Good morning, ladies and gentlemen. Welcome to the audio conference call that will review Embraer's first quarter 2017 results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will come to the question and answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by one. 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 Cretton, Director of Investor Relations.
I would like now to turn the conference over to Mr. José Filippo. Please go ahead, sir.
Thank you. Good morning, everybody, welcome to Embraer first quarter 2017 earnings conference. I would like to start with the presentation as usual, then I will have Paulo Cesar do his initial comments, and then we'll be open for Q&A section. With the presentation, starting in page three, with corporate highlights, with information that last week, Standard & Poor's published an update now reaffirming the investment grade status. Also, in terms of Embraer liquidity situation, we issued in January a 10-year bond of $750 million with our net debt average maturity increased to 6.3 years from 5.3. Closing the corporate highlights, the comment of the creation of Embraer Business Innovation Center to explore opportunities in the future via air transportation.
As part of that, we announced last week an agreement with Uber to explore the concept of potential development of small electric vertical take-off and landing vehicles. Next page four. Now starting the highlights of business units. Starting with commercial aviation. We delivered 18 E-Jets in the first quarter of 2017. As far as sales activities, we announced a new order of four E175s to American Airlines. As already mentioned, the names of the launch operators for E2 generation, which were with the launch operator of E190 E2 and Azul with the 195 E2. In relation to the E2 development, the 190 E2 fourth prototype joined the first test campaign. The milestone of the first flight of the 195 E2, both 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 four large aircraft. Included on that was the first Phenom 100EV with new avionics and engine performance improvements. Also in the deliveries of the quarter was the Phenom 300 number 400 to a new customer, Elite Jets. In terms of sales activities, as already mentioned, Phenom 300 was the best-selling executive jets across all segments in the fourth consecutive year of last year. Finalizing the highlights of Executive Jets, in the first quarter, we appointed Michael Amalfitano as the new CEO of business unit of Executive Jets. Next page six, highlights for defense and security, starting with information of the delivery of two Super Tucanos to the U.S. Air Force, which will be commissioned to the Navy.
In terms of the KC-390 development, it continues to advance with tests 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 subsidiaries activities, Atech inaugurated the Air Traffic Command and Control Center in India. Savis and Bradar announced a cooperation agreement with Rockwell Collins to evaluate business opportunities. Finalizing highlights for defense and securities, the information of the launch of the Brazilian satellite that was postponed to the second quarter and is now scheduled to happen later this week. We close the highlights of corporate and business units and move into financial results. Starting with page eight, 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 nine, aircraft deliveries. Starting with commercial aviation, 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 four large aircraft. Seasonally, the first quarter is the weakest quarter of the year, and this year particularly, three planes slipped to the initial days of April.
For 2017, we are confirming our guidance of deliveries of 97-102 aircraft in commercial aviation and 105-135 in Executive Jets, broken by 70-80 light jets and 35-45 large jets. Next page 10. In relation to net revenues, consolidated revenues reached $1 billion in the first quarter of 2017. The reduction compared to the previous years 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 $100 million of revenues in that business. For revenues, we are also maintaining our guidance for 2017.
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 $104 million in the previous year. The slight increase in G&A expenses is related to the 20% stronger real against the dollar when comparing both years. The next 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 an $8 million 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 three planes that were delivered in early April, the combined EBIT margin would have increased from 3%-5.5% in the quarter.
For EBIT, in terms of dollars and margin, we are confirming our outlook for 2017 of $450 million-$550 million and 8%-9% margin. Next page 13. In relation to EBITDA, we reported a total of $103 million in the first quarter of 2017, with a 10.1% margin. For EBITDA outlook in 2017, we are confirming the range of $770 million-$890 million and margins from 13.5%-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 a total investments of $72 million in 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 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 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 17. Before moving to a Q&A session and Paulo Cesar's comments. In relation to our cash and debt position, we closed the first quarter 2017 with a total debt of $4.3 billion.
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 returned to a net debt of $806 million as of March 31st. With that, we finalize the presentation. I'd like to turn to Paulo for his initial comments before he turns to Q&A session. Thank you.
