Good afternoon, ladies and gentlemen. Welcome to the Embraer Day 2017 Brazil. We're glad we are all here today to attending this event. We will start with our 2016 16 financial results and the 2017 outlook. The first part of the event will be broadcast.
Today with us, we have Mr. Paulo Seza de Silva, our President and CEO Mr. Jose Filippo, our Chief Financial Officer and myself, Eduardo Purtos, I'm 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. Embraerra 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. Jose Filippo. Filippo, you can start. Okay. Thank you, Eduardo, and welcome again to attending our conference.
As usual, we're going to go through the presentation of the 2016 results and also in the 2017 estimates, and then we'll be entering the Q and A session. So starting the presentation, starting Page 3 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 $6,200,000,000 the adjusted EBIT of $499,000,000 with 8% EBIT margin. Total investments were $630,000,000 and net cash flow was a consumption of $359,000,000 And finalizing the financial results, we closed 2016 with the backlog of $19,600,000 sorry, dollars 19.6 $1,000,000,000 adjusted net income of $291,000,000 and an earnings per ADS of $1.58 Our net debt position as of December 31, 2016, was $575,000,000 Going to next page, Page 4, regarding commercial aviation highlights.
We delivered a total of 108 aircraft in 2016, including the E Jet number 1300, which was an E195 to our customer, Chinese customer of Tianjin Airlines. With that, we have accumulated some orders of more than 1,700 and 1700 aircraft since the entry into service of the IJET family. In terms of the E2 program, first commercial activities will reach 275 per module with a total of 6.90 commitments. And in relation to the development, the E1-nineteen E2 still on test flight campaign with 40% completed with the entry into service scheduled for the first half of twenty eighteen. And as of last year, we probably had the rollout of the first E195E2, we scheduled to enter into service in 2019.
And finalizing the highlights of commercialization regarding our service activities, our proof of program has reached over 50% to 60% of all the ERJ customers and 65% of EJET customers. Next page, Page 5. Moving to Executive Jet highlights for 20 16. We delivered a total of 117 Executive Jets, broken by 17 live jets and 44 large jets. Including the Executive Jets number 1,000 and the final number 700.
In terms of industrial activities, we delivered the 1st Legacy 450 with final assembly in our Melbourne, Florida facility. In terms of commercial activities, we launched 2 new adaptive jet versions, the Phenom 100EV and the legacy 650E. And the Phenom 300 was again the most delivered executive jet in the industry for the 4th year successfully. Regarding customer satisfaction, we were ranked number 1 by both AIN and ProPilot survey in 2016. And finalizing the highlights of the JetFJET, we ended 20 16 with market share of 18% in terms of deliveries and 9% in terms of revenues.
Next page, talking about the FSF Security business highlights in 2016, starting with the KFC 3 90 development, flight campaign test continued as we planned it. Super prototypes are now over 1,000 hours of flight in the test. Also, we started the serial production of the KC-three 9 for the first KC-three 9 to the Brazilian Air Force. And the first two Leggett's 500 for in flight inspection to the same customer. The Brazilian satellite program concluded final test and is now ready to be launched and is expected to be in the Q1 of this year.
We also signed new contracts for air traffic control modernization in Brazil and abroad. And finalizing the highlights for defense, the business we inaugurated in 2016, the Gripen Design and Development Center in Brazil in our Davion Peixoto plant. Okay. Now moving to the financial results in Page 8, starting with our backlog. We reached $19,600,000,000 at the end of 2016, and this amount is broken by 70% for Commercial Aviation, 23% for Executive sorry, 22% for Defense and security and 7% for EZF.
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 similar to the previous year. On Executive Jet, on the right side, we delivered 117 aircraft, as we said, broken by 73 light jets and 44 large jets. For both business units, we were within the guidance range of 105 to 110 jets for commercial and 105 to 125 for executives. Next page, regarding net revenues.
We reported a total of $6,200,000 in 2016, on the high end of the guidance range and 5% above 2015. If we break the net revenues of 20 16 by decisions, we will have 57% related to commercial, 28% for executives and 15% for defense. Also in terms of revenues, we met the guidance range of $5,800,000 to $6,200,000 in the year. Next page, net revenues by segment and by quarter. 4th quarter was the strongest quarter for all the business units.
