can deliver a better value to our clients and be recognized for that in the markets.

We are doing micromanagement in terms of manufacturing and cash in the unit.

So we are looking to 2017 to really fix the ask and demand -- the offer and the ask in the markets.

So we believe that this year, 2017, we are going to see a better cash generation in the unit.

Our next question comes from Myles Walton with Deutsche Bank.

Sorry about the technical difficulty.

There was a big drop in residual value, negative adjustments in the quarter.

And I'm just curious, Paulo, can you comment on the backdrop of your E-Jet residual values and 145 values?

And if this lack of negativity in the quarter is any indication of it -- of a trend going forward that we maybe have a lower run rate?

Myles, let me help to answer that.

We don't -- the decrease, I think, is natural because of the schedule of the commitment that we have as we get into the moment you naturally produce this.

So I don't think this can be a different trend.

We see prices, okay, not decreasing.

[That's mostly -- be affecting] like potential new impairments.

So I don't think that could be something that could be taken as new behavior of that impact.

So it's just like a very specific thing that happened in the month or in the quarter.

And I would say that it's mostly related to the schedule of the maturity of each commitment that we have.

It's Eduardo here, Myles.

Actually, we have that reduction in provisions for E-Jets aircraft in the first quarter.

So if compared to previous provisions, our numbers were actually better this quarter.

Yes -- no, that's what I was implying.

It was much better.

So I'm asking is it indicative of a trend that your provisions going forward could continue to be better than they have been historically?

Again, I don't think that, that means necessarily a different change in the way we should treat [small business] specific in the quarter, and that could remain relatively same projection that we used to do.

Okay.

And then in terms of cash flow improvement through the course of the year, 1Q is similar to last year's first quarter probably because of the satellite and also the few deliveries slipping into April and then lighter business Jets.

But should we expect a substantial improvement in second quarter cash flow?

Or do we really have to wait until the very end of the fiscal year?

No, no.

I think that we should still look at the year as a 12-month basis, not specifically in the quarter.

We had that comment about the milestone of a satellite launch, but I don't think that could change the profile throughout the quarters.

I think we should remain to expect this by midyear to have a better color, better look on how these things are going.

We're confident about the estimates we made, the negative 150 or better, that we should keep that target going forward.

Our next question comes from Derek Spronck with RBC Capital Markets.

Just on the KC-390, have you seen any pickup in interest internationally on the product?

And what are some of the biggest pushbacks from customers?

I mean, it seems to be a technologically very advanced plane.

What would you say is the biggest obstacle that you're facing when you're selling this aircraft internationally?

Well, so we are seeing a very good interest on the KC-390 as we move forward, in the campaign -- the test campaign.

So this is normal for an aircraft like this, right?

So we have to go step-by-step.

We are bringing again the KC-390 to the Paris Airshow to Europe.

So we will do a tour, a demo flight tour after Paris Air Show.

So we remain very confident that throughout this year we are going to get our first international order, international outside of Latin America.

So we continue to be very bullish on this program.

We are not seeing a pushback on the aircraft.

So it's just a question to wait until we move forward step-by-step into the certification of the program, but we remain very bullish.

The -- is Boeing providing any sort of benefits with that relationship there yet?

Or do you think that will continue to grow?

It continues to -- we continue, of course, to work with Boeing.

But as I said, it would be a step-by-step growing interest of the KC-390 as we move forward into the campaign.

But the partnership with Boeing will be very helpful, and -- so it's a combination, all right, of product and marketing, international marketing in this case, that will bring the success right on this program.

And are you comfortable with the pricing of the product in the marketplace?

Yes, we are.

Definitely.

Great.

And on -- one more just -- I guess, not as material, but you announced a partnership with Uber Elevate.

How big of a market do you see that growing into?

Is that a recognition that sole ownership of the business jet may be moving more towards a partial or an Uber-type of model?

No, I wouldn't go that far at this stage.

So I think the announcement is an initiative to put us more into this kind of situation, new business model, new technologies and things like that.

So since the VTOL will be electric vehicle, it is our interest in developing or understanding much deeper the electric aircraft or hybrid aircraft.

So this is a good fit for us at this stage.

So how markets -- how big is the market?

I think the market is very big.

But the bigger question is, will the stakeholders, the ecosystem, achieve these markets or not?

So there's a lot to happen.

We need the certification.

We need the authorities to approve flying in big cities.

We need to find a good solution for the battery and for the recharge of the battery.

So we have to solve the logistics, right?

For instance, in big cities, in order to have this aircraft -- these vehicles taking off and landing, so there's a lot to be right done in order to achieve what we are anticipating is a huge market.