Thank you, Filippo, and good morning to all. Thanks for joining us this morning. Few comments I'd like to make. As you have seen, the results on the first quarter was a little bit disappointing. However, we are not at all worried about that. We believe that it came a little bit weaker than expected. We are very confident to keep our guidance for 2018. We already have seen certain deliveries of aircraft or events that happened just as we crossed from the first quarter to the second quarter. We continue to develop the E2. It's on time, no big issues. Of course, we have regular, normal topics to deal with, but not at all any big issue, and our plan is to deliver the first 190 E2 on the first half of 2018.
The certification campaign is moving very nicely according to the plan. The same for the KC-390. Both programs, we are very pleased with the development. We continue to focus on costs, either by reducing costs or looking ways to gain more efficiency in the company. This is something that I outlined to you when I took over last year. 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. As the budget for 2017 is being implemented, we are achieving the targets that we defined last year. We will not stop here. We are already looking into new initiatives to continue this rise. 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 great activity in commercial aviation. Our teams are very busy globally. We are quite positive that we can see a demand that will bring us additional opportunities. Of course, I'm not guaranteeing that we're going to close these deals. However, it's very good, very positive to see the level of activity that we are engaged nowadays. Of course, whenever we have a transition from one aircraft program to the other, always there is a more challenge because of the ramp-up of the new program. 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, still early to say what's going to happen.
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 2018 versus 2017, which is still a very good margin. Double digits, and we will 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 1st, and he's already implementing certain actions that I'm sure will bring better margins 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 this strategy. We are really looking even more with higher focus to reduce costs on business jet unit.
Our market approach is going to look more at the value that we are offering to our clients than going for market share. We are already seeing a slight improve in the margins for business jets. On the new business unit, service and support, we are taking the necessary actions to implement the unit. We are almost finalized the organization of this new business unit. As we move into the second quarter, we will implement it. As we have anticipated, when we announced the launch of this new BU, there is a lot of synergies that we can have gains there, by having only one unit looking into that. Synergies in people, synergies in the warehouses, in the inventory. I'm sure that we will extract a good value from this new business unit.
All in all, I think we are set for a good year in 2017. We are on schedule on everything and keeping our guidance. Looking forward to have a new call with you guys in July, when we will analyze the second quarter results. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Myles Walton with Deutsche Bank. You may begin. Myles Walton, your line is open. Please check your mute button. Our next question comes from Peter Skibitski with Drexel Hamilton. You may begin.
Good morning, guys. I guess just on the satellite launch, I think you said it would happen this week. Should we conclude then, just on your comments, José Filippo, that the second quarter will be your highest revenue quarter for the year in defense? Is that a fair assumption?
Pete, good morning. Not necessarily. I don't think we should consider exactly that to be enough to get the best quarter, because it depends on some schedule of deliveries and some other things. Yes, it's confirmed that it's scheduled for May fourth, so two days from now, so far. Until we have anything new, that's the schedule, and we are confident that this will happen, and definitely 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. 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.
Again, it's scheduled for this week, so far there's nothing that indicates that that's not going to happen.
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 standalone services unit. They have put out a revenue target, sort of a notional revenue target. Two questions for you on that. I guess number 1, would you guys consider putting out a revenue target for that unit as sort of a notional long-term target? Number 2, 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 any external guidance, like target for that. We have internal right number that is being already disclosed, and the head of the unit last week in Orlando in the MRO conference mentioned about that. Nowadays we have about 15% of our revenue coming from the services and supports across the three BUs, and we want to bring this at one quarter of our revenue in the next 4 years. This is, I would say, is a first target, internal target. As far as how we are going to grow on the BU. Initially, we are targeting to look into more scope in terms of work that we can do.
We believe that we can not 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. This is a first initiative, so we can grow in our MROs in Nashville and OGMA, and especially in component repair, so we can do much more. Thirdly, if there is an opportunity to an acquisition, a small one, that can enhance the new business unit, we will be looking to that as well.
Okay. Very helpful. Thanks, guys.
Thank you. Our next question comes from Cai von Rumohr with Cowen and Company. You may begin.
