Good morning, everyone, and welcome to the Embraer Third Quarter 2016 Results. This conference call is being held during the Embraer 2016 in the U. S. With the presence and investors and the market analysts here in Orlando. At this time, the company will present its Q3 2016.
Afterwards, we will conduct a 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 ir.embraer.com. Br. This conference includes forward looking statements or statements about events or circumstances, which have not occurred. Embraer has based its 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 in other markets where the company is present. The words believe, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward looking statements. Embraer undertakes no obligations to update publicly or revise any forward looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward looking events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward looking statements.
Participants today are Mr. Paulo Cesar de Soza Silva, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO and myself, Eduardo Guto, Director of Investor Relations. Now I would like to pass to Filippo to start the presentation. Thank you.
Okay. Thank you. Paredes joining us in this Q3 results conference. As we do, we start with the presentation and then we enter in the Q and A session. So with the presentation starting Page 3, the highlights and starting with the Commercial Aviation business, we had in terms of deliveries, the delivery of 29 ejets in the 3rd quarter compared to 21 ejets in the same quarter of last year.
In terms of sales activities, two important information, colorful Izu Airlines order for up to 5 E190 in China and also the announcement of AerCap to place 5 E Jets E2 with Borajat. This reflects what we are seeing, the successful placement of E2s by leasing companies with airlines. Regarding certification, we had the approval for E-one hundred and seventy-one hundred and seventy five for operation in Russia. We already had this approval for the 190,000,000 and 195,000,000 Regarding in relation to the E2 development program, we had a 3rd prototype of the E2190 joining the flight campaign and the status of the order activity with the backlog that reached 272 from orders in a total of 670 commitments. Moving to next page in relation to the highlights of Executive Jet business.
Starting with the delivery of 25 jets in the 3rd quarter, broken by 13 lights and 12 large, a good mix between large and light. Also regarding sales, colorful UNAM order for 2 Phenol 300. In relation to the programs, we launched the Phenon 100 EV with new avionics and modified engines. And in the legacy 450 program, the first legacy 450 assembled in Melbourne is now in flight tests. As we use the information before, regarding the customer satisfaction, we were ranked number 1 in both AIN and ProPilot product support surveys for 2016.
This is something very important for the business jet. Moving to next page, highlights of Defense and Security. Starting with the KC-three ninety program, we had the flight test campaign that reached over 600 hours with now 2 prototypes. We concluded the delivery of the 20 aircraft to the U. S.
Air Force in the LAS program. Also, we delivered the 1st Leggos 500 for airport in flight inspection to the Brazilian Air Force. Regarding the development of the Brazilian satellite, the program is in final test. And finalizing the highlights of Defense and Security, we got a new contract for environmental and monitoring of the Amazon region through the Aztec subsidiary. Moving to next page.
And before we enter in the financial results, we would like to touch briefly on the FCPA investigation case. So the next page, as we already publicly announced, we reached the final agreement with the U. S. And the Brazilian authorities for the settlement of the allegations of non compliance in U. S.
1 Group Practice Act. With that, we agreed to pay the amount of about $206,000,000 to the U. S. And Brazilian authorities. And also, the Department of Justice agreed to defer the prosecution for 3 years.
Trages will be dismissed if the company does not violate terms of the deferred prosecution agreement. And also, we agreed to retain an external and independent monitorship for a period of up to 3 years to access compliance with the final agreement. In next page, we like to take the opportunity to say that the company embarked in a comprehensive effort to improve and expand its compliance program worldwide. Some key enhancements include the creation of a compliance department with the appointment of a Chief Compliance Officer, the development of a program to analyze the engagement and the payments for third parties the improvement of policies, procedures and controls and the enhancement of anonymous and other reporting channels, among other initiatives. Some examples of such activities are the numbers that we show here, the 20,000 people trained through as of the end of 2015 and also over 7,700 certifications of third parties in the due diligence program.
