Hello. Good afternoon, ladies and gentlemen. Welcome to the Embraer Day 2017, Brazil. We are glad we are all here today attending this event. We will start with our 2016 financial results and the 2017 outlook. The first part of the event will be broadcast. Today with us, we have Mr. Paulo César de Souza e Silva, our President and CEO, Mr. José Filippo, our Chief Financial Officer, and myself, Eduardo Couto. I am the Head of Investor Relations. Before we start, just as a reminder, this conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and other markets where the company is present. The words "believe," "may," "will," "estimate," "continues," "anticipate," "intend," "expect," and similar words are intended to identify forward-looking statements. Embraer undertakes no obligation 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. With that, I would like to turn the conference over to Mr. José Filippo. José, you can start. Thank you.
Thank you, Eduardo. Welcome again to attending our conference. As usual, we are going to go to the presentation of the 2016 results, also in the 2017 estimates. We will be entering the Q&A session. Starting the presentation, starting page three, with the corporate financial highlights for 2016. Considering only the recurring results, the company had a positive year meeting all the guidance. For the year 2016, the total revenues amounted to $6.2 billion. The adjusted EBIT of $499 million, with 8% EBIT margin. Total investments were $630 million. Net cash flow was a consumption of $359 million. Finalizing the financial results, we closed 2016 with a backlog of $19.6 billion, adjusted net income of $291 million, and an earnings per ADR of $1.58. Our net debt position as of December 31st, 2016, was $575 million. Go to next page four.
Regarding commercial aviation highlights, we delivered a total of 108 aircraft in 2016, including the E-Jet number 1,300, which was an E195 to our Chinese customer, Tianjin Airlines. With that, we have accumulated firm orders of more than 1,700 aircraft since the entry into service of the E-Jet family. In terms of the E2 program, first commercial activities, we reached 275 firm orders of the total of 690 firm commitments. In relation to the development, the E190-E2 still on test flight campaign with 40% completed, with the entry into service scheduled for the first half of 2018. As of last year, we proudly had the rollout of the first E195-E2, is scheduled to enter into service in 2019. Finalizing the highlights of commercial aviation, regarding our service activities, our Full FATS program has reached over 60% of all the Executive Jet customers and 65% of E-Jet customers.
Next page five. Moving to Executive Jets highlight for 2016. We delivered a total of 117 Executive Jets, broken by 73 light jets and 44 large jets, including the Executive Jet number 1,000 and the Phenom number 700. In terms of industrial activities, we delivered the first Legacy 450 with final assembly in our Melbourne, Florida facility. In terms of commercial activities, we launched two new Executive Jet versions, the Phenom 100EV and the Legacy 650E. The Phenom 300 was again the most delivered Executive Jet in the industry for the fourth year consecutively. Regarding customer satisfaction, we were ranked number one by both AIN and ProPilot Survey in 2016. Finalizing the highlights of Executive Jets, we ended 2016 with a market share of 18% in terms of deliveries and 9% in terms of revenue. Next page, talking about Defense & Security business highlights in 2016.
Starting with the KC-390 development, flight campaign tests continue. As we planned, two prototypes are now over 1,000 hours of flight in the test. Also, we started the serial production of the KC-390 for the first KC-390 to the Brazilian Air Force. The first two Legacy 500 for in-flight inspection to the same customer. The Brazilian satellite program concluded final tests and is now ready to be launched, which is expected to be in the first quarter of this year. We also signed new contracts for air traffic control modernization in Brazil and abroad. Finalizing the highlights for Defense, the business we inaugurated in 2016, the Gripen design and development center in Brazil, in our Gavião Peixoto plant. Okay. Now moving to the financial results in page eight.
