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. 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. As a reminder, this conference is being recorded and webcasted at ri.mbrear.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 believes, 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 y Silva, President and CEO Mr.
Jose Filippo, Chief Financial Officer and IRO and Mr. Edward Quito, Director of Investor Relations. I would like now to turn the conference over to Mr. Jose 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 Seza do his initial comments, and then we'll be open for Q and A section. So with the presentation, starting in Page 3, with corporate highlights, with information that last week Standard Tools 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 $750,000,000 with net debt our net 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 via air transportation. As part of that, we announced last week an agreement with IDER to explore the concept of potential development of small electric 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 Q1 of 2017.
And as far as sales activities, we announced a new order of 4 E175 to American Airlines. And 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 Force prototype joined the 1st test campaign and the milestone of the first flight of the 195 E2 both ahead schedule. Next page, moving to executive jet highlights. We delivered 15 executive jets in the Q1 of 2017, being 11 light and 4 large aircraft.
Including on that was the first Phenom 100 EV with new avionics and engine performance improvement. Also in the deliveries of the quarter was the Phenyl 300 number 400 to a new customer Elite Jets. In terms of sales activities, as already mentioned, Signal 300 was the best selling executive jets across all segments in the 4th quarter, 4th consecutive year of last year. And finalizing the highlights of executive jets, in the Q1, we appointed Michael Molsono as the new CEO of Business Unit of Executive Jets. Next page, Page 6 highlights for defense and security, starting with the formation of the delivery of 2 Super Tucano to the U.
S. Force, which will be commissioned to the level. In terms of the KC-two ninety 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, ATEC inaugurated the air traffic command and control center in India and SABIZA and BARDAR announced a cooperation agreement with Rockwell Collins to evaluate business opportunities.
And finalizing highlights for defense and securities, the information of the launch of the Brazilian satellite that was postponed to the Q2 and is now scheduled to happen later this week. So we now will close 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 R19.2 billion dollars 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 $1,500,000,000 in the Q1 of this year. Next page, Page 9, aircraft deliveries.
Starting with Commercial Aviation, the left side, we delivered 18 aircraft in the Q1 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 Airline order. Regarding effective jets, we delivered a total of 15 aircraft in the Q1, broken by 11 light and 4 large aircraft. Seasonally, the Q1 is the weakest quarter of the year and we see a particularly 3 planes slipped 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 7 to 8 light jets and 35 45 large jets.
Next page, Page 10. In relation to net revenues, consolidated revenues reached $1,000,000,000 in the Q1 of 2017. The reduction compared to the previous years reflected lower deliveries. The amount of revenues is broken by $633,000,000 in commercial, representing 62 percent of the total, dollars 226,000,000 in executive, representing 22% and $156,000,000 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 $100,000,000 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 $140,000,000 of sales and general administrative expenses in the Q1 2017 compared to $140,000,000 in the previous year. The slightly increase in G and 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 $31,000,000 in the Q1 of 2017 with 3% margin. This number was adjusted to $8,000,000 costs 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 $450,000,000 to $550,000,000 and 8% to 9% margin.
Next page, Page 13, in relation to EBITDA. We reported a total of $103,000,000 in the Q1 of 2017 with a 10.1% margin. For EBITDA outlook in 2017, we are confirming the range of $770,000,000 to $890,000,000 and margins from 13.5% to 14.5%. Next page, net income. We reported adjusted net income of $23,000,000 in the Q1 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 $72,000,000 in the Q1 of 2017, broken by $8,000,000 in research, dollars 31,000,000 in development and $33,000,000 in CapEx. The total investments in the Q1 was mainly affected by suppliers' contribution of $86,000,000 For the year 2017, we are estimating the total of $650,000,000 broken by $50,000,000 in research, dollars 400,000,000 in development and $200,000,000 in CapEx. Next page, Page 16, as far as free cash flow. We reported a free cash flow consumption of $199,000,000 in the first quarter of 2017.
The cash consumption of $48,000,000 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 $150,000,000 of barrel. Next page, in Page 17, before moving to the Q and A session and Faiza and Saul Sezer's comments. In relation to our cash and debt position, we closed the Q1 2017 with a total debt of $4,300,000,000 In this amount, it is included the recent 10 year bond issued of $750,000,000 which improved the debt profile to 6.3 years of average maturity. In terms of our cash position, we had a total amount of $3,500,000,000 which returned to a net debt of $806,000,000 as of March 31.
Okay. With that, we finalize the presentation. I'd like to turn to Paolo for his initial comments before we turn to Q and A session. Thank you.
So thank you, Filippo, and good morning to all. So thanks for joining us this morning. Few comments I'd like to make. As you have seen, so the results on the Q1 was a little bit disappointed. However, we are not at all worried about that.
So we believe that it was I mean, it came a little bit weaker than expected, but we are very confident to keep our guidance for 20 18 and we already have seen certain deliveries of aircraft or events that happened just as we crossed it from the Q1 to the Q2. We continue to develop the E2 in some time. 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 192 on the first half of twenty eighteen.