Yes, thank you very much. 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? Give us some help. You mentioned the potential of lower deliveries next year. What percent of your delivery slots, how many delivery slots, 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 commercial aviation markets, I think the activity we are seeing is really global, including the U.S. There is a good activity there for the 76-seater, with major airlines and also regional airlines. The 190, 195 also, elsewhere. There's really very, I'll say, good activity that we are engaged. I cannot comment more than that. We are pleased with the opportunity that we are seeing. For 2018, we don't know yet. I think it's too early to mention anything here, we would have to wait a little bit more in order to elaborate on how 2018 could be. Right? However, in terms of margins, we can see already that we have a weaker margin in commercial because of the transition from E1 to E2. Whenever you have a transition like this, you have more inefficiencies in the process.
The ramp-up will be such that, at the beginning, brings a lower margin to us. We are not concerned on that, because from 2019 and on, we are already anticipating that the margins will improve again. For number of deliveries next year, I'd prefer to wait a little more.
Okay. Maybe if you could give us some color on biz jet demand and your production rate, given that you entered the year with some white tails. Have you pulled that production rate back to get rid of the white tails? At what point might you start to pick production up again? Thank you.
On the business jet market, it is still weak, under pressure. Last year, total delivery was around 650. I believe this year it is going to be flat. However, I think that we can have a slight improvement on margins as we work with the new models and with the services attached to it. We believe that we can deliver a better value to our clients and be recognized for that in the market. We are doing micromanagement in terms of manufacturing and cash in the unit. We are looking to 2017 to really fix the ask and demand, the offer and the ask in the market. We believe that this year, 2017, we are going to see a better cash generation in the unit.
Thank you very much.
Thank you. Our next question comes from Myles Walton with Deutsche Bank. You may begin.
Thanks. Good morning. Sorry about the technical difficulty. There was a big drop in residual value, negative adjustments in the quarter. I'm just curious, Paulo, can you comment on the backdrop of your E-Jets residual values and 145 values, and if this lack of negativity in the quarter is any indication of a trend going forward that we maybe have a lower run rate?
Myles, let me have to answer that.
The decrease, I think, is natural because of the schedule of the commitment that we have. As we get into the moment, you will naturally reduce it. I don't think this can be a different trend. We see prices okay, not decreasing that much that we affecting, like, potential new firms. I don't think that could be something that could be taken as a new behavior of that impact. It's just like a very specific thing that happened in the month or in the quarter. I would say that's mostly related to the schedule of the maturity of each commitment that we have.
Okay.
Also, if I may add, it's Eduardo here, Myles. Actually, we have a reduction in provisions for used aircraft in the first quarter. If compared to previous provision, our numbers were actually better this quarter.
Yeah, no, that's what I was implying. It was much better. 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 means necessarily a different change in the way we should treat. It's more very specific in the quarter. That could remain the same projection that we used to do.
Okay. Then, in terms of cash flow improvement through the course of the year, 1Q was 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. 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 the year as a 12-month basis, not specific in the quarter. We had that comment about the milestone of the satellite launch. I don't think that could change the profile throughout the quarters. I think we should remain to expect this by mid-year to have a better call or a better look on how these things will go. We're confident about the estimates we made, the negative BRL 150 or better, that we should keep that target going forward.
Okay. All right, thanks. I'll stay tuned.
Thank you, Myles.
Thank you. Our next question comes from Derek Spronck with RBC Capital Markets. You may begin.
Thank you for taking my questions. Just on the KC-390, have you seen any pickup in interest internationally on the product? What are some of the biggest pushbacks from customers? 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?
We are seeing a very good interest on the KC-390 as we move forward in the campaign, the test campaign. This is normal for an aircraft like this, right? We have to go step by step. We are bringing again the KC-390 to the Paris Air Show to Europe. We'll do a tour, a demo flight tour after Paris Air Show. We remain very confident that throughout this year, we are going to get our first international order, international outside Latin America. We continue to be very bullish on this program. We are not seeing a pushback on the aircraft, it's just a question to wait until we move forward step by step into the certification of the program. We remain very bullish.
Is Boeing providing any sort of benefits with that relationship there yet, or do you think that will continue to grow?