Starting with our backlog, we reached $19.6 billion at the end of 2016, and this amount is broken by 70% for Commercial Aviation, 22% for Defense & Security, and 7% for Executive Jets. Next page, in terms of deliveries, starting with Commercial Aviation on the left, we delivered 108 aircraft in 2016. Around 80% of those deliveries were E175, percentage is similar to the previous year. On Executive Jets on the right side, we delivered 117 aircraft. As I said, broken by 73 light jets and 44 large jets. For both business units, we were within the guidance range of 105-110 jets for Commercial and 105-125 for Executive. Next page, regarding net revenues. We reported a total of $6.2 billion in 2016, on the high end of the guidance range and 5% above 2015.
If we break the net revenues of 2016 by business units, we will have 57% related to Commercial, 28% for Executive, and 15% for Defense. Also, in terms of revenues, we met the guidance range of $5.8 billion-$6.2 billion in the year. Next page, net revenues by segment and by quarter. Fourth quarter was the strongest quarter for all the business units. Going to each business unit, starting the clockwise way. Commercial Aviation on the top right, we reported a total of $3.53 billion in 2016, within the guidance. In the bottom right, Defense & Security reported $0.93 billion in 2016, slightly above the guidance range, with a very strong fourth quarter. Moving to Executive Jet in the bottom left, the total of $1.73 billion in 2016, in the high end of the guidance range.
Closing the page, on the top left, as already mentioned, the total of $6.2 billion in 2016 for Embraer in a consolidated base. Next page 12, regarding SG&A expenses. Reflecting our focus on cost control, we had a reduction from 2015, with total SG&A expenses of $533 million in 2016, being $164 million for general and administrative expenses and $369 million for selling expenses. Next page. Regarding operating result, in order to have a fair comparison, we excluded from the reported EBIT the non-recurring items, which were highlighted on the box on the right, that we show the exclusion, with the positive impact of the recovery of American Airlines Chapter 11 in 2013. In 2015, the provision for Republic Airways of $101 million. In 2016, we excluded three items, was the partial recovery of Republic Airways of $52 million.
The voluntary dismissal provision of -$117 million, and also the impact of the FCPA settlement of $228 million, with a total of $293 million in 2016. With that, we report the adjusted EBIT of $499 million in 2016. With an 8% margin, both in the high end of the guidance range of between $405 million-$500 million, and margin of 7%-8%. EBIT margin broken by segment in 2016 were, in commercial aviation, 12.3%, executive jet, a positive 1.3%, and defense, positive of 4.1%. All business were positive in the full year basis. Next page, adjusted EBIT, EBITDA. We had the same treatment mentioned in the previous page. We had a total of $839 million in 2016, with a 13.3% margin. For both amount and margin, we reached the guidance range. Next page, adjusted net income.
We had a total adjusted net income of $291 million in 2016, with net margin of 4.7%. Next page 16. In terms of earnings per ADS and payout ratio, we had $1.58 per ADS in 2016, with a payout ratio of 25%. In page 17, in terms of investments, we invested a total of $630 million in 2016, broken by $48 million in research, $381 million in development, and $201 million in CapEx, in line with the outlook for the year. Next page 18, regarding free cash flow. Although we had a positive free cash flow in the fourth quarter, we ended the year with a consumption of $359 million. In line with the guidance. The main reason for the cash consumption were the heavy investments in the E2 programs, reflecting the additions intangible assets and higher working capital requirements, mostly related to the aircraft inventory.
Next page 19, regarding Embraer capital structure through debt and cash. At year-end, we had a total debt of $2.76 billion. In terms of cash, our position in the end of 2016 was $319 million, which returns to a net debt of $575 million. In terms of average years, in terms of the debt, our debt was 5.3 years at year-end. As you may know, in early 2017, we issue a new senior bond of $750 million. After that, the average terms of our debt will increase to 6.3 years. With that, we conclude the financial results, and we move into the 2017 outlook. In page 21, deliveries and revenues outlook for 2017. On the left, in commercial aviation, we expect to deliver from 97 to 102 aircraft, and revenues in the range of $3.35 billion-$3.4 billion.
