Morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's First Quarter 2016 Results. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session As a reminder, this conference is being recorded and webcasted atri.embria.com.br. This conference call includes forward looking statements or statements about events or circumstances which have not occurred.
Envira 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 in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward looking statements. Embraer undertakes no 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, these forward looking events and circumstances discussed on this conference call might not occur.
The company's actual results could differ substantially from those anticipated in the forward looking statements. Participants on today's conference call are Mr. Federico Corrado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO Mr. Eduardo Quito, Director of Investor Relations.
I'd like to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Okay. Thank you, and good morning, everybody, and thanks for joining Embraer's Q1 2016 conference. As we've been doing in the past, we're going to do the presentation and then we'll be ready for the questions. So starting the presentation, Page 3, the highlights and starting with the institutional highlights with the information that Fitch Ratings started coverage of Embraer with investment grade rating of BBB-. Also, Standard and Poor's reaffirmed our BBB rating investment grade.
Now we have coverage by 3 rating agencies. Next page, Page 4. Moving to operating highlights and starting with Commercial Aviation. We had a total delivery of 21 key jets in the Q1, which included the first E175 to KLM of the order of 17 firms. Regarding customer activity, the Austrian airline became a new e jet operator, and we announced early this month that Horizon Air ordered 30 E175, which will fly for Alaska Airlines.
In relation to the E2 development program, 2 important updates, the E190 prototype and the taking ground test ahead of the first flight in the first half of this year. As you remember, we had the whole rollout in early February. Also, we started the production of the first prototype of the 195 module. Next page, page 5, now taking talking about the effective aviation highlights. The delivery of 23 jets in the Q1 of 2016, including the first delivery of the Legacy 500 in China.
An important milestone in the effective jet business was the delivery of the aircraft number 1,000, which was the legacy 500 to Flexjet. Regarding sales activity, we selected across a Zimbraer sales representative in Mexico. Next page, Page 6. Moving to Defense and Security business. Regarding the KC-three ninety program, the 2nd prototype joined the flight test campaign to the 1st flight yesterday.
Also, the first prototype is already performing ramp opening tests in flight. In relation to the defense company's activity, 1st, in the development of the Brazilian satellite, Vazona signed 6 contracts for remote sensing services. On radars, we signed contract with Brazilian Navy to develop by VOTA S prototype radar. And finally, defense, our teams in support in the upcoming Olympic Games in Brazil have concluded the air traffic control and message systems tests. Next page now talking about the financial results, let me move to Page 8 with the firm backlog numbers?
We reached the total of $21,900,000,000 in the end of March, slightly below the end of last year above the Q1 of 2015. Next page, Page 9, as far as aircraft deliveries. Starting the left chart, Commercial Aviation delivered 21 E Jets in the 1st quarter. And on the right side, the Active Jet 23 deliveries in the 4th quarter, broken by 12 light jets and 11 large jets. We are reiterating our outlook for the year of 105 to 110 ejets, 40 to 50 executive large jets and 75 to 85 as active light jets.
Next page, Page 10, net revenues. We had a total of $1,300,000,000 in the first quarter, equivalent to BRL5 1,000,000,000. And also for the 2016 outlook, we are maintaining our range between €6,000,000,000 to €6,400,000,000 in terms of net revenues. Next page,
Page 11,
revenues grew by business. From the top right, In Commercial Aviation, we had total of $711,000,000,000 in the first quarter, to the bottom $189,000,000 in defense and for the left in the bottom $402,000,000 in executive jets in the Q1. For all of the business, we are maintaining our guidance range for 2016. Next page, Page 12, regarding SG and A expenses. We reported a total of $140,000,000 in the first quarter.