Well, we continue, of course, to work with Boeing. As I said, it will be a step-by-step growing interest of the KC-390 as we move forward into the campaign. The partnership with Boeing will be very helpful. It's a combination, right, of product and marketing, international marketing in this case, that will bring the success right on this program.
Are you comfortable with the pricing of the product in the marketplace?
Yes, we are. Definitely.
Great. 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 a 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. I think, the announcement is a initiative to put us more into this kind of situation, new business model, new
technologies, and things like that. Since the VTOL will be electric vehicles, it is our interest in developing or understanding much deeper the electric aircraft or hybrid aircraft. This is a good fit for us at this stage. How big is the market? I think the market is very big, but the bigger question is, will the stakeholders, the ecosystem, achieve this market or not? There is a lot to happen. We need certification. We need authorities to approve flying in big cities. We need to find a good solution for the battery and for the recharge of battery. We have to solve the logistics, for instance, in big cities, in order to have these aircraft, these vehicles, taking off and landing. There's a lot to be done in order to achieve what we are anticipating. It's a huge market.
When you talk to Uber, the numbers are really big, and the efficiency of the system, if implemented, will be a success. I have no question about that. If you look at that nowadays, Uber is in 75 countries, 450 cities, and there are 60 million people that monthly require a Uber car. We can imagine the huge demand for this service.
Okay, great. Thanks so much.
Sure.
Thank you. Our next question comes from Noah Poponak with Goldman Sachs. You may begin.
Hi, good morning, everyone.
Morning.
Morning.
Can you tell us with regard to the $200 million cost plan, where were your 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?
Noah. I think that we are as we planned. Remember, maybe coming a little bit back on how we break the BRL 200 million. Most of it, about BRL 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 left the company, basically because of the functions that those employees performed. We have to wait some of them until we adjust the processes and to that. Still, I think now it's over the most of this target there. The balance will be coming from general expenses related to travel expenses, primarily, which is one important item for us, and also some consultancies and general expenses. I would say that we're there.
In terms of the target, like I said, the headcount reduction was achieved, and everything else was already budgeted, and the leaders have in their new targets already considered that. The benefit of that will be still coming throughout the year. We understand that mostly, we still will go this year, 2017. By the end of the year, we'll go into that stage in full. We see 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 way. The Brazilian real strengthened against the dollar. This is a punctual thing, that we think that this is not enough to affect the plan. Summarizing to the question, we're okay.
Most of the BRL 200 million reduction will be seen in 2017, and after that, in full implementation. That's basically how we see that.
Okay, the BRL 450-BRL 550 EBIT guidance has something close to the BRL 200 million in it?
Correct.
What does it have in it for FX going against you?
It's difficult because we don't have that situation. 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. It's hard for us to anticipate if for some reason, the FX will go against us.
We have to compensate. That's normally how we do. We had that situation in years before. Normally, when we face a diverse exchange rate in the currencies, in the expenses, in reais. Normally, we call the leaders, and we review their targets to compensate that. 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. Presumably, you must be making some assumption for that in your EBIT guidance, because if I adjusted your margin for 2016 for all of the one-time items, I get back to about 8%. If I were just to assume you were flat on that underlying basis in 2017, if I only added BRL 200 million to that, I'd get to a much, much higher margin level. There must be some FX or other offset that you're assuming in the guidance that I'm trying to get to.
Yeah. I do not want to get into more details here, you are right in terms if you do that calculation, are going to find that. The BRL 200 is the comparison with the target that was established last year for that. Of course, if you take, for example, the average exchange rate of last year was about 3.5. If you take the current exchange rate that we are using, which is 3.2, it is already at a disadvantage there. We already consider it in the guidance that we have. This was partially compensated with the reduction. We are not going to see full the BRL 200 if you do this calculation. There are other impacts that we have. There was also a wage increase of 5% in November that we have in September. This adjustment with the union with a 5% off.
There is a combination of things that we have to face, but if we focus on the headcount reduction and the expense reduction in others, I think we can get to the blended combination, which will return to the guidance that we have.
Yeah
sure that we do sometime directly. I do not think now it is because there is so many comments to make on that. I do not think it would be worth to explore this now, but considering several pros and cons on that. Focus on the root of the plan, which is headcount and general expense reduction.
Yeah. Actually, I guess also you achieved some of the plan in 2016, that impacts the comparison as well. 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 the EBIT line?
It will be about 20%.
Okay. Thank you.
Yep.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Bruno Amorim with Santander. You may begin.
Yes. Hi, guys. Good morning. Two follow-up questions. The first one, given that you were surprised negatively with the results as well, why not revising the guidance now? 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? Second question, the gross margin, the Executive Division was only 8%, so apparently the weak result in this 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? Thank you.
Okay, Bruno. I think regarding the guidance for the year, like we said, first quarter is typically a weak quarter. We comment about two specific postponement of events that affected, which was the slip of three planes in executives and also the satellite launch. 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 send out. I don't think we should be changing or having any comment that we should get there. I think this is not something new. We already face that almost every year. Regarding margin, I think that what you saw in terms of executive jets, of course, that not only necessarily the direct margin. There's also some costs that impact the gross margin if you have a number of deliveries.
You saw that 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 product, avoiding more aggressive low-margin deals. I think we're still going in that direction. We don't see that will be something that change the way we expecting. I think that we may see definitely an improvement in the margins of executive jets going forward, which is the same that we saw in previous years. Basically, that's my comments on your question.
Thank you.
Thank you. Our next question is a follow-up from Cai von Rumohr with Cowen and Company. You may begin.
Yes, thank you so much. KC-390, what do you still have to do to certify it and get it really into production? What sort of risk do you see of having to take a reserve as you go through that process?
We have flown more than 1,000 hours with the two aircraft that are in certification process, are in the test campaign. We believe that we are moving nicely into this certification. We are not anticipating at this stage any big hurdle or any big issue. So far so good, I'd say. It's really going very well. 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. It's part of the certification process. As I said, we are gradually and step-by-step, moving forward nicely in the program.
Roughly when do you expect to certify the aircraft?
The initial certification towards the end of this year. The full certification, mid next year.
Got it. Last question, you had large losses in both business jets and the Defense business for the year. What are you now looking for margins approximately for those two sectors?
Yeah, Cai, we're not disclosing guidance specific for business units, I think we're keeping the same level that we remember when we announced the guidance for the year, which is about mid-single digits for both Executive and Defense, with expectation to be a little bit better than that. That's what we plan.
Thank you very much.
Thank you. Our next question is a follow-up from Noah Poponak with Goldman Sachs. You may begin.
Hey, Paulo, when you mentioned the potential for a little pressure on the commercial margin in 2018 versus 2017, would you 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, Noah, because we are, as you know, on the Business Jets. The cycle is much shorter than in Commercial, right? We sell a lot during the back of the year for delivery in the same year. It's too early to say. It will depend upon how the Business Jets markets will develop in the next quarters. On Defense, I believe we can have more or less the same margins. It's really more on the Commercial Aviation that we are anticipating now, margins that will be slightly lower than what we have today.
Okay. Thank you.
Sure.
Thank you. Our next question comes from Rajeev Lalwani with Morgan Stanley. You may begin.
Good day, everyone, and thanks for the question. Just another quick one on your expectation for some pressure on your commercial profitability next year. I think you attributed that just to the ramp-up of the E2, I was just wondering if some of that pressure could potentially come from lower E1 pricing.
Josh, no, that's exactly how you perceive that. It's more related to the transition between one model to the other and the capacity to deliver the number of deliveries. We don't work with the different prices as of we are operating today. It's basically because of the transition year.
Okay, great. 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?
No. From E1 to E2s? No, we are not anticipating that. We believe there is a demand now for E1, as well as for the E2. Depending on the market, depending on the application of the aircraft. As you know, we have three models right, on the E2. Three models, four models on the E1. U.S. is a very strong market with different dynamics when compared to other markets. We are not anticipating this.
Do the contracts give that flexibility, or is that something that, in most cases, the customer really doesn't even have that option?
No. In general, there is no this option, to go from E1 to E2. It could be in one or two small cases, but it's not relevant.
Thanks very much.
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.