For executive jet, deliveries are expected to be between 105-125 aircraft, broken by 70-80 light jets, 35-45 large jets. Revenues for executive jets are expected to be in the range of $1.6 billion-$1.75 billion. On Defense, our expected revenues will be, for 2017, in the range of $0.8 billion-$0.9 billion. Other revenues are estimated to be $50 million. Combining all segments, our consolidated revenues for 2017 are expected to be in the range of $5.7 billion-$6.1 billion. Next page, regarding 2017 outlook for results, cash, and investments. We expect EBIT to be in the range of $450 million-$550 million, with 8%-9% margin. In terms of EBITDA, we forecast a range of $770 million-$890 million, with 13.5%-14.5% margin.
For free cash flow, we are estimating a consumption of $150 million or better, yet reflecting the investment phase of the E2 development. Finalizing 2017 outlook, we are estimating investments of $660 million, broken by $50 million to research, $400 million to development, and $200 million for capital expenditures. Okay. With that, we finalize the presentation, and we're now ready for the Q&A session. Thank you.
Okay. We're going to start the question and answer section. If you're on the phone, you can also ask a question. Just press star one in your phone. We will start with the audience first. If you're here in the audience and you want to ask a question, just raise your hand. We have a couple of mics in the room. Thank you.
Hello. Hi, good afternoon, everyone. Bruno Amorim from Santander. My question relates to the Commercial Aviation division. If I'm not mistaken, you have 175 firm orders in the backlog still, and you plan to deliver 100 aircraft this year. If you go ahead with your plan, you deliver 100 and you receive no orders this year, let's say, you still have 75 left for the next few years. What does it imply in terms of the risk that in the transition to the E2, you would eventually not maintain the current level of deliveries in the upcoming years?
Hello, everyone. Good afternoon. Thanks for coming and joining us for this session. The Commercial Aviation. You are talking about the E1 only, right?
Yes.
Yeah. We will start to deliver the E2 next year. We have to look at combined numbers. From next year on, 2018 and on, there'll be E2s as well. Right? We have to add that to that number. The E2 program is on time. We are flying with the fourth aircraft now, so we are not anticipating any delays at this stage. On the contrary, we are on time. We should be delivered the first E2 between January and June next year. We are, of course, building up our backlog for the future. John Slattery will talk more about that when he presents on the Commercial Aviation. We feel that we will have a smooth transition from E1 to E2 in the next year.
When we look back years ago and looking into the future, we could see a huge gap. Now, of course, we know already that we were able to close this gap, and I'm sure that going forward also, we are going to have a good transition. We have announced recently the 190 launch order for the Norwegian company, Widerøe. As of yesterday evening or this morning, we have announced also that Azul here in Brazil will be the launch customer for the E2-195. All in all, it's definitely there is more pressure next year, right, which is the year that we are going to do this transition. We feel that we'll do a smooth one.
Thank you. All that said, is it fair to say that your base case for the next year is you delivering around 100 aircraft, or is there a real risk that next year it's going to be around 100?
We don't know yet. We at this stage, we cannot affirm whether or not we will do that. What we know is that we are in important engagements, in important campaigns. Whether or not we are going to close, we don't know. There is a strong activity going on now.
Thank you.
Sure.
Peter Skibitski, Drexel Hamilton. I wonder if you could talk about the big beat to the defense revenue guidance in the fourth quarter. Maybe talk about what the drivers are and maybe quantify them to the extent that you're able to.
Yeah, maybe. The fourth quarter, the defense, you have to see the year. Sometimes specific events, because of the lowest level of revenues of the company, especially events may interfere. We had specifically the deliveries of four Super Tucanos to the Mali Republic in the end of the year. Those contracts, they were different. They were not price over construction. It was like the delivery we invoiced. Sorry, as we delivered, that impacted. I think we should see in a yearly basis rather than a quarter. I think that it tends to be like the guidance we said, that's going to be $0 .8 billion-$0. 9 billion beginning next year. It tends to be more distributed.