So when we talk to Uber, so the numbers are really big and the efficiency of the system, if implemented, will be a success.

I have no questions about that.

If you look at that nowadays, Uber is in 75 countries, 450 cities.

And there are 60 million people, 6-0, million people that monthly require Uber car.

So we can imagine the huge demand for this service.

Our next question comes from Noah Poponak with Goldman Sachs.

Can you tell us, with the -- with regard to the $200 million cost plan, where were you run rating on that, I guess, on an annualized basis as you entered the quarter versus where you exited the quarter?

And I guess, what's in the full year EBIT guidance from the $200 million?

Okay, Noah.

I think that we are, as we planned, most -- remember, maybe coming a little bit back on how we break the $200 million.

Most of it, about $130 million, will be coming from the headcount reduction, which was actually achieved by the dismissal plan that Paulo mentioned about the 1,600 employees that left.

Of course, there's a schedule for that left.

Actually, in the first quarter, we just announced that the remaining group was -- left the company basically because of the function that those employees performed.

So we have to wait for some of them until we adjusted the processes.

And to that -- so still I think, now it's over, the most of this target there.

And then the balance would be coming from general expenses related to travel expenses primarily, which is one important item for us, and also some of my consultancies and general expenses.

So I would say that we are there, in terms of the targets, the -- like I said, the headcount reduction was achieved.

And then everything else is already in budget and the leaders have, in their new targets, already considered that.

The benefits -- the benefit of that will be still coming throughout the year.

We have understand that mostly we still -- will go this year, 2017.

By the end of the year, we're going to that stage in full.

This year, still some way to get there, but we already achieved that.

You saw that some impacts that we cannot control about like exchange rate, that sometimes can impact for one direction or the other.

In this quarter, we had the opposite expected ways as you know Real strengthened against the dollar.

But this is a function of things.

We speak that this is not enough to affect the plan.

So in summary -- in summarizing to the question, we are okay.

And most of the $200 million reduction will be seen in 2017.

And after that in full implementation.

That's basically how we see that.

Okay.

So the $450 million to $550 million EBIT guidance has something close to the $200 million in it?

Correct.

And what does it have in it for FX going against you?

It's difficult because we don't have that situation.

We are -- we plan to have the exchange rate we use for the year is almost what we're having today, about 3.2.

We already mentioned that before, so it's hard for us to anticipate if, for some reason, FX would go against us.

But we have to compensate.

That's normally how we do.

We have that situation in years before.

Normally, when we faced the worst exchange rate in the currencies -- in the expenses in Real.

Normally, we call the leaders, and we review their targets to compensate that.

That's normally -- and I don't think we should consider that any exchange rate change will be enough to affect our target, in terms of the expense reduction.

Okay.

But presumably, you must be making some assumption for that in your EBIT guidance because if I just -- if I adjusted your margin for 2016 for all the onetime items, I get back to about 8%.

And if I were just to assume you're flat on that underlying basis in 2017, if I only added $200 million to that, I'd get to a much, much higher margin level.

So there must be some FX or other offset that you're assuming in the guidance that's where I'm trying to get to.

Yes.

I don't want to get into more details here, but you're right, in terms of, if you do that calculation you're not going to find that.

The $200 million is the comparison with the target that we established last year for that.

But of course, if you take, for example, the average exchange rate of last year was about 3.5.

And if you take the currency exchange rate that we are using, which is 3.2, so already [that is disadvantage] that we was already considered in the guidance that we have.

So this was partially compensated with the reduction, so we're not going to see full, the $200 million.

If you do this calculation, there are other impacts that we have.

There was also a wage increase, like 5%.

You remember that we had in September the adjustment with the union -- with a 5%.

There was a combination of things that we have to face.

But if we focus on the headcount reduction and the expense reduction and others, I think we can get to the blended combination, which will return you to the guidance that we have.

We make (inaudible) some time directly.

I don't think now it's -- because there's so many comments to make on that.

I don't think we'll work to explore this now.

But considering several pros and cons on that, but focus on the root of the plan, which is like headcount and general expense reduction.

Yes.

Actually, I guess, also, you achieved some of the plan in 2016, so that impacts the comparison as well.

But what -- just one more margin question.

How should we think about the margin on the satellite project when that lands in the second quarter?

How much of that will drop through to EBIT line?

Maybe about like 20%.

(Operator Instructions) Our next question comes from Bruno Amorim with Santander.

So 2 follow-up questions.

The first one, given that you were surprised, and I [particularly] with the results as well, why not revising the guidance downward?