And going to each business unit, starting the clockwise way, Commercial aviation on the top right, we reported a total of $3,53,000,000 in 2016 within the guidance. And in the bottom right, Defense and Security reported $193,000,000 in 2016, slightly above the guidance range with a very strong Q4. Moving to Executive Jet in the bottom left, the total of $1,73,000,000 in 2016, in the high end of the guidance range. And closing the page on the top left, as already mentioned, the total of BRL6.2 billion in the 2006 for Embraer in a consolidated base. Next page, Page 12, regarding SG and A expenses.
Reflecting our focus on cost control, we had a reduction from 2015 with total SG and A expenses of $533,000,000 in 2016, being $164,000,000 for general and administrative expenses and BRL369 1,000,000 for selling expense. Next page, as far as operating result. In order to have a fair comparison, we excluded from the reported EBIT the nonrecurring items, which were highlighted on the box on the right, that we showed exclusion with the positive impact of the cover of American Airlines Chapter 11 in 2013. In 2015, the provision for Republic Airways in of $101,000,000 And in 2016, we excluded 3 items, was the partial recover of Republic Airways of $52,000,000 the foreign sale dismissal provision of $117,000,000 negative and also the impact of this FCPA settlement of BRL228 1,000,000,000 with a total of $293,000,000 in 2016. So with that, we reported adjusted EBIT of $499,000,000 in 2016 with an 8% margin, both in the high end of the guidance range of between $405,000,000 to $500,000,000 and margin of 7% to 8%.
EBIT margin broken by segment 2016 were in commercialization 12.3 percent, Executive Jet a positive 1.3 percent and Defense, positive of 4.1%. So all business was positive in the full year basis. Next page, adjusted EBITDA. We had the same footprint I mentioned in the previous page. We had a total of $839,000,000 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 $291,000,000 in 2016, with net margin of 4.7%. Next page, Page 16. In terms of earnings per ADS and payout ratio, we had 1 point $58 per ADS in 2016 with a payout ratio of 25%.
In Page 17, in terms of investments, we invested a total of $630,000,000 in 2016, broken by $48,000,000 in research, dollars 381,000,000 in development and $201,000,000 in CapEx, in line with the outlook for the year. Next page, Page 18, as far as free cash flow. Although we had positive free cash flow in the 4th quarter, we ended the year with a consumption of $359,000,000 in line with the guidance. The main reason for the cash consumption were the heavy investments in the E2 program reflected the additions intangible assets and higher working capital requirements mostly related to the aircraft inventory. Next page, Page 19, regarding the capital structure through debt and cash.
At year end, we had a total debt of $2,176,000,000 And in terms of cash, our position in the end of 2016 was $319,000,000,000 which returned to a net debt of BRL575 1,000,000. 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 issued a new Canadian bond of $750,000,000 and after that, the average terms of our debt will increase to 6.3 years. Okay. With that, we conclude the financial results and move into the 2017 outlook.
On Page 21, deliveries and revenues outlook for 2017 from the left. In Commercial Aviation, we expect to deliver from 97 to 102 aircraft and revenues in the range of $3,350,000,000 to $3,400,000,000 For Executive Jet, deliveries are expected to be between 105,000,000 to 135,000,000 aircraft broken by 70 to 80 large jets, 35 to 45 large jets. Revenues for executive jets are expected to be in the range of $1,600,000,000 to $1,750,000,000 On defense, our expected revenues will be for 2017 in the range of $800,000,000 to $900,000,000 and other expenses or other revenues are estimated to be $50,000,000 Combining all segments, our consolidated revenues for 2017 are expected to be in the range of $5,700,000 to $6,100,000 Next page regarding 2017 outlook for results, cash and investments. We expect EBIT to be in the range of $450,000,000 to $550,000,000 with 8% to 9% margin. In terms of EBITDA, we forecast the range of $770,000,000 to $890,000,000 with 13.5 percent to 14.5 percentage mark.
For free cash flow, we are estimating a consumption of $150,000,000 or better, yet reflecting the investment phase of the 2 results. And finalizing the 2017 outlook, we are estimating investments of $650,000,000 broken by $50,000,000 to research, dollars 400,000,000 to development and dollars 200,000,000 for capital expenditures. With that, we finalize the presentation, and we're now ready for the Q and A session. 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 1 in your phone. We will start with the audience first. So 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. Bruno Morin from Santander. So my question relates to the Commercial Aviation Division. If I'm not mistaken, you have 175 for mortgages in the backlog still and you plan to deliver 100 aircraft this year. So 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.
So what does it imply in terms of the risk that is in the transition to B2, you would eventually not maintain the current level of deliveries in the upcoming years? Okay. So hello, everyone. Good afternoon. So thanks for coming and joining us for this session.