In relation to G and A, we had a total of $39,000,000 below the same period of last year. And on selling expenses, €101,000,000 in the Q1 2016 above the same period of 2015, reflecting primarily the high number of deliveries. Page 13, next page, in relation to operating income. We reported a total of $86,000,000 in the first quarter with 6.5% margin, which combined positive 12.3% in Commercial Aviation and negative 1.5% in Executive Jets and a positive 2.2% in Defense. Regarding the column 16 outlook, we are confirming our estimate of €480,000,000 to €545,000,000 with a margin of 8% to 8.5%.
Next page as far as EBITDA. We reported a total of $168,000,000 in the first quarter with margin of 12.8%. For EBITDA, we are also confirming our estimate for the range of €800,000,000 €870,000,000 with a margin of 13.3% to 13.7%. Moving to next page regarding net income. We reported a profit of $104,000,000 in the Q1 of 20 16 with a 7.9% margin.
As we've been observing in previous quarters, this result was impacted by the exchange variation in the income tax. In this quarter, we had a positive impact. Next page, Page 16, in relation to investments, we had a total of $52,000,000 in the first quarter broken by $7,000,000 in research, dollars 12,000,000 in development and $33,000,000 in CapEx. These figures are net of contribution of suppliers. And for 2016, we are estimating the total of $650,000,000 for investment.
Next page, Page 17, regarding free cash flow. We used $216,000,000 in the Q1, primarily reflecting the normal increase of working capital in the beginning of the year, the divestment in the development of the E2 program. For 2016, we are estimating the use of $100,000,000 of gas. The next page, finalizing the presentation before the Q and A section, our capital structure. We recorded a net debt of $220,000,000 in the end of March with $3,400,000,000 in cash and $3,600,000,000 in debt.
In relation to our debt profile, we are maintaining a comfortable maturity term of almost 6 years. With that, we conclude the presentation. And now we're ready for the Q and A. Thank you.
Thank you. Your first question comes from the line of Cai von Rumohr from Cowen and Company. Please go ahead.
Yes. Thank you very much. So good results. Can you tell me can you give us some color on what you're seeing in terms of demand in the biz jet market? I think others have said it was particularly slow in January, February, but it has gotten a little bit better since then.
Hello, Cai. We see also some softness. No real change from the last quarter. So the U. S.
Market continues to be the where most of the activities, but some softness there. Also there is, as we have said before, some pricing pressure on OEMs. So but stable is the way I would describe it.
Okay. And then the last one. Now that your competitor has won Delta, and I guess IAG is talking to them, what are you seeing as a result of in your RJ and in your kind of commercial air transport market, both in terms of opportunities and in terms of any changes you might have seen in terms of the pricing there?
Well,
I think, of course, Delta was a very important campaign. And in no way I want to diminish the importance of that campaign, but it was somewhat atypical. It was not a straight race between 75 new aircrafts. So in our case, the offering as requested by Delta was a combination of new and used aircraft. We remain very convinced that we have an extremely competitive product family both in E1 and down the road in the E2.
We were very aggressive in the campaign. I believe although of course we do not know the details of the competitive bids, the onerous contract provision of $500,000,000 for subcontracts, I think probably says a lot about where the decision came from. So we remain competitive, but also disciplined as far as the integrity of our product portfolio and our backlog and of course, our cash position and balance sheet. So we're not discouraged at all about this result. And we remain, as I said, very comfortable with the competitiveness
of our company and our products.
Thank you very much.
Thank you. Thank you.
Our next question comes from the line of Myles Waters from Deutsche Bank. Please go ahead.
Thanks. Good morning. I was wondering if you could talk a little bit about the demand picture in the defense environment, in particular as it relates to the KC-three ninety with the second aircraft in the air. Does that get you closer to a point where international campaigns can kind of come to fruition?
Good morning, Mayos. Yes, well, first on the development side, which is very important not to miss our deadline of certifying the aircraft by end of next year. So we can start deliveries in 2018. Everything is going fine. Second prototype will fly.