Just one follow-up. If you gave us the 2016 segment operating margins, just directionally, how should we think about 2017 for the three main segments?
It's low double digits for commercial, as you said, and mid-single digits for both of the others. That could be it.
Thank you.
Josh Milberg from Morgan Stanley. Just going back to your initial question on the delivery level and also the transition to E2. I think recently you've talked about some potential sources of incremental demand. One of those being U.S. carriers looking to replace 50-70 seaters, and another source of potential demand being startup airlines in China looking, it being required actually by regulations to add regional aircraft. I was just hoping you could update us on your view on those potential sources of demand.
Okay. Thank you. I'll make just a few comments on that, and then I will leave it with John to elaborate more on that, because that is in his presentation. These views are very complex. It's a huge dynamic that's going on now in both sides, China and also in the U.S. We continue to see very strong opportunities in these two markets. Okay, having said that, I will leave it with John to elaborate more on that.
Thank you. Turan Quettawala from Scotiabank. My question was regarding the restructuring that you are sort of working through right now. Can you give us a sense of how much of the savings are already in 2016 numbers, and how much should we expect sort of incremental savings to come through in 2017?
Yeah. Thanks, Turan, for the question. In terms of the cost saving, the Mission 200 that we launched last year, the implementation so far has been super good and on schedule, say, maybe even faster than we previously thought. From the BRL 200 million, we should capture around BRL 100 million because we have some offsets like the stronger currency, the wage increase that we had last year. From this BRL 100 that we should capture, around one-third was captured last year already in the fourth quarter, and two-thirds will be captured throughout this year.
If I may add, Turan. Consider the plan that we have. The big piece of the plan, the larger piece, will come from the headcount reduction, which we achieved. As you know, we recorded the provision for the dismissal. Everything else in terms of the cost of, for example, travel expenses and consultancies, they already budget. All the managers of the company already have this target, and they have to comply with that in the targets that they have for 2017, because it's already considered in the budget for 2017. Yes, I may add also one more word on that. We will not stop in this initiative that we launched last year, the Mission 200. We will continue. New initiatives will come in order to make our company more efficient, like in the cost side.
Of course, we are working out on the revenue side through this new business unit on services that over time will deliver more revenue. The business jet market also, I believe that may improve from now on. I think we have reached the bottom already. There is an upside now for the business jet going forward. If you look what's going on in the West and the economies. I believe that the worst is over. The combination of a little bit more revenue and more efficiencies in the cost side. We believe that we can get additional margins going forward.
If I may ask a follow-up quickly. On the commercial aviation side, with the E2 coming into production and deliveries next year, can you talk a little bit about how much of the losses you're expecting on the E2 next year when the first units are delivered? Maybe, or just a number, sort of maybe across the whole program, how much of a loss are you expecting on that?
I don't know yet. Of course, any ramp-up, of course, of a new program, you have additional cost right at the beginning. I can't say now for how much that would be. It's already like embedded in our plans because we start already to manufacture the E2 this year. By June, July, we will start manufacturing aircraft for the deliveries for next year. Already the cost is embedded in 2017, and you have now our guidance here for 2017 in terms of margin, so on and so forth. It's not bad. Turan, just to complement. I think most of the deliveries in 2018 will still be on the E1. Something that we have to take into account as well is that even for 2017, we will require, of course, demanding working capital for the starting of the production of the E2.
We estimate something around like $200 million. It's already included in the guidance for cash consumption that we send out.
Thank you very much.
Let's choose the broadcast question now, since we have a chance. Okay. Can we take a question from the phone, operator?
Okay. Yeah. Mariana Pérez Mora from Bank of America Merrill Lynch .
Yes.
Can you please discuss the order pipeline for business jets in the U.S.?