Next page, now entering the financial results and we go directly to Page 10, where we show our firm backlog reached the $21,400,000,000 in the end of September, despite the deliveries in the quarter. And we had a decrease in of $500,000,000 when compared to June 2016. Next page regarding deliveries, starting from the left of this page. In terms of Commercial Aviation, the delivery of 29 e Jets in the 3rd quarter and accumulated of 76 delivers in the year. In the right side of the page, Executive Jets Delivery, we had the delivery of 25 ejets sorry, 25 Bijjets in the quarter broken by 13 light jets and 12 large jets.
The total accumulated in the year was 74 planes broken by 48 light jets and 26 large jets. We take this opportunity to confirm our guidance for 2016, which is in the range of 105 to 110 ejets and 105 to 125 executive jets broken by 35 to 45 light jets and 70 to 8 large sorry, light jets, 35 to 45 large, 7 to 80 light. The next page, Page 12, in terms of net revenues. We had a total of $1,500,000,000 in the 3rd quarter, higher than the same quarter of last year due to the increasing deliveries. As of September 2016, the accumulated net revenues reached almost $4,200,000,000 For the full year, we are estimating revenues in the range of 5.8 to $6,200,000,000 Next page, in terms of net revenue by segment, starting from the right top, Commercial Aviation recorded $927,000,000 in revenues in the 3rd quarter, accumulated of $2,500,000,000 in the year.
Down right in terms of defense, the revenues were $216,000,000 in the 3rd quarter, accumulated of $61,000,000 in the year so far. And in terms of Executive Jets, in the bottom left, the quarter revenues were BRL367 1,000,000 with accumulated worth $1,060,000,000 in 2016. For all business units, we are expecting to meet the guidance range of net revenues in the full year of 2016. Next page, in terms of selling and general and administrative expenses. We reported a total of $120,000,000 in the 3rd quarter and accumulated of $407,000,000 in 2016.
When compared to the same quarter of last year, we see higher selling expenses due to the number of deliveries compensated by a lower G and A, which reflects the company focus on cost reduction. Next page relates to EBIT. We show here the adjusted EBIT, which actually takes into consideration several non recurring items that have been impacting the previous quarters to help the comparison. We have a small table on the top on the bottom right, which explains what are those. Basically, the provisions made to Republic Restructuring, Chapter 11 in the Q4 of last year.
Then we have the contingency of FCPA penalty, which was the recording of the provision that we made in the 2nd quarter and the final adjustments made in the 3rd quarter. And also some provisions related to the voluntary dismissal program, the missile program, which was in the Q3 of this year. If we don't consider those events, we had the EBIT for the Q3 of 2016 positive in $95,000,000 with a 6.3% margin. Split by commercial business, 10.8% margin, Executive Jets negative 1.9% and Defense was 0%. So those 3 combined accounts for the blended 6.3% that we're showing there.
In an accumulated basis, the adjusted EBIT was $254,000,000 for 2016 with a 6% margin. We are maintaining our guidance range of $405,000,000 to $500,000,000 for the adjusted EBIT in 2016. Next page regarding EBITDA. We had a total of $187,000,000 in the 3rd quarter with the EBITDA margin of 12.4%. The same calculation was made excluding the nonrecurring items for the EBIT that we just showed.
Accumulated in fiscal 2016, EBITDA was $507,000,000 with a 12.1% margin. Also for EBITDA, we are confirming our expectation to meet the guidance range for 2016 in the range of $735,000,000 to $840,000,000 Next page, as far as net income. Excluding extraordinary items, the net income in the Q3 of 2016 was $90,000,000 with a 5.9% margin. Accumulated in 2016, net income was negative of $39,000,000 if we consider all the items, but in the recurring basis was positive in $294,000,000 Next page, Page 18, in terms of investment. We had a total accumulated in 2016 of 4 $23,000,000 broken by $29,000,000 for research, dollars 244,000,000 for development $150,000,000 of CapEx.