It has flown. Okay, great. Yes. So and not only this, but also the some very key flight tests such as the ramp, opening in flight and also the parachutes, the door and opening the envelope So far, we're doing extremely well. So on the development side, we are extremely happy with where we are.
As far as campaigns, there are preliminary campaigns going on. As we all know, this military campaign will take a little longer than commercial. Having said that, dialogues going on with several potential customers And also with Brazil, because there is this outstanding order of 28 aircrafts. I believe 3 of them to be delivered in 2018. Budget constraints, of course, but as you probably have seen in our financials, we have been able to keep what we said we would keep because our accounts receivable where they are, payments are regular and now we have rescheduled the contract.
So we are optimistic about not only the Brazilian the fulfillment of the Brazilian contracts, but also international prospects. Probably, I'd say towards the end of the year, early next year, we're going to have probably more momentum as far as those sales campaigns.
Okay. And could you comment on the margins at Executive?
So it's about, I guess,
a 15,000,000 dollars year on year, dollars 16,000,000 year on year negative swing in operating profit on a $250,000,000 higher revenue base. I know that 650s are a big portion of that. But I mean, were there any negative adjustments to use or anything else that's bringing down that overall EBIT margin? And then give us a trajectory
to get to the high
single digit target for the year.
Yes, Myles. We're still maintaining that target. What we saw in the Q1 was a mix, negative mix, which included the legacy 650 with the impact of that. Also, most of these legacy 650 were carryover from last year. And we also had in the semi expenses, a couple of nonrecurring items there, some $10,000,000 of non recurring there, but also the number of deliveries impacted that number as well.
So it's a combination that had that. So but it's important that we're still confident about the capacity to deliver what we indicated for the full year in terms of the Active Jets margin.
Okay. Thank you.
Thank you. Our next question comes from the line of Josh Milberg from Morgan Stanley. Please go ahead.
Good morning, everyone, and thank you for the call. I had
a couple of questions on the fence.
The first was, it was good to see your EBIT margins there turning positive this quarter? And just wanted to know if you had any cost based revisions in your favor this period? And if not, is that something we're likely to see in upcoming quarters, assuming that the currency stays where it is?
Yes. We didn't have any impact in terms of contract provision as we had last year. We already said that if we see more stability in terms of the currency, we should have this situation which actually happened. So it was basically on the activity in the Q1. We still think that it's possible to keep in that level and probably like we indicated like close to mid single digit margin in this year.
Yes. Just to add, Josh, Eduardo here to what Filippo said, we didn't have any base adjustment as far as effects on defense. So we use it around 3.90 BRL for defense in the Q1. So as the currency gets stronger, if that continues, we may have the opposite effect of what we had last year when we had negative impacts as far as
cost base revision. Okay, great. And then just another question on defense is if you could touch on the issue of defense receivables. The currency moves cloud, the picture of it, but we saw in the ITR that the amounts of the government, I think, were down about 10% sequentially in local currency terms. I mean, so I just wanted to understand what was going on there and what we might expect looking forward?
In the Chilean dollars, not real any sizable change, $350,000,000 just for the defense program and Brazilian government to BRL347. So do you It's BRL1.2 billion. Yes, coming down from BRL1.30 billion to almost BRL1.4 billion. I think it's currency related, right?
Yes. Mostly currency related. Yes. In dollars, it's pretty much the same.
Yes. Since the Q2 of last year, we have been able
to maintain accounts receivable more
or less stable, actually slightly down. It came from 370,000,000 dollars Q2 2015 to $347,000,000 Q1 'sixteen. So down $30,000,000 small amount of 10%.
And any developments since the close of the Q1 or anything going on there that might move it better or worse in the next quarters?
Well, we last year, we as we said, we did a great effort with our customers at Virgin Air Force as the main one, but also the Ministry of Telecommunication with satellite side and also the SysPharm with the Army to really adapt our pace of our programs to the budgetary reality that we could afford. And this has been actually followed quite correctly over the Q1. Our expectation is that we do not have any interruption of this. As we all know, I mean, we are facing some political turmoil here in Brazil. We know there is a impeachment process going on right now and Senate has already passed a warehouse.