Can you repeat?
Sure. Can you please discuss the order pipeline for business jets in the U.S.?
The order for.
Have you seen any change after the election?
Oh, market. Market.
Yeah. Executive jet.
Well, the business jet market, if you look at the numbers of last year, it's still very depressed. The market last year delivered 648 units. The peak of the business jet market was in 2008, with 1,300 aircraft. Having said that, we still see very large inventory of used business jets, around 12% of the number of aircraft in operation. That's meaningful. That's a lot. It's too many. We still need to clear this inventory a little bit, have this inventory drop to around 7%, 8% in order to have a more neutral market. It's going to take a while. However, we believe that the worst is over now. From now on, we can see gradual improvement, but it's not going to be a strong improvement. It's going to be step by step. Very good, I'd say, small improvement.
We believe that we are with a line of products which are state of the art. The Phenom 300 being the most delivered aircraft for the fourth year in a row. That is very important, meaningful. The position of Embraer in customer support also has been such that we have been able to grab a lot of attention and gradually also improve our client base. All in all, we believe that we can see better results going forward now. The U.S. economy, as we all know here, is going through a process with the new administration, which can provide additional growth right in the market. We are seeing what Wall Street is thinking about this new administration, right?
The stock market is going up and records, and we know that business jets, executive jets, is very much linked right to both GDP and stock market. U.S. market is the largest market in the world for business jets. About 60% of the global market is within the United States. Therefore, it's one more element that can help for this market improve right from now on.
Thank you.
Okay. Our next question will come from the phone. Operator, can you open the line and introduce the question, please?
Our next question comes from the line of Cai von Rumohr of Cowen and Company. Your line is now open.
Yes. Thank you very much for taking the call. As you look at 2018, do you feel you will be able to hold your commercial margins as you introduce production of the E2? Secondly, should we look for a lift in business jet margins? I assume this year, your production will be down so that you can reduce your inventory of white tails. Thank you.
Cai, can you repeat the first question, please? The second is regarding the business jet margins, right?
The first part of the question was commercial margins next year. As you introduce the E2, do you feel you will be able to hold them or are they likely to come down? On business jet margins next year, given that this year you have production down to the white tail, I would guess that would not be an issue next year.
Yes, Cai. We are hearing very bad, as long as I understood the question, the first piece was related to the margins for commercial aviation in holding 2017. Yes, we think we can retain that. That's the plan. Primarily, orders that we had before, we have, like Paulo mentioned, discipline in terms of costs that we think we'll be able to retain those margins for commercial. Regarding executive jet, definitely, we expect to have a better margin in 2017. The last quarter of last year, although this is always the best quarter of the year, you can see there improvement in the results, which reflects what we mentioned before about being more disciplined in terms of the deals, making sure we're not matching the others, and that we have quality on each deal that we get into.
We expect to see better, an improvement of margins in executive jet in 2017. If I missed, you can repeat, please, if we missed anything from the question.
Okay. We are going to try to reconnect Cai, maybe we can move in the meantime for the next question. Also from the phone, operator, can we have the next question from the phone, please?
Our next question comes from the line of Darryl Genovesi of UBS. Your line is now open.
Hi, guys. Thanks for the time. Your margins in the fourth quarter were up a lot relative to last year. Can you give us a sense how much of that is your cost-cutting program flowing through and how much more there is of that to come in 2018?
Yeah. I don't know. Do you have the margin for the breakdown?
Yes. Maybe you can give the details of the margin for business, Darryl Genovesi. Thanks for the question. We had a 12% EBIT margin, consolidated EBIT margin, excluding non-recurrent items. 14.8% on commercial aviation, 9.2% on Executive Jets, and 9% on defense and security. The cost-cutting plan was launched towards the end of the third quarter, we already captured, as I mentioned on the previous question from Turan Quettawala, part of the BRL 200 million Mission 200 in the fourth quarter. I think it's tough to quantify the percentage of the margin improvement that comes from cost-cutting, but it's a combination of cost-cutting, our change, I would say, in behavior on Executive Jets, focusing more on profitability rather than volumes, as we have already said. It's a combination of things. I don't know if Silva can follow on that.