We estimate a total of $650,000,000 for investments in 2016. Next page regarding free cash flow. We had in the Q3 of 16, a consumption of $38,000,000 The development of the D2 program was partially offset by a positive cash generation by operating activities, mainly due to the level of deliveries in the 3rd quarter and a positive working capital recognition. The accumulated free cash flow in 2016 is a consumption of $693,000,000 For the full year, our estimate is to have a consumption of $400,000,000 or better. In expectation, in terms of our capital structure, we had a net debt of $653,000,000 at the end of September.
But regarding our debt, we had a total of $382,000,000 in the end of September with maturity terms of 5.5 years totally adapted to the need of the company in the long term investment. Next page, we'd like to give you an overview on the status of our cost reduction plan. As we already mentioned to the market, we launched a program to reduce the recurring cost in $200,000,000 per year. And if you see in Page 22, we show the details. The program was launched in September and is anchored in a labor adjustment, which should represent about $130,000,000 of reduction.
The balance should come from a reduction of other expenses like travel expenses, consultancy fee and others, And that's what we're working today on that. We have been working with the leadership to that. There's commitments and the plan has been 100 details for each of them. And we are in a way to get the situation where we again, we plan to have a full $200,000,000 range reduction in a recurring basis. In Page 23, we have the details of that, which we had the voluntary dismissal plan Dismissal Plan, which about 1600 employees already signed for it.
And we are we recognize in this quarter, like we indicated, the provision for the payment of this termination of these employees. Also, the program includes a reduction in the 2017 budget, which are the areas that is explained here. In the next two pages, we show our guidance for 2016, for which we are confirming our expectation for 2016. So we are maintaining our expectation in the numbers that will be in developing. Page 26, before we go into the Q and A session and then I have some speak some words from Paolo to us, we'd like to recall some of the Embraer short and midterm opportunities.
In terms of those opportunities, we try to show here what would be the opportunities for revenues, for margins, for free cash flow. And we have, for example, in terms of opportunities for revenues, the Itsu entry into service, the program is developing well and you have the opportunity of accessing, of course, the E Jet base. Also, the E Jet brings some opportunities today in Asia and the U. S. Market.
Super Tucano sales, a lot of interest on this equipment that we're showing a lot of new orders and interest growing interest for this product. The development of the KC-two ninety under schedule as we expected to get into service in 2018, certification at the end of 2017. And also in the Busjets, the new customers for legacy 50450 and the growing in terms of revenue services in all of the business units. In terms of margins, the cost reduction plan is an important way of achieving those improvements. Also the ramp up of the Lagos 500, 450, which are now in a moment where we can see better results for that.
In terms of discipline in costs and price, as we indicated recently for the Busjets, Also some industrial optimization in Florida, we're eliminating some overlaps between Brazil and the U. S. I think we come to a moment where this can be better captured. And also the streaming of subsidiaries and service centers, there's a coordination of that that could lead us to have better improvements and increase in terms of revenues and margins coming from services. Regarding free cash flow, of course, everything in terms of margins brings better cash flow, and we'll probably be able to achieve higher EBITDA generation.
Level of investments, we enter in phase, although we have still the following years to finalize the Itsu program, but after that, it will be an opportunity for us to reduce the level of investments in a program like that. And also some working capital gains in terms of managing better inventories in accounts receivable. Just like some points of highlights that we can be explored and we're working very hard on this to see how can we improve the results of the company, how we can have a better in terms of revenues, in terms of margins and also consequently in cash. Okay. With that, I finalize this presentation and ready for next moment of Q and A.
But before we get there, I would like to have Paolo with some words for us.
So thanks, Filippo. Hello, guys. Good morning. So thanks for coming here to hear to us. So I think we are facing very special moments at Embraer.
So you remember in our call in July, so we've had a couple of announcements that were very important to Embraer. So the first was the provision on the FCPA and the second was the revision on the guidance for especially for Business Jet. And I think at that moment, so we started to adjust to the company for the environment that we are seeing in the all three business units. And also regard the FCPA, that was the beginning of the settlement on our case. So let me elaborate a little bit on this because, of course, this is a high profile case for us.