So the commercial reaction, so you are talking about E1 only, right? Yes. Yes. So we will start to deliver the E2 next year. So we have to look at what combined numbers.
So from next year on, 2018 and on, so there'll be HITUs as well, right? So we have to add that to that number. The E2 program is on time. So we are flying with the 4th aircraft now. So we are not anticipating any delays at this stage on the contract, so we are on time.
So we should be delivering the 42 between January June next year. So we are, of course, building up our backlog for the future. We are John Slattery will talk more about that when we present on the Commercial Aviation. So we feel that we will have a smooth transition from E1 to E2, but in the next year. So when we look back years ago and looking into the future, so we could see a huge gap, right, so now.
So of course, we know already that we were able to close these gaps. And I'm sure that going forward also, so we are going to have a good transition. We have announced recently the 190 launch order for the Norwegian company, Hydro. And as of yesterday evening or this morning, so we have announced that Azul in Brazil will be the launch customer for the E219. So all in all, so it happens that there is more pressure next year, right, which is the year that we are going to do this transition, but we feel that we'll do a good one.
And all that said, so is it fair to say that your base case for the next year is still delivering around 100 requests? Or is there a real risk that next year it's going to be around 100? So we don't know yet. So we are at business stage, so we cannot affirm whether or not we will do that. What we know is that we are in quite important engagements in campaigns, important campaigns, whether or not we are going to close, so we don't know.
But there is a strong activity going on now. Thank you. Steve Kaminsky, Trussell Hamilton. I was wondering if you could talk about the bit beat of the defense revenue guidance in
the 4th quarter. Maybe talk
about what the drivers are and maybe quantify them to the extent that you're able to. Yes. Maybe the Q4, the defense you have to see the year because sometimes specific events because of the lowest level of revenues of the company, especially events made in this year. We had specifically the deliveries of 4 Super Tucano's to the Maili Republic in the end of the year. And those contracts, they were different.
They were not priced over construction. It was like the delivery we invoiced. Sorry, as we delivered, so that impacted. But I think we should see in a yearly basis rather than the quarter. But I think that we tend to be like the guidance we said that's going to be €400,000,000 to €900,000,000 in next year.
It tends to be more distributed. And just one follow-up. If you
give us the 20 16 segment operating margins, just directionally, how should we think about 2017 for the 3 main segments?
Yes. It's low double digit for commercial, as you said, and mid single digit for both the others. That's good news. 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 potential sources of incremental demand, one of those being U. S. Carriers looking to replace 50 to 70 seaters and another source of potential demand being startup airlines in China looking being required actually by regulations to add regional aircraft.
And I was just hoping you could update us on your view on those potential sources of demand.
Okay. Thank you. So I will make just a few comments on that, and then we'll leave with John to elaborate more on that because that is in his presentation. So this is very complex. So it's a huge dynamic that's going on now in both sides, like China and in the U.
S. But we continue to see very strong opportunities in these rights to markets. So having said that, I will leave with John to elaborate more Thank you. Tram Kwaitala from Scotiabank. My question was regarding the restructuring that you're 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? Thanks, Cora, 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 with drilling the software. From the BRL200 1,000,000, we should capture around BRL100 1,000,000 because we have some offset like the stronger currency, the wage increase that we had last year.
But from this 100 that we should capture, around onethree was captured last year already in the 4th quarter and twothree will be captured throughout this year. If I may add, 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. And everything else in terms of the cost of, for example, travel expenses and consultancy, they already budgeted. So 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 considering the budget for in the budget for 2017.
Yes, I may add also one more word on that. So we will not stop in these initiatives here that we launched last year, the 2 other initiatives. So we will continue. So new initiatives will come in order to make our company more efficient right in the cost side. Of course, we are working out from 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 main pool from now on, I think we have reached the bottom right, already. So there is an upside now for the business that's going forward. If you look at what's going on in the U. S. And the economies and I believe that the worst is over.
So the combination of a little bit more revenue and more efficiencies, right, in the cost side. So we believe that we can get additional by 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? And maybe or just a number maybe across the whole program, how much of a loss are you expecting on that?
I don't know. Yes. I don't know. Yes. Of course, any ramp up, of course, of a new program.
So you have additional cost right at the beginning. But I can't say now for how much debt would be. So it's already embedded in our plans because we start already to manufacture the E2 this year, right? So by June, July, so we will start manufacturing aircraft for the deliveries of next year, right? So already the cost is embedded in 'seventeen.