So the market in Brazil is reacting very favorably to the potential change. So one way or the other our expectation is that the commitments which are in place will be respected at least. So of course, if the country gets better, the macro economy gets better, then of course, we'll be even more certain that the condition will be fulfilled and the budget will start to be adjusted upwards. And the current fiscal loss will be reduced and the ability of the government to fulfill its obligations will be reinforced. So we are as I said, what we see ahead is at least the continuation of the Q1 and therefore the achievement of our goals of our guidance.
Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead.
Good morning, everyone. This is Mariana Perez Mora from Ron.
Good morning. Hello.
Where do you sign a long term agreement for a flight out pool program with Colorful with Berlin? In addition, you spent BRL 14,000,000 for the pool program spare parts. Can you talk about your strategy with regards to the aftermarket? How should we think about the size of the parts of the business today? And can you quantify the long term earnings potential for this?
Okay. Well, all three business units are more and more investing in our after sales infrastructure and support programs. So it's a clear strategic direction. And again, as I said, in all 3 business units and commercial, of course, was a pioneer on this. I believe we do not report separately the results.
We intend everything under each unit. I can't say quality, the field is growing. I'm checking here while Eduardo fetches some data. But qualitatively it's a growing interest and focus of all our 3 units. I do not know if we have any specific figures.
It's above 10%. It's around 10% to 15%. Of revenues. Yes. Of revenues.
And tends to have, of course, a more predictable and higher margin.
Your next question comes from the line of Alexander Falcao from HSBC. Please go ahead.
Good morning, everyone. Good morning. Good morning.
Hello. Good morning, everyone. So my question is regarding commercial and margins going forward. Is it fair to say that if we see FX in the same path, that was already in the same level that we saw on the Q1, we're probably going to see this is a peak margin
for the year. And second,
I would like to comment if there's going to be any shift on the levers going forward
and on the division? Thank you.
On the second part, shift of what?
Of mix, sorry.
A mix, okay. Well, we I mean, in Q1, the exchange rate, the average exchange rate was exactly 3.9%, which is as a coincidence, of course, that is exactly the number we use in our planning. So a good reference to where we can be as far as the margins on the commercial business. As of course, as FX comes down, as the Brazil evaluates, there will be some cost headwinds, which we will face as we have faced over the last several years, just boosting the competitive, the cost reduction measures. So whether or not the peak, it's hard to tell.
But if you remember, a year ago, we were all discussing that the mix of 175s would bring the margins down, less 190s, 195s and more 175s. And we said that, yes, potentially, yes, but we would fight very hard on the cost side, also benefit from the standardizing of the fleet because many of those contracts are large quantities. So we really have a more standard product and supply chain management. And there we are, believing more or less the same margins with fundamentally 175. So any currency headwinds will be counteracted by additional efforts we adjust and we do have budgets in reals and dollars separately.
So we probably we're going to adjust the budget in reals in the new reality of the extended rates. So we do not really just lose this momentum. And obviously, shifting the mix going forward, this year is fundamentally 175. We have activity especially in Asia and Middle East, but more so some in China as well, which are more centered in the 190, 195. So we may see a different a little bit different mix in the future.
But so fundamentally, the bulk of the demand will be 175 for the last 2 years at least, so 'sixteen and 'seventeen, the bulk is 175. And they have some tailwinds of some additional 190s, 195s.
Perfect. And just one quick follow-up after the Delta Nat Company, is there any big campaign in the horizon that you guys could
share
with us? Thank you. We don't think there is any short term campaign going on. I mean, to be decided in the U. S.
Right now. The potential in the U. S. Is too large. There are we at least we and we actually have 120 options 175 for the next few years.