I think this is over now. We have to turn this page. So the company fortunately made that mistake years ago. The company is responsible for that. So I think we have already wrote in our press release everything about that.
Internally also, we had a few meetings with the leadership explaining what happened. And now so we really have to turn this page and look forward and look to into our operations and how we will develop for Denbriere going forward. So having said that, and immediately or in concurrence with the FCPA case, say, with the settlement right of the case, we announced this cost reduction by program. It is highly necessary. So we had we still have an efficiency in the company.
And so it was it is very much due. We estimated that $200,000,000 in the orientation was that we have to get $200,000,000 cost reduction until end of this year. So I think you would appreciate that this is quite aggressive. So we are talking about 14% reduction in the cost in a few months only, right? So since August until end of this year.
So we will start January with $200,000,000 less cost in the company. Of course, that some of this cost will be offset by cost increase that we would have anyway, which refers to the labor salary increase due to inflation in Brazil, which is under negotiations now. So we don't know yet what the index will be, okay? And also, it is also impacted by the dollar real rate, right? So which we don't know also how this they behave of the rate will be next year.
However, what is important is that we are now adjusted for this environment, right? And a lot of these $200,000,000 the book of that will be in our result for sure. So another important element here, I think, for sure is that we will monetize. So we will have to consolidate our investments in the company made in the last years. So of course, we have to finalize the E2 investment, which will go until 2018, the KC-three ninety until 2018.
These two developments are going very well. So we are very pleased with the results of these programs. So, so far, it's excellent results. Jackson and Joi Zlata will talk more about that. So we are set to be on the market in 2018.
So 2 amazing products, the KC-twenty 19 will bring Embraer in a more global basis, right in defense. The agreement with Boeing is very important. Jacques will talk more about that as well. So we are very bullish on this aircraft. KC-three ninety will be a success, no matter what.
So it's going to be a huge success in the market. The same for the E2. So we have the best family of aircraft in the market. Each aircraft is optimized for its size. So John Slade will develop more right on that.
On business jet, we have the best products in the market in the segment. We have invested heavily in the last years. So we are set now to monetize these investments. So we are adjusting the cost of the business jet unit. We will make further adjustments there.
So I'm sure that from next year on, we will start to generate a good result in that unit. So we had announced also in July in the call that
we have to understand the dynamics of
this market. We will not our right market share. So we have to be more disciplined in terms of number of aircraft, right manufacturer and sold. So it means that we could potentially reduce a little bit revenue going forward. However, we are favoring margins, so yields, right, in the unit.
So it's not a good strategy to fight for market share while we have depressed market, right? So we have to really be careful on that. So all in all, I think we are really set to have a good moment going forward. So I'm very positive. So the team, the whole leadership team at Embraer is reacting very well for this adjustment.
So this is important, very important because we do need the leadership to understand the moment of the company and identify the opportunities to be more efficient. And so we are doing that. So with that, guys, this is my final comment here. For next years, we will be looking also how to grow revenue in other areas. And one of the area that we would like to go deeply because we see more opportunities there is on services, okay?
So we will be developing our plans going forward to take more opportunities in services. I believe it's an integral part of our business. We already have a good part of our revenue and services around 18%. But we see a lot of opportunities to further develop this business, right? So areas where we are not yet in and where we already are, so opportunities to further develop.
So and as you know, rights services is a very important right part of the business because it does provide a more recurrent revenue and also margins are right slightly better than the aircraft themselves. So this is where we will be looking at. With that, so I thank you very much again for being here. And I will turn back to Eduardo.
Okay. No problem. Thank you. I think now we enter the Q and A session. We'll start with the audience here.
We have support from the microphone. So if you want to ask a question, please raise your hand and they will be sending the microphone to you.