I just wanted to add that it's important about the performance of the last quarter. Like you said, good margins, this is not what we should replicate for all the quarters. Typically, that is the strongest quarter. I think that in a yearly basis, as we indicated, the guidance range should be broken by, I repeat, maybe you can get that, by low double digits for commercial and mid-single digits for defense and for executive. That will, on a blended basis, return to the 8%-9% that we are expecting for the full year 2017.
Okay. Thank you. On free cash flow, based on your guidance today for the $150 million outflow in 2017, within the context of, I think, about BRL 400 million in development spending, would you expect that free cash flow number to turn positive in 2018?
No. It's still too early. Of course, we don't give guidance for 2018 at this point. As we already indicated, 2018 is a transition year for the E1 and E2 model. Again, it's too early to think about that in terms of our disclosure. I don't think it could be better than that. As you know, in recent years, we're trying to be breakeven because it's a very important phase of investment, and the learning curve of a new model is always something that we have to go through. This has to be taken into account when we expect in terms of cash generation for the following years.
Okay. Thank you.
Okay, maybe we can take a question from the audience now. If you have a question, please just raise your hand.
Hi. Lou Fennel from Deutsche Bank. Sorry. What is the spot rate you assume for the year?
320.
Got it.
Between BRL 310-BRL 320, which is more or less at current levels. That's our exact for 2017.
Very good. Thank you.
Hello, this is Faith Correa from Goldman Sachs. How much conservatism is there in the margin guidance that you guys gave?
It depends on the U.S. dollar. Who knows?
Okay. Very good.
Our guidance, of course, reflects. There are challenges on the guidance always, because that's the way we work. It has to be something that we think is going to be reasonable and achievable. I think there's a combination of what we see, because we have some orders already booked. There's still challenges to sell during the year, which typically we have. It's not different than we had before. I think last year we had a lot of non-recurring items and a lot of impacts on the company that affected the whole of the company. Taking that out, I think the trend is to really be in a situation where we can really achieve those targets and challenges that we have, especially because we had this focus on the cost reduction. I think they are already reflecting.
The impact of the stronger currency is always a headwind. We have to face this anyway. I think that's reasonable. That's what we expect to see. I don't think it's conservative. I think it's realistic.
Just how much of contingency there is in this plan? Because if you think about it, as you said, there's a lot of non-recurring that won't happen anymore, and there's the cost-cutting that you can see in already, at least a good portion of it, in 2017. How much of a deal of contingency plan there might be embedded in this guidance so that we achieve the levels that you're talking about?
I don't think we have much contingency to be accounted for in 2017. I think what we had in 2016 was more like a one-time impact. The typical contingencies that we have are related to impairment of airlines, which we've been dealing, and it's diluted throughout the year. Also, other non-financial labor contingencies that we always disclose in the balance sheet. There's nothing specific that we can anticipate in 2017.
Thank you.
Let's maybe take one more from the phone. Operator, can we take a question from the phone, please?
Our next question comes from Alexandre Falcão of HSBC. Your line is now open.
Good afternoon, guys. My questions are regarding Defense. First, on the receivables front, how much do you still have to receive from the government, and where are we on the program in terms of the KC? Assuming the KC, when it becomes operational, what happens in terms of the pre-operational expenses and how you guys are going to go out to the market? Is there going to mean lower margins there? As Jackson pointed out in the last February day, that you expected to have almost 60% of the revenues on being U.S. dollar denominated. Where are we on that and what we expect, and what's the expectancy of margins for 2017 in specific on Defense? Thank you.