Was there margin of safety in the guidance you gave us in March?

Or is there something coming better than initially expected and therefore offsetting today's weak results?

And second question, the gross margin in the executive division was only 8%.

So apparently, the weak result in the division was not fully explained by low dilution of G&A.

Could you please comment on the pricing and competitive environment?

Is it getting worse than at the end of last year somehow?

Okay, Bruno.

I think, regarding the guidance for the year, like we said, first quarter is typically a weak quarter.

We comment about 2 specific postponement of event that affected, which was the slip of 3 planes in executive and also the satellite launch, so -- but that could be something that we expect to see in the second quarter.

I don't think that will be enough for us to review the year.

We're still confident about the guidance that we sent out, so I don't think we'll be actually changing or having any comment that we shouldn't get there.

This is not something new.

We've already faced that almost every year.

Regarding margin, I think that what you saw in terms of Executive Jets, of course, that's not only necessarily the direct margin.

There's also some cost that impact the gross margin, which will have a number of deliveries.

And you saw that the deliveries were not strong, and that is also something that we can consider.

We don't see a change in the market that we saw before.

It is not improving, neither worsening.

I think that we still have a very competitive and very challenging market.

We're facing this market with the value proposition on the projects, avoiding more aggressive low-margin deals.

I think we're still going in the direction, and we don't see that there will be something that will change the way we're expecting.

And I think that we may see definitely an improvement in the margins objective just going forward, which is the same that we saw in previous years.

Basically, that's my comments on your question.

Our next question is a follow-up from Cai Von Rumohr with Cowen and Company.

So KC-390, what do you still have to do to certify it and get it really into production?

And what sort of risk do you see of kind of having to take a reserve as you go through that process?

So we have flown more than 1,000 hours with the 2 aircraft that are in certification process, are in the test campaign.

We believe that we are moving nicely right into this certification.

So we are not anticipating at this stage any big hurdle or any big issue.

So so far, so good, I'd say.

So it's really going very well.

So the first delivery is being forecasted for next year for the Brazilian Air Force.

In the next month, we are going to do refueling, right testing.

We are going to do an operation in the ice.

So it's part of the process, of the certification process.

So as I said, so we are gradually and step-by-step, moving forward nicely in the program.

And roughly, when do you expect to certify the aircraft?

So the initial certification towards the end of this year?

And the full certification.

And the full certification, mid next year.

Got it.

And last question.

You had large losses in both business jets and the defense business for the year.

What are you now looking for, for margins approximately for those 2 sectors?

Yes, Cai, we're not disclosing guidance specific for business units, but I think we're keeping the same level that we -- remember, when we announced the guidance for the year, which is about like a mid-single-digit for both executive and defense, with expectations to be a little bit better than that, but that's what we planned.

Our next question is a follow-up from Noah Poponak with Goldman Sachs.

Paulo, when you mentioned the potential for a little pressure on the commercial margin in '18 versus '17, would you then expect that to be true for the total company?

Or can that be made up, or more than made up, elsewhere?

It's early to say no, because we are, as you know, in the business jets.

So the cycle is much shorter than in commercial, right?

So we sell a lot during the year for delivery in the same year.

So it's too early to say.

So it still depends upon the -- how the business jets markets will develop in the next quarters.

On defense, I believe we can have more or less the same margins.

So it's really more on the Commercial Aviation that we are anticipating our margins that will be slightly lower than what we have today.

Our next question comes from Joshua Milberg with Morgan Stanley.

Just another quick one on your expectations for some pressure on your commercial profitability next year.

I think you attributed that to, just to the ramp-up of the E2 and I was just wondering if some of that pressure could potentially come from lower E1 pricing.

Josh, no.

That's exactly how you proceed.

It's more related to the transition between one model to the other and the capacity to really do a number of -- for deliveries.

We don't see -- we don't work with the different prices as offered operating today.

It's basically because of the transition year.

Okay.

Great.

And then just with your current E1 backlog, could you just comment on whether you see potential for a meaningful percentage of that backlog converting to E2?

From E1s to E2s, no.

We are not anticipating that.

So we believe there is a demand now for E1 as well as for the E2.

So depending on the market, depending on the application of the aircraft, as you know, so we have 3 models, right, on the E2.

3 models -- 4 models on the E1.

So U.S. is a strong market with a different dynamics when right compared to other markets.

So it's -- I mean, we are not anticipating this.

And do the contracts give that flexibility?

Or is that something, in most cases, the customer really doesn't really have that option?

No.

In general, there's no disruptions to go from E1 to E2.

It could be in 1 or 2 small cases, but it's not relevant.

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.