And you have now our guidance here for 'seventeen in terms of margin, so on and so forth. So it's not bad. And Suraj, just to complement, I think most of the deliveries in 2018 will still be on the year 1. And something that has taken 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 issue, we estimate something around like $80,000,000 to $100,000,000 is already included in the guidance for cash consumption that we send out. Thank you very much.
Let's choose the output of the broadcast question now, just so you have a chance. Can we take a question from the phone? Operator?
Can you please discuss the order pipeline for business sets in the U. S? Can you please discuss the order pipeline for business sets in the U. S? Have you seen any change after the election?
Yes,
executive, yes.
Okay. So the business jet market, if you look at the numbers of last year, it's still very impressive, right? So the market last year delivered 648 units. And the peak of the business jet market was 2,008 with 1,000 presented aircraft. So having said that, we still see a very large inventory of the used business jet, around 12 percent of the number of aircraft in operation.
So that's meaningful. That's a lot. That's too many. So we still need to clear this inventory a little bit, having this inventory down, drop to around 7%, 8% in order to have a more neutral market. So it's going to take a while.
However, we believe that the work is over now. So from now on, so we can see gradual improvement, but it's not going to be a strong improvement. So it's going to be step by step, but very good, I'd say small pool. We believe that we are with a line of products, which are state of the art. So the Phenom 300 being the most delivered aircraft for the 4th year in a row.
So that's very important, very meaningful. And 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. So all in all, so we believe that we can see better results like 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. So we are seeing what we're trying to think about this new life administration, right, so with stock market going up and record and record. And we know that business jet, executive jet is very much linked in respect to both GDP and stock markets. U. S.
Market is the largest market in the world for business jets. About 60% of the global market is within the United States. So therefore, it's one more element that can help for this market to move 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. So if you look at 2018, do you feel you will be able to hold your commercial margins as you introduce production of the E2? And secondly, should we look for a lift in business jet margins because I assume this year your production will be down so that you can reduce your inventory of Whitetails? Thank you.
Hi. Can you repeat the first question, please? The second is regarding the business jet market, right?
So the first part of the question was commercial margins next year. Do you feel you will be able to hold them or are they likely to come on business jet margins next year, given that this year you have production down to the Whitetail, I would guess that would not be an issue next year?
Yes. We are hearing very, very bad, but I don't know if I understood the question. The first piece was related to the margins for Commercial Aviation in holding 2017. Yes, we think we can have we can retain that. That's the plan primarily orders that we had before.
And we have, like Paolo mentioned, discipline in terms of costs that we'll be able we think we'll be able to retain those margins for commercial. Regarding his active jet, definitely, we expect to have a better margin in 2017. The last quarter of last year, well, although this is always the best quarter of the year, but you can see the 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. So we expect to see better an improvement of margins that we get in 2017. If I missed what you can repeat please if we missed anything from the question.
Okay. We're going to try to reconnect Kai and 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 Daryl Gudemannouminski of UBS. Your line is now open.
Hi, guys. Thanks for the time. So your margins in the 4th 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?
Yes. Maybe you can give the details of the margin per business, Darryl. Thanks for the question. We had a 12% EBIT margin, consolidated EBIT margin excluding our recurring items, 14.8% on commercial aviation, 9.2% on adaptive jet and 9% on the sensing security. The cost cutting plan was launched towards the end of the third quarter And we already captured, as I mentioned on the previous question from Turan, we already captured part of the $200,000,000 mission in the Q4.
So 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 behave on adaptive jet, focusing more on profitability rather than volumes as we have already said. So it's a combination of things. Silvia can follow on. So I just wanted to add that it's important about the performance of the last quarter, like we said, good margins, but this is not what we should replicate for all the quarters, typically that's the strongest quarter.
I think that in a yearly basis, as we indicated, the guidance range could be broken by, I will repeat, that you didn't get that by low double digit for commercial and mid single digit for defense and for that that will on the blended basis, we will return to the 8% to 9% that we are expecting for the full year 2017.
Okay. And then on free cash flow, based on your guidance today for the $150,000,000 outflow in 20 17 within the context of I think about $400,000,000 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. But as we already indicated, 2018 is a very it's a transition year for the E1 and E2 model. So again, it's too early to see to think about that in terms of our disclosure.
But I don't think it's going to be it could be better than that. As you know, in recent years, we're trying to be a 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. So it has to be taken into account what we expect in terms of cash generation for the following years. Okay. Thank you.
Okay. Maybe we can take the question from the audience now. If you have a question, please just raise your hand. What is the spot rate you assume for the year? 3.20.
Between 3 pounds to 3.20, which is more or less at current levels. That's our impact for 2017.
This is Faith Korea from Goldman Sachs. How much conservatism is there in the margin guidance that you guys gave?
Okay. Our guidance, of course, reflects what there are challenges on the guidance always because that's the way we work. But it has to be something that we think is going to be reasonable and achievable. So I think there's a combination of what we see because we have some some orders already booked, but there's still challenges to sell in the year, which typically we have. Not different than we had before.
I think last year, we had a lot of non recurring items and a lot of impact from the company that affected the whole company. But taking that out, I think the trend is to really be in a situation where we can really achieve those targets and challenge that we have, especially because we have this focus on the cost reduction. I think they will be reflecting. They have the impact of the stronger currency is always a headwind that we have faced in the same way. So I think that's reasonable that we can't that's what we expect to see.
There's no I don't think it's conservative. I think it's logistic.
So just how much of contingency there is in this fund? Because if you think about it, as you said, there's a lot of non recurring that won't happen anymore. And there's a cost cutting that should continue already, at least a good part portion of it in 2017. So how much of a deal is a 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 consistency to be accounted for 2017. I think what we had in 2016 was more like a one time impact. The typical contingencies that we have are related to impairments of airlines, which we've been dealing and it's diluted throughout the year. Also other multi label continues that we always disclose that in the balance sheet. So there's nothing specific that we can anticipate in 2017.
Okay. So let's maybe take one more from the phone. Operator, can we take a question from the phone, please?
Our next question comes from the line of Alexander Flacco of HSBC. Your line is now open.
Good afternoon, guys. My question is my questions are regarding defense. First, on the receivables front, how much you still have to receive from the government? And where are we on the program in terms of the KC? And assuming the KC is going to 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? And as Jackson pointed out in the last February day that you expected to have almost 60% of the revenues on being dollar denominated, U. S. Dollar denominated. Where are we on that?
And what we expect and what to expect? And
what's the
expectancy of margins for 2017 and specific on defense? Thank you.
Okay, Ernest. I'd like to see if I got all the questions. In terms of receivables from the government, we ended 2016 with $264,000,000 in receivables. That can be compared to 350,000,000 in the end of 2015. So it's been followed the schedule as we expected.
The development of the program you have this year is an important year, scheduled to enter into service in the first half of twenty eighteen. And this is going to be the development program will stop and we start to build a series of program. It is as the concept of the sale of our customer today is cost over recording through the cost. So we will I think we will have through the development and the manufacturing of the aircraft recognizing the revenues that could be seen in 2018 or at least starting maybe in the end of this year. And then it'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 the highest denominated. And this will be changing when we have the series being delivered, the TC-twenty 9 mostly related that there will not be a big change in terms of the revenues shift into dollars and unmet the revenues, almost all of them.
Okay. And if you can just if there's this bump up in the defense budget in the U. S, do you think there's opportunities specifically for the supratoconos there? Is there any indication that we're going to see a recurring order there? Any thing you can share?
Thank
you. Yes, of course, we see we have the super to colonel with the U. S. 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. So going forward now, of course, so 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 Tucano replacement for the A-ten for instance. But also more recently, also talk about jets. It isn't jets for training, like final training. So it's another opportunity also. But we have to wait for additional information and see how we can move forward from here.
So it's early to say. Can we take now a question from the audience? Anyone? This is Bruno from Santander. I have a follow-up question on the Executive division.
You have mentioned that going forward, you intend to focus on profitability rather than on increasing delivery. So 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. So how should we look at it? How can you improve profitability if you are not decreasing the number of deliveries this year? If you look at our guidance last year in February, so our guidance were for 150 aircrafts or sovieton business there.
So then in August, so we decided to drop to 117, if I'm not mistaken. So what's the big adjustment? 119. 119. 19.
100 and 19. So it was a big adjustment, right? So 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 Q4 because from August when we decided to drop the level of aircraft being off in the market, We closed many deals already from August to November, December, especially to November. And we could direct in some improving margin. So going forward now with this view that the market can also improve a little bit from the bottom of 6748 aircraft last year.
So we believe we can keep this more or less the same number and still have a margin improvement. Okay. So but where does this improvement in the Q4 come from? Is it the market that is improving? Or is it something that Embraerica specifically, is doing?
Both. We're more disciplined in terms of price, in terms not putting too much pressure in market share. So it was a combination of cost to drive reduction a little bit and a little improvement also in price Thank you. Anyone else from the audience with a question? Otherwise, we'll move to the phone back to the phone.
Operator, do you still have questions on the phone?
We have a question from the line of Derek Spronik 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?
And when we look at 2017, how do you think the mix will be between those 2 aircraft types?
So as I said, so the Sennon 300 was the most delivered aircraft last year. The 450500, it's a growing interest in these aircraft now. So we start to deliver the 2015. We are now manufacturing both, assembling what's called in the U. S, in our factory in Melbourne.
For the we delivered the first one, 500 back in December, like in the U. S. Manufacturing in Elba. So going forward now, and we are seeing more and more interest in the 450 FERRE. So I do believe that 2017 will be a year that we will see a great interest in this aircraft for definitely.
Okay.
And just moving on quickly to the E175, E2, you didn't get the scope clause changes from the guidance to allow the higher weight aircraft on the regional jet side. What are your plans there? I mean, if there aren't school block changes in the future, do you plan on manufacturing both the current generation E175 and the new E275?
Well, the current 175 is a very efficient aircraft. We're flat about that. So if you look at the number of orders that we have got in the last year, so it's 80 percent market share versus the CRJ900. So we do believe that with the modifications that we did in the wingtip and other improvements and getting a oil burn reduction of about 6%, that was crucial in order to get this order. So we have then a very efficient E1.
The difference to the 175,000,000 v2 is about another maybe 6% or so. However, we have the scope of clause in the U. S. So there's almost nothing that we can do to change the scope of clouds in the United States as a manufacturer, right? So it's really very challenging.
Even for the airlines, it's quite a challenge to negotiate scope clause for this type of aircraft. However, the 76 market is not only the U. S, so there is a market outside the U. S. And we have to be ready and pay attention for the competition that is developing also an efficient 76 seater like Mitsubishi, for instance.
So going forward, so we can afford to monitor a little bit the U. S. Market and continue with the yuan, right? We have a good advantage in this regard, I'd say, because we can have in the same line of the HF, hybrid line. So we can manufacture both E1 and E2s in the same line with the same level of right efficiency.
So for a while, right, so we can do that. And whenever the scope of change in the future, if it does, so we will be ready also to deliver the E21 105. So you'll see how the market will develop, but in our view, so we are doing very well in both, right, in this regard. And we have decided to postpone 1 year, the 175,000,000,000 and now it's 2021, which I think was a good thing to do since we have this COVID-nineteen topic in the U. S.
That's great color. If you were to manufacture both concurrently on a hybrid line, Would it add 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 threshold in margins. So we are of course, we are still we are not yet, right, in this step, but we are taking the necessary steps to be as efficient as we are nowadays. So we believe that we'll keep the same Leandro Fontanesi, this is Gudeville.
Can you comment on your cost cut? What percentage was allocated to executives and what percentage was allocated to commercial? And a second question, in the past, if I'm not mistaken, you were using trade ins in the market for executive segment. So how is this trading evolving right now? Do you continue to do this as a market practice?
And also you mentioned about your inventories. Were inventories for the effective segment higher than usual or not? Just to understand if you're sort of changing your strategy of carrying more these aircraft in your inventories instead of selling them to third parties as a trading? Thank you. Yes.
In terms of the allocation of cost, there's no specific allocation for that be cost reduction applied specifically for 1 division. Most of the cost reduction was fixed cost, like the payroll and all things. Normally, it's allocated to the percentage of the revenues. So it's more like the distribution will be among the percentage of the revenues that we should take that percentage rather than that specific. I wouldn't say that we're going to be any reception than the others because of the plan of reception.
In terms of the inventory, we ended up with a little bit more of inventory in 2016, as we indicated, because we decided to reduce the offer during the year, but the production the carryover production would require us to have higher inventories. We have expected not more than what we expected. It's going to be adjusted throughout 2017. Here was another question. About trading.
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 sale itself. So we can accept savings, but not as a basic assumption. I think you have to analyze and there's a criteria now for us to accept the tradings. But it has to be continued to be done because it's part of the business dynamic and the market dynamic.
So it's what we'll do, but different than we did before, lower numbers definitely with more quality in terms of the way we approach the deal. Okay. Any final question? 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 the individual presentation of each one of our business units. Thank you.