Okay. Let's try to see if I get all the questions. In terms of receivables from the government, we end up 2016 with $264 million in receivable. That can be compared to $350 in the end of 2015. It's been following the schedule as we expected. The development of the program still have, this year is important year, scheduled to enter into service in the first half of 2018, and the development program will stop, and we start to build a series. The program, it is at the concept of the sale of our customer today, is the cost over recording through the cost. I think we will have through the development and the manufacture of the aircraft, recognizing the revenues that could be seen in 2018 or at least starting maybe in the end of this year.
Then there's going to be, of course, the running curve of the program, which we don't anticipate any pre-op charges. In terms of the revenues, today, still 90% of the revenues of Defense are reais denominated, and this will be changing when we have the series being delivered, the KC-390, and mostly related. There will be a big change in terms of the revenues shift into dollar-denominated revenues, almost all of them.
Okay. Thank you. If you can just, if there's bump up in the defense budget in the U.S., do you think there's opportunities specifically for the Super Tucano there? Is there any indication that we're going to see a recurring order there? Anything you can share? Thank you.
That was the last one? Only or?
Yeah, of course, we have the Super Tucano with the U.S. Air Force in operation in Afghanistan. The information we have is that the U.S. Air Force is very happy with the performance of the aircraft. Going forward now, of course, we have to wait and see the opportunities that will arise to us. There are many information already on the press, of the need for the U.S. to replace certain aircraft, not only in military and, like the Super Tucano, to replace them for the A-10, for instance. Also more recently, also talk about business jets for training, like pilot training. It's another opportunity also. We have to wait for additional information and see how we can move forward from here. It's early to say.
Thank you so much.
Can we take now a question from the audience? Anyone?
Hi, this is Bruno from Santander. I have a follow-up question on the executive division. You've mentioned that, going forward, you intend to focus on profitability rather than on increasing deliveries. Volumes is not your main focus right now, but your guidance implies a similar level of deliveries, a similar number of deliveries versus last year. How should we look at it? How can you improve profitability if you are not decreasing the number of deliveries this year? Thank you.
If you look at our guidance last year, in February, our guidance was for 150 aircraft or so, right, in business jets. In August, we decided to drop to 117, if I'm not mistaken. It was a big adjustment.
119.
119. It was a big adjustment, right? What we are seeing now is that with this level, so we are able to improve our margins, and we already have a good indication from the fourth quarter. From August, when we decided to drop the level of aircraft being offered in the market, we closed many deals already from August to November, December, especially to November, and we could already see some improvements in margin. We're going forward now with this view that the market can also improve a little bit from the bottom of 648 aircraft last year. We believe we can keep this more or less the same number and still have a margin improvement.
Where does this improvement in the fourth quarter come from? Is it the market that is improving, or is it something that Embraer specifically is doing?
Both. There was more discipline in terms of pricing, in terms of not putting too much pressure in market share. It was a combination of a cost reduction a little bit and a little improvement out in price of aircraft. Small improvement in price of aircraft.
Thank you.
Anyone else from the audience with questions? Otherwise, we will move back to the phone. Operator, do you have questions on the phone?
We have a question from the line of Derek Spronck of RBC Capital Markets. Your line is now open.
Okay. Thank you. Just turning back to business jets again. How is the mix right now between the Phenom and the Legacy 450, 500? Are you getting the orders that you anticipated and the pricing on the Legacy? When we look at 2017, how do you think the mix will be between those two aircraft types?
As I said, the Phenom 300 was the most delivered aircraft, right, last year. The 450, 500, it's a growing interest in this aircraft now. We start to deliver back in 2015. We are now manufacturing both, assembling both in the West, in our factory in Melbourne. We delivered the first one, 500, back in December, right, in the West manufacturing in Melbourne. Going forward now, we are seeing more and more interest in the 450, 500. I do believe that 2017 will be a year that we will see a great interest in this aircraft, for definitely.