There are still some whatever 300 to 400 aircraft, 50 seater aircraft, which we will be replaced in the next several years. And there's also potential demand for replace of our early seventy seaters, especially older CRJs, which can also bring additional demand. So I think the U. S. Has been, of course, has seen a great demand for aircraft.
I think the campaigns of 2016, most the largest ones are done. Probably, I mean, we don't know, but probably 2017, we are going to see more activity again. But also, as I said, we see demand going on in Asia, a little bit in Europe, more on Eastern part mainly and also Africa. And those are more 190, 195.
Thank you. Our next question comes from the line of Pete Skibitski from Jefferies. Please go ahead.
Hey, good morning. Hey, guys. On the cash flow for the Q1, you view substantially less this year than you did in the Q1 of last year. And you did your initial guidance, of course, for the full year in free cash flow. I'm just curious, do you think there's a nice opportunity to outperform this year in free cash flow guidance because it's a good start, and I think some of the things that allowed you to meet last year like supplier contributions and customer advances and running down the inventory seems like opportunities this year as well.
So just looking for some color there.
Okay, Pete. Actually, this is something that we'll be very focused on because it's important in terms of cash generation, all the working capital management and being very close to that. I think that we follow pretty much the standards of the Q1, which is the increasing in terms of inventory to build the capacity for the deliveries throughout the year, it's naturally. We had a tailwind of supplies contribution, like we mentioned, that positively affected this quarter that maybe we don't see that in the same level going forward in the following quarters. Basically, we are pretty much aligned and in what the target that we stand, the consumption of €100,000,000 or less.
So I don't think that's much change in terms of it could be reflected throughout the year. I think it's more like a control mix in terms of the Q1 that will be adjusted then following quarters.
Okay, understood. And then just one follow-up. The Horizon order, the last quarter, is that going to fill out your last available slots in commercial for 2017, or or are there still some available slots? I think you're 80% filled even before that order?
Well, of course, it will depend on where we set our production levels. If we think about a stable production level around 100, Probably we're pretty much done. But the answer to your question is yes, we do have not available slots. We do have the ability to offer slots in 2017, and of course, we are.
Okay. So maybe incremental orders kind of pressure your production rate up a little bit next year?
Well, at least to maybe to maintain where we are around low 100s, 105 or something like that. So we are very profitable about keeping more or less the same level where we are. And we do have the ability, of course, if we have confirmation within the next, let's say, 6 months or so to back end to raise in the back end of 2017, raise the lever if we need. So the supply chain in our industrial capability is not limiting our ability to sell maybe more aircraft in 2017.
Thank you very much. Thank you.
Thank you. Our next question comes from the line of Derek Sponck from RBC Capital Markets. Please go ahead.
Good morning. Thanks for taking my question. In Defence, you're undertaking many different or new or newer initiatives from the satellite remote sensing service where you've indicated you signed a bunch of contracts recently. How material could these new initiatives grow into if we exclude the QC390? And which initiative holds the most promise?
Well, thanks for the question. I besides, let's say, the flying objects on the space, on the military Defense and Security business. We have those 3 additional, let's call, core competences and around 3 different companies. 1, ATAC, it's really a software house. That's a company which we believe there's a great potential there for further expansion.
And maybe not only into the defense security space, but there is competence in software there, which we are assessing and trying to see which other applications we could use, the know how that there is there. So ATEC, that's on the software development side. Then we have VISIONA on the space side. So of course, this company started to 1 single program, 1 single project, which is a geostationary satellite, a huge one, more like a PMO project. But it's getting momentum, it's getting knowledge and know how.
And as you correctly said, we did sign some new contracts. So the way we see and want to position Verona is the space, the space company of Brazil. So we also see expanding opportunities as soon as the economy rebounds. There is of course a second geostationary satellite foreseen for the next 2 or 3 years, but there are also smaller constellation of low orbit satellites and maybe even other services. We are also considering discussions with the potential partners, so we can boost our ability to acquire technology in space.