Pete Skibitski, Drexel Hamilton. So, Paul, so
you said that it sounds like
the bulk of the cost takeout will stay in your results, I think is what you said. So is it fair to conclude that adjusted operating margins will rise in 2017? And also, I'm very curious about if that implies that cash flow will turn to positive in 2017.
Well, yes, margin should be better than next year, right? So that's the plan. Of course, we have an execution risk here, but we have to be focused on execution. On the commercialization, it's already more or less set, so it's more on the right on the business jet. But we are bullish on the business jet, as I mentioned.
So on the cash generation, we should be so I don't know if I can give I'd say that. But we already mentioned, right, in our call in July that the cash this year is going to negative for a couple of reasons. But one of the main reasons is that as we decided to manufacture business jet this year, but not put pressure in selling and also deliver this year, right? So we will go with inventory of business just for next year around $200,000,000 So this is one of the reasons that we are having these big net write cash negative, but next year it's going to be much better.
I think it's important to recall that we started the year 2016, our guidance was a negative 100 or better. And then we changed that for the negative €400,000,000 exactly when we announced that we were reducing our the level of deliveries in this year. So we did some inventories and we could expect 2017 that the opposite way because those inventories will be sold and but we already produced. But don't forget that we still have the level of investments of these 2 still peaking the 2016 'seventeen as we've been seeing. So it's still something that we have to face next year.
Myles Walton, Deutsche Bank. I'm just going to follow-up on that for a second. The Business Jet Unit, the margins were negative again. And, Paolo, you talked about next year being a better year. Are we going to hit low single digit this year for the full year in business jets?
Is that going to be profitable this year? And what is the target for business jet margins over the next couple of years?
We of course, Darius, the adjustments that we mentioned, they are in the process of some adjustments to be made. There is a seasonality of the Buschats, but typically the first three quarters are not the best quarter. So we expect to be profitable in 2016. We don't give the guidance for the market itself, but we mentioned that it will be like a low single digit. That will be something that we would be expecting and we hope that we can get by 2016.
That's what we target. Okay.
And your target for that business over the medium term?
The medium term, of course, as we adjust the capacity that in terms of focusing the price rather than the volumes, then the company will adjust itself as well with those cost reduction measures will affect also this year. So we expect to have profitable business in the following years. That's what we expect. Talking about business
Yes. Cai von Rumohr from Cowen. So, Paolo, you have up there one of the points being that there would be lower investment after the E2, while Embraer has done a terrific job of developing products. One of the complaints investors have is the cash flow has been not as consistent. If you look out to 2020, do you have any longer term targets for where you think margin should be and where you think cash flow should be as a percent of sales or any sort of metric?
Well, in terms of margins, I think this business should generate double digit margins, right? So somewhere between 11%, 13%. So I do expect that going forward with the adjustments that we are making with enhancements like in products, so on and so forth. And of course, we have to count a little bit also the improvement of the market. But I think we are set to have better margins going forward.
So this is our, I'd say, target, right? So I believe investors will be happy if we can deliver that. So hopefully, we have to better understand also what is going on in the cycle now, right, in the commercialization cycle. But it looks like we continue to have a quite a strong market with pockets of softness, right, in certain markets. But however, overall speaking, so it's still very good and we are receiving very good interest on day 2.
So John will talk more about that on the opportunities. So I think this is right, it's positive on margin. On the cash generation, if we don't invest, of course, we will generate more cash, right? However, it's an industry right,
anything
right, anything decided. We are looking as always we do to alternatives. So what's next for Embraer, what's next in the right business jet, what's next in commercial. And but nothing at all is being decided. So we have to be careful.
So we have to first of all, I want to monetize these investments that we have made in the last years and look also into the services business and see which opportunities that will be there in order to grow our business.
Before we get next question, I just ask you to hold the desk, give the opportunity for the ones that are connected
before your questions. Yes. We're going to now shift to the phone. We're going to take a question before the next question from the audience. We're going to shift and take a question from the phone.
Operator, can you help us?
Our first question comes from Noah Poponak with Goldman Sachs.
Hey, good morning, everyone. Paulo, where do you think you can be next year in 2017 relative to that 11% to 13% EBIT margin that you just mentioned?
Good morning. This is a tough question. I don't know. So our plans, I mean, we are planning to be more efficient by all means, right? So it gets extracted the most value on our products, in our business units and growing our revenue.
So where we are going to be next year is not clear yet, but higher than what we are today and probably less than what I said.
Okay.
Can you quantify are you able to quantify even if roughly what you see as the labor inflation and FX headwinds next year against the $200,000,000
Well, labor index, this is unclear. The ask is about 9%. I do expect that we negotiate to be much lower than that because we are showing to our employees, to our people that if we continue to keep growing salaries like this as we did in the previous year, So this is no longer sustainable. Next, I would say 9%, but I do expect that it will be less than that. For the exchange rates, this is much harder to guess.
So I think nobody understands or can guess, right, the exchange rate. So we already saw many forecasts that were not valid at the end. I don't know, we count, I think the exchange rate can be around the $320,000,000 $330,000,000 in average next year, right? So now we are seeing $320,000,000 We had some real appreciation in the last 30 days, given the agreement between Brazilians with the money outside Brazil. So they are were clearing right their investments outside Brazil and pay a fine for that and also write taxes.
So a lot of money for the fine for the taxes went into Brazil. So that's one of the reasons that the real appreciated in the last 30 days. But today, which is the last day of this event, So the real is back around the 3.17, 3.18. So I think from now on, it's going to be between $320,000,000 $330,000,000
And can you guys just rebase us on your total company EBIT FX sensitivity, just given it's kind of a moving target with the commercial and the defense pieces moving in the opposite direction?
Yes. Noah, it's Fedor here. Our sensitivity for the FX, it went down a little, but it still remains around 10 to 15 basis points for each $0.10 weaker BRL against the dollar. So if the BRL gets $0.10 weaker, we tend to expand margins by 10 to 15 basis points.
Okay. All right. I'll jump back in the queue. Thanks a lot.
Let's go back to the Christine
Liwad from Bank of America Merrill Lynch. Post the E2, you guys are pretty clear that for long term investors, that's where you'll get a lot of return, margins and steady free cash flow. But when you look at the competitive dynamics in your market, right, so the 70 to 1 Jig Seed market, you're getting a lot more competition out there. You've got the MRJ, you've got the Sukhoi. The Chinese are trying to definitely build narrow body aircraft follow on to the E2 after the E2?
Or do you think is your product really that much better than competition that you don't need to invest right away? Can you give us a little bit more background of how you're thinking about that issue?
So thank you. This is a very good question. And so of course that we'll have to look at the market, right? So the market is very dynamic. So we have seen a big movement now from the big manufacturers or the main manufacturers, right, by investing in new products or the range of the current products like the Boeing and Airbus.
So they took a decision to range in their narrowbuses after Bombardier launched the C Series. And with that we also had to launch the E2. So at that moment when these decisions were made, oil price was $130 $140 and now it's $45 $50 right? So I don't believe that all these new products would be launched if we would have to take a decision today. So this shows how the market is dynamic in this regard, right?
So going forward now, I don't think that we will launch any new aircraft that will be larger than the E2. If Boeing and Airbus are still in the segment and where they are today. So I think we have taken the right decision few years ago when we decided not to go head to head with our buzz and voice. Again, so we are very much able to do a very efficient narrow body. So we have the know how.
So we have the people, we have the engineers, so we have the experience. But we don't see a strong business case to compete head to head with Airbus and Boeing. So if they decide to move upwards to grow their aircraft in the 140, 150 seat jets and give up a little bit of this market yet at that moment is different. So we will look again. So going forward now with the from 2018, we are going to have MRJ, we are going to have the Chinese with ARJ21 more in the market, right?
And also Sukhoi, it's already in the market. So they are looking at a new version now of a 100 seats. So we believe that we are in a strong position. So we have a very good product, the most efficient family of aircraft in the segment. We are market share leaders.
We have in incumbency. We have I mean, we are with the EGS in 70 countries, I'm sorry, and in more than 50 countries, almost 100 of the right operators. So it's a huge incumbency. So we have to continue to do our homework to continue to be efficient, right, in the product and customer support and to more of what we are doing with some enhancements. So with that, I believe that we will continue to have a success in commercialization.
Great. That's very good color. And if I could squeeze one more on that margin question. I mean, if I look at the $200,000,000 that you plan to save that you announced in September 2016, do we expect that all to flow through your numbers in 2017? Because if you do the math there, it looks like you're pretty much close to double digits in 2017, if that's the case.
It should be half of that.
Great. Thank you.
Thank you. Derek Spronck at RBC Capital Markets. Commercial, you had a nice pickup in deliveries for the Q3. Is that sustainable accounting for seasonality into 2017?
Well, it's our plans for next year is to deliver more or less the same number of aircraft as we did this year, right, in commercialization. So we don't know exactly the numbers. So we will give guidance next year, right, in January, February. But we can anticipate that's going to be more or less in the same order of right magnitude for the full year of 2017. Okay.
And have the U. S.
Carriers started converting on any of their options of some of the orders that you won with the ERJ175 the last few years? And have any of the options passed without any of the carriers converting.
Let me ask you to wait and Louisa, I'm going to ask Jonas to elaborate on this presentation.
Is that okay? Yes, that works. And then just finally, you have about 2 months left remaining in the year. I'd say that you have a fairly wide range for your EBIT and EBITDA margins. Are you tracking closer towards the top end of your guidance range in 2016?
Yes. We're still in the middle, not top. I think that middle will be fair to expect, and we're on a way to get there.
Okay. And just finally on the settlement with the Brazilian and U. S. Governments. With compliance of the settlement, are there reoccurring costs as you continue to comply with the settlement that you reached with those two countries?
Regarding the settlement itself, it's done. The company has its program of improving its processes and everything. I already mentioned that as part of the ongoing business, there's no specific costs that will be expected related to the agreement. The agreement
sense. Okay. Now we're going to take another question from the phone. Operator, can you help us?
The next question comes from Taran Quettawala from Scotiabank.
Yes. Hi, good morning. I guess maybe in terms of the margin targets for next year, you provided some really good color on the cost savings there. Is there can you give us any sense of maybe where pricing is trending, I guess, more on the executive aviation side? I'm wondering if that can chew away some of that improvement that you're looking at in terms of cost?
Hello?
Yes. Well, it's no secret, right, that the margins in this sector are under pressure. So we are seeing the but the markets, it is what it is. So we have 5 manufacturers, right
manufacturing around
650, 700 aircraft this year coming from a market that in 2008 was a big 1300. So it's a lot of pressure on this market, a lot of used inventory still, right? So it's a pressure, right, on this market. So we count on improving margins next year by reducing our costs on the business jet units. There are inefficiencies still in business jet because we are manufacturing aircraft in Brazil and we are manufacturing aircraft in the U.
S. And as we transfer 100% of the business aviation into U. S. Melbourne. So there will be, of course, less cost associated to that.
And this cost reduction plan here also will be in place from January on. In addition to that, we believe that we have a product that merits a right of premium. And we are seeing the market with the Fanon 300 and the legacy 450 and the legacy 500 is coming as well. So as we consolidate this product, especially the legacy 4 50 and 500 in the market, so we believe that we will be able to gain some margin as well. So this is our forecast, this is our view for next year.
Okay, great. Thank you. And I guess just one quick one here also on the cash payments. It's about $225,000,000 I guess, in terms of both the voluntary retirement and the DOJ payments. All of that is going to go through in Q4, correct, on a cash side?
No. In cash basis, we can consider the $80,000,000 will be made next year.
Out of that $325,000,000
Yes.
Thank you.
Thank you, gentlemen, and good morning. Steve Trent from Citi. Just two questions for me. The first is when you think about the your order campaigns for the E2, any thoughts as to what is your base case thinking with respect to whether your Canadian rival gets additional help from its federal government? And the or should I say help as the feds haven't helped yet?
And the second question just on the military side. When you think about the Super Tucano, any color on potential new demand for that, whether it's coming from foreign governments or whether it could come from the eventual retirement of the A-ten in the United States?
So thanks, Steve. On your first question, I think the E2 program is going very well, so in both, by technical and also by sales by commercial. So if you look at that, we have launched this program in 2013, right? And 3 years after, so we are basically with 2 80 firm orders firm and the 600 plus when we consider LOIs and other agreements. So I believe it is quite solid.
George Lazo will elaborate a little bit more right on the market. So we are seeing tremendous potential going forward. There are new events. There are new information that's important to share with you, and John will do that. On the Super Tucano, yes, there are more opportunities.
And I will also hold on my comments here because I don't want to jeopardize Jackson's right presentation, okay?
Very helpful. Thank you very much, Alok.
Hi, Alexandre Foucault, HSBC. I have two questions. First one on the gap between E1 and E2. If I'm not mistaken, I still have 35 30 to 40 airplanes to fill up the gap. When as we're entering 2017, when is a date that we should see those?
And can you spend the whole year of 2017 without those gaps? And second, where are you willing to go on margins to fill that gap? That's the first question. Thank you.
So thanks for calling. If you allow me just to go back to Steve's question because a part of his question I did not answer regarding Bombardier in Canada and this is a very important one. So I think we were already very vocal on this topic and we will continue to be. So we can't afford to have in this industry government right support that this balance the gain and put into your party the level of Penfield, right? So what Bombardier did, of course, is not good and may destroy the dynamics of the market because they offer their right products at the low cost.
No matter what, I don't know you guys, if I ask you here what was the price, maybe some of you will say 23, others will say 21, 22. So whatever the price is below 27, 28, so this is below cost, okay? And so Government of Canada, Quebec in this case is banking this gap. And we are very close to our government. And our government is taking actions in the sense of talking to the authorities in Canada to show that this is something that must stop.
Recently also the United States government interfered as well in I think last week and also started to be more vocal also right on this problem. So we do count, we do believe that the federal government of Canada will not place this additional investment of $1,000,000,000 If they do, of course, we will be very rightly disappointed. And going to WTO, it's not in Brasil, of course, it's Brazil that would go to WTO. It's a possibility. However, it's not efficient, right?
So going to WTO is going to take 6 to 8 years. We will have a big dispute there. But what is important is what happens in the market meanwhile, right? So we are looking to that. So we are focused on that.
And hopefully, there will be no need for that. So for your question, you repeat it again, sorry.
Yes, no more.
On the gap between E1 and E2? No, we
have the gap, yes. Yes, we still have a gap. We still have a gap, but we are seeing solid activities and John will talk more about that. So I believe we have until Q3 of next year, right, to close sales enough to place us in a better position in 2018. So it's still it's not bad 2018, right?
But we still need more. But we are very positive that being orders coming from the United States for the 76 seaters or 190, 195 from other countries, we will get there.
Okay. And just final question. How much of the legacy family or how much of the margin increase on the business that depends on the legacies, $415,000,000 and the $500,000,000 How much you need to sell that to come to your target or at least to have this improvement in margins going forward?
You mean for next year?
Yes. And going forward, yes.
Exactly, I don't know how to answer this for counsel. I think we'll have to look at that and get back
to you. Okay, perfect. Thank you.
Okay. I think we still have a lot of questions, but we're still going to have our individual presentation for the business unit. So I think with that, we concluded our Q3 2016 conference call. Thank you very much for all that are connected through the phone. Filippo, do you have any final words?
Okay. So that's it. We conclude our 3rd Q 20 16 conference call. Thank you. Have a good day.
Okay, guys. Audience that stays here, we're now going to do a quick break, a 15 minute break, and then we will start with the individual presentations. Okay? Thank you.