So the campaign certification campaign is moving very nicely according to the plan. So the same for the KC-three ninety, 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 $200,000,000 mission. A bigger part of this is already done, which was the dismissal of 1600 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 this drive. 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 in markets, we are seeing a great 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 us additional opportunities. Of course, not is not 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, 2018 is always I mean, whenever we have a transition from one aircraft program to the other, so always it's very easy, a more challenge because of the ramp up of the new program.
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 2018, 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 commercialization in 2018 versus 2017, which has been still a very good margin, so double digit and we will continue to have these strong margins in commercialization. On Business Jet, Michael came on board, Michael Mofdanu, 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 going forward and also cash for the unit going forward.
I do expect that in the Q2 or Max in the Q3, 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 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 a slightly improved in the margins for business jets. On the new business unit, services and support, So we are taking the necessary actions to implement the unit.
So we are almost finalized the organization of this new business unit. And as we move into the Q2, we will implement it. So as we have anticipated, when we announced the launch of this new BU. So there is a lot of synergies that we can have gains there by having only one unit looking into that. So synergies in 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 only scared on everything and keeping our guidance. So looking forward to have a new call with you guys in July when we will analyze the Q2 results. Thank you.
Thank Our first question comes from Myles Walton with Deutsche Bank. You may begin. Our next question comes from Pete 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, Jose Filippo, that the Q2 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 deliveries and 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 agree with you that it's going to be impacting the second quarter in about $100,000,000 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 Q2 will be the best. I think we should now retain on the $100,000,000 revenues for the satellite launch in the Q2. 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, Paolo. 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.
And they have put out a revenue target, sort of a notional revenue target. And so two questions for you on that. I guess number 1, would you guys consider putting out a revenue target for that unit to sort of a notional long term target? And number 2, are you guys considering M and 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 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. So nowadays, we have about 15% of our revenue, about 15 percent is coming from the services and supports across the 3 BUs. And we want to bring this at one quarter of our revenue in the next 4 years. So this is, I would say, is a first target, internal target.
As far as the how we're going 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 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. So this is a first initiative. So we can grow in our MROs in Ashview and Ogma and especially in components repair.
So we can do much more. And thirdly, if there is an opportunity to an acquisition, small one that can enhance the new business units. So 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. 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, 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 is very, I'd say, good activity that we are engaged.
So I cannot write 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.
So however, in terms of margins, so we can see that already that we 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 such that at the beginning brings a lower margin to us. But we are not concerned on that because from 2019 and on, we are already anticipating that the margins will improve again. But for 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 bizjet 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? And at what point might you start to pick production up again? Thank you.
On the business jet market, it's still weak under pressure. Last year total delivery was around $650,000,000 I believe this year is going to be right flat. However, I think that we can have a slightly improved 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 market. 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 market. And so we believe that this year, 2017, we are going to see 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, Paolo, 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 trend going forward that we maybe have a lower run rate?
So, Myles, let me have to answer that. We don't the decrease is, I think, is natural because of the schedule of the commitments that we have as we get into the moment you naturally introduce. So I don't think this is this can be a different trend. We see prices, okay, not decreasing that much that we're affecting like potential impairments. So I don't think that could be something that could be taken as a new behavior of that impact.
So it's just like a very specific thing that happened in the month or in the quarter that and I would say that mostly related to the schedule of the maturity of each commitment that we have. And also we
certainly had Eduardo here, Maers. Actually we have
a reduction in provisions for U. S. Aircraft in the Q1. So if compared to previous provision, 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 you should treat.
It's more very specific in
the quarter and that could remain the same projection that we used to do.
Okay. And then in terms of cash flow improvement through the course of the year, 1Q was similar to last year's Q1, 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 the Q2 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 a specific in the quarter. We had that comment about the milestone of the satellite launch, but 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 color, better look on how these things are going. We're confident about the estimates we made, the negative SEK150 1,000,000 or better that we should keep that target going forward.
Okay. All right. Thanks. I'll stay with you.
Thank you, Mike.
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-three ninety, 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 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-three ninety 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-two ninety to the Paris Air Show to Europe. And so we'll do a tour, a BEMFLY tour after Paris Air Show.
So we remain very confident that throughout this year we are going to get our 1st international order, international outside 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.
Is Boeing providing any sort of benefits with that relationship there yet or do you think that will continue to grow?
Well, it continues to we continue of course to work with Boeing. But as I said, so it will be a step by step growing interest of the KC-three ninety as we move forward into the campaign. But the partnership with Boeing will be very helpful. And so it's a combination, right, of product and marketing, international marketing in this case, that will bring the success right on this product.
And are you comfortable with the pricing of the product in the marketplace?
Yes, we are. Definitely.