So Vision is the 2nd pillar. And the 3rd, Saris, is the company which is in charge of the Cisron. It's our 1st value broader horizontal integrated defense system. So including radars, including acquired equipments and things on the ground and also UAE visit center. So it's also a third competence of integrating complex systems for especially for the military and for defense and security.
And recently, we have actually merged Saviz with Bredar. So it's a company that does have a private portfolio. So as we adjusted our activities to the reality of our main customer, Brazilian Air Force and Brazilian Army, We think we are well positioned again to number 1, consolidate our portfolio of competence. Number 2, really make try to make more inroads into the export market.
That's great. Thanks. How healthy are the margins on that difference there? Is that the defense across the line? Are they generally accretive for your overall business?
It is. We had a very nice growth story for the last several years. 2015, we were hit by the lack of payments from our main customer. So let's say, as the world is in conflict, there is of course a growing activity as far as the military procurement around the world. But it's not only now just acquisition of equipment, it's a lot about systems, integration surveillance, which are some niches where we have products, we have offerings.
So we actually believe this business, which again was hit hard last year by Brazilian government payables and the reduction also in quantities and written, We'll resume its growth and again, mostly probably for exports from now on. We also, of course, have the Super Tucano now being built in the U. S. And that's also a very good platform for export of the aircraft into areas of the world where this counterinsurgency aircraft is required.
Just moving on to the commercial aero. You've been focused on the E170 with the scope loss changes. The E190, E195 sales, it seems to be a little bit more challenging recently. If we were to look at the E2, has the market dynamics changed at all when you look at the demand environment for the E21 190, 195? And is the Lombardi C Series, is that I know they don't compete directly, but is it the delta order becoming more of a concern for the E2190, 195?
No, we do not see
a change in dynamics in the mid to long term. The E2 will enter into market by 2018, the first model. In the short term, there is I think there are a couple of important elements in this scenario. One is the very large backlogs of both Boeing and Airbus for MAX and EOS. So there is clearly a huge amount of aircraft already ordered.
And also the reduction in the oil prices has eliminated the urge of many airlines to replace their fleets with more efficient aircraft in the short term. So this is I think what we have seen when we see across the industry Boeing Airbus book to bill is less than 1. And so in the short term, yes, that does not quite affect the E2. And we are doing well in the year 1. We know we have sold out in 'sixteen and it looks very, very good in 'seventeen and even 'eighteen.
So I mean, the fulmines are there and we are crossing this period relatively unscathed and with a strong backlog. As far as C Series, the C Series 100 has a direct competition with our 195 E2. I mean, again, we are very sure about the competitiveness of the 195, E2 given, of course, normal competition conditions, both performance wise and competitiveness wise, the maintenance cost, acquisition cost, operating cost. The 300, the C Series 300 is more again for Boeing and Airbus. It's a larger aircraft.
So it's a more 7 37, 320 competition. So no real change in the dynamics. And again, I think the development order was an important one, which was a bit atypical. And I do not know how much of the $500,000,000 impairment is related to that order. But between that order and Air Canada's order, there's a $500,000,000 impairment, which I think explains a lot about what happened there.
Your next question comes from the line of Stephen Trent from Citi. Please go ahead.
Hi, good morning guys. Just 2 or 3 for me. First, could I trouble you to repeat what you said earlier about the margins per segment, EBIT margins? I caught Defense at 2.2%. But could you tell me for Exec and Commercial again?
Sure, Steve. Good morning. So this is Fred. So commercial is around 12%, 12.3% to be exact. For executive negative 1.5% and defense and security, you've got it right at 2.2%.
Great. Thanks so much, Fred. And then in terms of the Executive segment itself, just curious about dynamics for large cabin versus small and mid cabin stuff. Are you starting kind of fair to buy for this market in terms of pricing trends and what you're seeing in demand and competition headwinds from those two sides? Or is it somewhat more uniform than I think?