Okay. Just moving on quickly to the E175-E2. You didn't get the scope clause changes from the INS to allow the higher weight aircraft on the regional jet side. What are your plans there? If there aren't scope clause changes in the future, do you plan on manufacturing both the current generation E175 and the new E175-E2?
The current E175 is a very efficient aircraft. No question about that. If you look at the number of orders that we have got in the last year, it's 80% market share versus the CRJ900. We do believe that with the modifications that we did in the wingtip and other improvements and getting a fuel burn reduction of about 6%, that was crucial in order to get these orders. We have, again, a very efficient E1. The difference to the E175-E2 is about another maybe 6% or so. However, we have the scope clause in the U.S., there's almost nothing that we can do to change the scope clause in the United States as a manufacturer. It's really very challenging. Even for the airline, it's quite a challenge to negotiate scope clause for this type of aircraft.
The 76 market is not only the U.S. There is a market also outside the U.S., and we have to be ready and pay attention for the competition that is developing also in efficient 76 seater, like Mitsubishi, for instance. Going forward, we can afford to monitor a little bit the U.S. market and continue with the E1, right? We have a good advantage in this regard, I'd say, because we can have in the same line of the jet, a hybrid line, we can manufacture both E1 and E2s in the same line with the same level of efficiency. For a while, right? We can do that, and whenever the scope clause change in the future, if it does, we will be ready also to deliver the E175-E2.
We'll see how the market will develop, but in our view, we are doing very well in both, right, in this regard, and we have decided to postpone one year, the E175-E2, and now it's 2021, which I think was a good thing to do, since we have this scope clause topic in the U.S. now.
That's great, Paulo. If you were to manufacture both concurrently on a hybrid line, would it put any pressure on margins, or how material would that cost be, or would you be able to manage that?
No, we are not anticipating right in the pressure and margins. Of course, we are not yet right in this path, but we are taking the necessary steps to be as efficient as we are nowadays. We believe that we will keep the same margins as we see.
Okay. Thanks very much.
Hi. Leandro Fontanella, Itaú BBA. Can you comment on your cost cut? What percentage was allocated to executives, and what percentage was allocated to commercial? A second question. In the past, if I'm not mistaken, you were using tradings in the market for executive segments. How is this trading evolving right now? Do you continue to do this as a market practice? Also, you mentioned about your inventories. Were inventories for executive segment higher than usual or not? Just to understand if you sort of change your strategy of carrying more these aircrafts in your inventories instead of selling them to third parties as a trading. Thank you.
In terms of the allocation of cost, there's no specific allocation for that. The cost reduction applied is specific for one division. Most of the cost reduction was fixed costs, like the payroll and other things. Normally, it's allocated through the percentage of the revenue. It's more like the distribution will be among the percentage of the revenue. We should take that percentage rather than have specifics. I wouldn't say that we're going to be any specific division that have more reduction than the other because of the plan of reduction. In terms of the inventories, we ended up with a little bit more of inventories 2016, as we indicated, because we decided to reduce the offer during the year. The carryover production would require us to have high inventories we had as expected, not more than what we expected.
This is going to be adjusted throughout 2017. There was another question.
About trade-
Yes, the tradings. Tradings, I got it.
Thank you.
Tradings. Yes, we still do because it's a market demand, but not the same way. I think it's part of what we said about the focus on the profitability and the result of the trade itself. We can accept tradings, but not as a basic assumption. I think you have to analyze, and there's a criteria now for us to accept the tradings. It has to be continued to be done because it's part of the business dynamic and the market dynamic. We'll do like different than we did before, lower numbers, definitely, with more quality in terms of the way we approach the deal. Okay, any final question? No. Okay. I think that's it. I think that concludes our 2016 earnings call. I want to thank you all that are attending by the phone. You can now disconnect.
For those that are here, we're going to do a short break, 15 minutes, and then we're going to come back with individual presentation of each one of our business units. Thank you.