Great. And one more just it's 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 with that far at this stage. So I think the announcement is the initiative to put us more into this kind of situation, new business model, new technologies and things like that. So since the Vuitton will be electric vehicle, so 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 market 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. So there is a lot to happen. We need the 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. So we have to solve the logistics, right, for instance, in big cities in order to have these aircraft these vehicles taking off and landing.
So there is a lot to be done in order to achieve what we're anticipating, it's a huge market. So when you talk to Uber, so the numbers are really big and the efficiency of the system, if implemented, will be if Hook says, I have no question about that. If you look at that nowadays, Uber is in 75 countries, 450 cities and there are 60,000,000 people, 60,000,000 people that monthly require Uber car. So 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.
Good morning. Good morning, Bill.
Can you tell us with regard to the $200,000,000 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 €200,000,000?
Okay. I think that we are as we planned. Most remember maybe coming a little bit back on how we break the 200,000,000 most of it about $130,000,000 will be coming from the headcount reduction, which was actually achieved by the dismissal plan that Paolo mentioned about the 1600 employees that left. Of course, there is a schedule for that to left. Actually in the Q1, we just announced that the remaining group was left the company basically because of the functions that those employees perform.
So we have to wait some of them until we adjust the processes to that. So still I think now it's over the most of this target is there. Then the balance will be coming from general expenses related to travel expenses primarily, which is one important item for us and also some like consultancies and general expenses. So I would say that we're there. In terms of the targets, the like I said, the headcount reduction was achieved and everything else is already budget 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 we go this year 2017. By the end of the year, we're going to debt stage in full. You 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 ways as in Brazil strengthened against the dollar. But this is a punctual thing that we think that this is not enough to affect the plan. So summary and summarizing to the question, we're okay. And most of the EUR 200,000,000 reduction will be seen in 2017 and after that in full implementation. That's basically how we see that.
Okay. So the $450,000,000 to $550,000,000 EBIT guidance has something close to the $200,000,000 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 the facts will go against us. But we have to compensate.
That's normally how we do. We had that situation years before. Normally when we face diverse exchange rate in the currencies, in the expenses in reais, we normally we call the leaders and we review their targets to compensate that. That's normally 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 adjusted your margin for 2016 for all of the one time items, I get back to about 8%. And if I were just to assume you were flat on that underlying basis in 2017, If I only added $200,000,000 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 I'm trying to get to?
Yes. I don't want to get into more details here, but you're right in terms if you do that calculation, I'm not going to find that. The 200 is the comparison with the target that was established last year for that. But of course, if you take, for example, the average exchange rate of last year was about 3.5. Percent.
And if you take the current exchange rate that we are using, which is 3.2 percent, it's already an advantage that we've already considered in the guidance that we have. So this was partially compensated with the reduction. So we're not going to see full to €200,000,000 if you do this calculation. There are other impacts that we have. There was also a wage increase like 5%.
Remember that we have in September, this adjustment with the union with a 5%. There's 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. We make it explore that we do some time directly. I don't think now it's because there's so many comments to make on that. I don't think it will be worth 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 just one more margin question. How should we think about the margin on the satellite project when that lands in the Q2? How much of that will drop through to the EBIT line?
It will be about like 20%.
Okay. Thank you.
Thank you. Our next question comes from Bruno Amorim with Santander. You may begin.
Yes. Hi, guys. Good morning. So two follow-up questions. The first one, given that you were surprised negatively 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 this Equities division was only 8%. So apparently the weak result in this division was not fully explained by low dilution of G and A. Of G and 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, Q1 is typically a weak quarter. We comment about 2 specific postponement of events that affected, which was the slip of 3 planes in executives 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 send out. So I don't think we'll be 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 just of course that not only necessarily direct margin, but some also some costs that impact the gross margin if you have a number of deliveries.
And 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. And we don't see that would be something that changed the way we're expecting. I think that we may see definitely an improvement in the margins of electric jet going forward, which is the same that we saw in previous years. So 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. So KC-three ninety, what 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 any big hurdle or any big issues. 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, dry 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.
In 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 mid single digit for both executive and defense with expectation to be a little bit better than that, but 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, Paula, when you mentioned the potential for a little pressure on the commercial margin in 2018 versus 2017, 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, on the business jets, so the cycle is much shorter than in commercial, right? So we sell a lot during the by the year for delivering in the same year. So it's too early to say. So it will depend upon the how the business jets markets will develop in the next quarters. On the sense, I believe we can have more or less the same margins.
So it's really more on the commercial aviation that we anticipate and now margins that will be slightly lower than what we have today.
Okay. Thank you.
Sure.
Thank you. Our next question comes from Josh Milberg 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 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 that. It's more related to the transition between one module to the other and the capacity to really deliver the number of deliveries. We don't see we don't work with the different prices as of we are 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?
No. 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 different dynamics when but 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 that in most cases the customer really doesn't even have that option?
No. In general, there is no dis option to go from E1 to E2. It could be in 1 or 2 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.