Steve, it's I think the pricing pressure is across the industry, it's across all niches. And when you do that, when you see such those movements, they tend to blur the lines between segments a little bit. So potential buyer of, let's say, larger Falcon or Gulfstreams, it's not so uncommon now to see that same person interested in evaluating the Leggis 500, which is a different aircraft, smaller, but cheaper and vice versa. So yes, there is pressing pressure around. We what we have done is we could have ramped up our large cabin, I mean, not large, I mean, our larger aircraft, the legacy 450, 500 aircraft more than we did.
So we are really trying to have some pricing discipline here. The $650,000,000 as we already discussed, we have some carryovers from. So this quarter, we had 2 elements which were impacted the results. We should be certainly around the mid or to mid to high single digit. Otherwise, this $10,000,000 non recurring commercial expense, but also purging a little bit of some carryover of 650 from last year, which had aggressive pricing.
So we are I mean, I think we are in a good balance of volume versus margins going ahead. And of course, the 300 is a best seller of its segment, both smaller aircraft. But I think everybody is seeing this all segments are seeing this pricing pressure. And I think until the market really rebounds from the mentally we have the U. S.
Today, all the other markets are relatively soft. Some are actually there's very little activities such as Brazil, for example, or even China. So I don't see a bifurcation. I see an overall trend. And of course, just to add the final comment, the pre flow market, there's a lot of available relatively new aircraft around there.
Some are clearly, I mean, for sale and some, even if they're not officially for sale, but they're always there also keeping some drag in our ability, our industry ability to raise prices. So the pre frond market also played an important part in this.
Okay, that's great. Very helpful, Freddie. And just one last question, and I'll let someone else ask a question. I saw in your release, I was intrigued by the meeting you had with a couple of Middle Eastern ambassadors on defense products, which seems logical given the incredible turmoil in that region of the world at the moment. When you think about longer term chances to replicate Cisron or something like that, Would you say broadly speaking that you're potentially talking to other regions of the world in terms of offering your suite of defense products?
Yes, Steve. This is exactly our willingness, our strategy. As we have built a large a broader portfolio of products, but also services integration, We are now able to offer more turnkey solutions than we were in the past. And of course, as we are able to sell a complete package, including let's say aircraft, radars, C4I system softwares, the name that's integrating 3rd parties, other OEM equipment into it. This tends to be a number 1 higher revenue numbers, but number 2, very importantly, higher margin numbers as well.
So I think the experience that we have acquired in those in the Sistron, in particular, is your question, will indeed allow us to be able to play into that segment. And yes, there are other countries are interested in seeing. We have been able to with of course with the Brazilian Army at their invitation. So some delegations visiting the own site and seeing what's being done there. It's a great and it's the best marketing you can have, seeing an operating system actually working.
Last year, we actually sold our 1st integrated system. So it's not I'm not only talking about something which just an idea. But to your question, we are really focusing and trying to expand that activity and showcasing that to other private countries.
Okay. I'll let someone else ask the question. Very helpful, Freddie. Thank you.
Thanks, Steve.
Thank you. Our next question comes from the line of Marco Spiner from Mubad
Hey, thanks for the call. I just wanted to talk a little bit on the trade ins that you talked about in the Q4 call in the executive business as a driver of core margins in the Q4 and to what extent that's going on now and kind of what the trade in strategy was or is and if it's changed at all?
No, this quarter, I think, was relatively normal as far as trading, which means no major cost headwinds due to trying to expedite sales of non Embraer branded aircraft. So it is where it should be kind of a neutral contribution to the business, facilitating of course sales. So we think also always to favor trading in our own products. Sometimes we do have to take other manufactured products. So what we saw last year to your question was I think a little bit a non recurring event.
We should not see another glut of used aircraft or trade in aircraft being sold to really move the inventory as we did last year.
And I guess then just to finish up, it just seems very hard to meet the kind of executive debt guidance for the year. I mean, I know you're sticking with it, but can you tell us a little bit more about where the improvement really comes in the second half of the year?
I think it's a very fair question and I'll be glad to share with you our visions. We had a concentration of 6 units in the first quarter. As you know, the large our guidance
is from
40 to 50 large cabin aircrafts, large for us is a like 450, 50, 650. So the vast majority of the remaining deliveries will be 450s and 500s, which have a much more pricing power than the 650s relatively speaking at this stage. So and on the phenoms, on the light side, 75 to 85 aircraft is our guidance. We are actually today with less of a challenge as far as the remaining sales than we were same time of last year. So number 1, we believe the volumes will be there.
We are feeling good about our ability to sell and deliver all those airplanes as per the guidance ranges. And number 2, there will be a pricing, therefore, a margin sorry, not pricing, a margin increase due to mix going forward. So if we do something around 8% for the next three quarters in that business, We should land
more or
less where we said mid to high single digit margins on this. What we need is something around 8% in average for the next three quarters.
Your next question comes from the line of Bruno Amorim from Santander. Please go ahead.
Hi, good morning. I have two questions. The first one is on the trading. I'd like to better understand why is it so different from you guys taking an aircraft from a different manufacturer with regards to impact of the savings on the margins. Is it because you are not able to sell the aircraft from different manufacturers at market prices?
And the second question is on the impact of low oil price on new orders. You said when answering a previous question that maybe low oil prices should imply a lower level of new orders for new aircrafts. But I remember in previous quarters, you mentioned not necessarily this environment should imply a relevant impact on the number of new orders for several reasons. They are practically sorry, the airlines, they have other reasons why they interested in renewing their fleet. So what is your latest view on that?
And to what extent do you really believe where oil price should impact or not the flow of new orders? Thank you very much.
Okay. So on the trade ins, the fundamental difference is on our aircraft. I mean, we have the ability to bring the aircraft in house And as we have the, of course, the type certificate of the airplane, we can enhance it, we can introduce options. We can play with the aircraft and offer a total care package as far as customer support. So it's like a more an e house solution.
On somebody else's aircraft, it's fundamentally a brokerage transaction. So we try to just as we acquire it to resell it. And obviously, it will depend which price, how much we pay for the aircraft. So last year, we had a little bit of that. We ended up selling used aircraft at a lower cost than what we actually recognized as a trade in.
So that created that non recurring effect last year. But the fundamental difference is actually harder. It's actually material in our ability to really do some enhancements around the airplane and holding the inventory, sometimes even investing in revisions or C checks or whatever has to be done and sometimes blended in customer support packages. On the low oil prices, I don't think I may have not been clear and I don't change my mind. I mean, it's there are airlines, which they have other reasons to on Solasence.
We just announced 30 airplanes for Alaska, for Horizon. Delta just acquired new airplanes as well. So there are procurements which will continue to go on and airplanes will be sold. What I refer to is that there was a extremely concentrated effort in the last 4 years or so of orders, especially MAX and NILs, but also in HUES for that matter, which they were they happened in the with the view that oil would stay around $100,000 $120 a barrel. So there was a kind of a golden rush for acquisition of those aircraft.
This urge is clearly down now because, number 1, the backlogs are full. And number 2, oil is there's no urgency in the short term. So those are lines which will substitute the airplane in the short term. They're doing that for other reasons such as obsolescence, such as fleet expansion or something like that. But that strong movement exclusively motivated by oil prices, there is a clear slowdown there.
And longer term, I think oil will go up to each level nobody knows. And the fundamental of any airplane that burns 15% less fuel than existing airplane, those fundamental remain. So they will be the reason for fleet renewals down the
road, but just not immediately.
So anybody willing to buy an E2 or a new or a Max, they probably can they are either already in the backlog or they can wait some years down the road for that.
Thank you. This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation.