Good afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's fourth quarter 2015 results, 2015 annual results, and 2016 guidance. Thank you for standing by. This conference call is being held during the Embraer day in Brazil with the presence of investors and market analysts. At this time, the company will present its fourth quarter 2015 results, 2015 annual results, and 2016 guidance. Afterwards, we will conduct a question and answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by one. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred.
Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, 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 on today's conference call are Mr. Frederico Curado, President and CEO, Mr. José Filippo, Chief Financial Officer and IRO, and Mr. Eduardo Couto, Director of Investor Relations. I would like now to turn the conference over to Mr. José Filippo. Please go ahead, sir.
Thank you. Good morning and good afternoon. Welcome to Embraer's financial results call. As usual, we're going to go through the presentation, and after that, we'll be open to questions from the audience here and also from people outside. Let's start this presentation, page three, with the financial highlights for the year. We had, as we anticipated in some quarters before, our record ever backlog of $32.5 billion in the end of the year. A free cash flow generation in the year of $178 million. Net cash position as of December of $7.2 million, and revenues of $5.9 billion. Also, we had an important non-recurring event, which was the filing of Republic Airways Chapter 11, which led us to record a provision of $101 million that impact the results. We'll do more details during the presentation, and we show the figures also with and without that impact.
In terms of result, we reported the EBIT of BRL 332 million with margin of 5.6%. Adjusted for the Republic impact, it would be BRL 432 million and a 7.3% margin. In terms of net income, reported a BRL 69.2 million of profit, and without the Republic, BRL 372 million. Going to the next page, starting the highlights for each business unit. First, commercial aviation for the year 2015. We had the delivery of 101 E-Jets and net firm orders for 155 airplanes in 2015. This returns into a book-to-bill ratio of 1.5, very important for the company as a big highlight for this business. We added new operators in 2015, and also, in the end of the year, we reached the trademark of over 1,700 aircraft delivered in the E-Jet program. Also, an important milestone of the E2 development program was the rollout of the first E190, which happened last week.
Next page, still in commercial aviation, but more focused on the fourth quarter. We had the delivery of 33 E-Jets in the quarter, including the delivery of the aircraft number 1,200 for Azul. Regarding new orders, we had the SkyWest order for 19 E175s that will fly for Delta Air Lines, and the two options confirmed by KLM Cityhopper, which will be actually confirmed in the last quarter. We're also finalizing the highlights of the commercial aviation. Another information related to the E2 development was the successfully started of the flight test of the new engines. Moving to the next page, highlights for Executive Jets in the year. In 2015, we delivered 120 Executive Jets, broken by 82 light and 38 large jets. As also we have in the commercial aviation, the book-to-bill ratio was very positive as well there. We had a 1.1 ratio in 2015, book-to-bill for Executive Jets.
Regarding our programs, the Phenom 300 was again the most delivered aircraft in the Executive Jet business in the year. This is now two years in a row of that performance. Finalizing the highlights for Executive Jets, the program of the Legacy 500 and 450. We had the certification into service of the Legacy 450 in the end of 2015, which we delivered three last year. Next page, in terms of the fourth quarter. The delivery of 45 Executive Jets, 25 light and 20 large. In terms of commercial activities, we had the order for Emirates Flight Training Academy for up to 10 Phenom 100, and also the delivery of two Lineage 1000 in the U.S. market. Also, in the fourth quarter, as we mentioned, the Legacy 450 entered into service, and we were able to deliver three aircraft in that quarter. Next page, defense for 2015.
Regarding the KC-390 program, first flight of the KC-390 happened in early last year. It was in February. Now, this plane is in certification process, over 100 hours of flight in this process. In terms of commercial activities, we reached 15 deliveries of the total of the 20 orders for the United States Air Force. Eleven of those were delivered last year. Regarding the Gripen program, we already started the works in Brazil and Sweden, we now have 46 engineers working in Sweden in the preparation of the program. Finalizing the defense highlights, the SISCOMIS project advanced and reached over 50% of execution. Next page, fourth quarter for defense. An important order of six Super Tucanos for the Lebanese Air Force. In relation to the defense programs, Atech completed its first phase of aircraft management system to be implemented in India.
The Brazilian Geostationary Satellite began the integration and testing phase. Concluding the highlights, the U.K. Armed Forces select the Phenom 100 to train their crew. Okay. Now, with that, we close the highlights, we enter in the financial results. Starting in page 11 with the backlog. As we already mentioned, we have the $22.5 billion in the end of December, a record ever of the company in a year-end position. That will be broken by 7% of that amount related to Commercial Aviation, 21% related to Defense, and 9% for Executive Jets. Next page. As far as deliveries, we have already mentioned the 101 deliveries for E-Jets in the year and 120 aircraft delivered in Executive Jets, broken by 82 light and 38 large. Next page, net revenues reached a total of $5.9 billion in 2015, within our guidance range.
The next page, exploring a little bit more details on the revenues breakdown by segment and region. In terms of segment, the reduction in Defense revenues was related to the dollar appreciation in 2015, now represented last year, actually, 13% of the revenues from 23% in 2014. We saw a participation of 56% of Commercial and 30% of Executive Jets in terms of the revenue breakdown. When you go to the right side of this page, by region, the highlight is the 65% delivered to the North American market base related to the orders and deliveries to the U.S. Next page, revenues by segment. All business reported the revenues within the guidance range, the negative highlight was the Defense revenues, as we mentioned before, due to the weaker Brazilian Real that reduced its participation here. Basically, this is the breakdown by segment. Next page. Sorry.
SG&A expenses. No, that's okay. SG&A expenses, page 16. A positive reduction reported in 2015 in both U.S. amount and percentage of net revenue, reaching 9% of revenues in 2015. That confirms our focus and commitment to really reduce the cost and take the opportunity as we can in terms of adding value and creating positive results for the result in terms of expenses and costs. Next page 17. Just the information broken by quarter, the SG&A expenses, we see how it worked. It's almost the same trend throughout the year in Brazilian Reals and U.S. dollars. Next page 18. Here is to elaborate a little bit more because of the impacts that we had here. We reported a total of $332 million with a margin of 5.6%. This number was negatively impacted by a non-recurring event of the mentioned Chapter 11 of Republic Airways.
Excluding that amount, the EBIT would have been $432 million with a margin of 7.3%. Also, as we've been indicating, we mentioned that when we reported the third quarter results, there were risks that could prevent us to reach the guidance range by year-end. Already in that moment, we indicate that we will be targeting the lower end of the range. In fact, those negative impacts actually happened, where the impairment of used aircraft coupled with the cost-based revision in Defense due to the devaluation of the Real in the end of the quarter, especially in the middle of the last quarter of last year. If we take those effects out in a pro forma basis, we would have been reporting EBIT of $494 million and an 8.3% margin in 2015. Okay. Next page.
In terms of EBITDA, the reported amount of $648 million with a 10.9% margin. Excluding the non-recurring Republic effect, that amount would have been $749 million with a 12.8% margin. In terms of net income, next page 20. We reported a $69 million net income with a 1.2% margin. Here are the two important effects that we would like to detail and adjust on the calculation. The first event was the Republic effect, as we already mentioned. The other was the devaluation of BRL that caused us to have deferred income tax, where we had that in previous quarters. In this quarter, we also had, and the combination of everything, returned into the year impact. If we return to those non-recurring effects, the net income would be $272 million with a 4.6% margin. Next page, earnings paid per ADR. Reported $0.38 per ADR with a 49% payout.
As we've been anticipating by quarter dividends, because of the adjustment in the end of the year for the Republic effect, it returned for a higher payout, which was 49%. If we adjust for the Republic non-recurring effect, the earnings per ADR would be $1.49. Next page 22. In relation to investments, we had a total of $518 million in 2015, broken by $42 million in research, $288 million development, and $188 million in CapEx. The weaker BRL was the main reason for the reduction compared to our guidance, as we already continue the programs and investment phase of the programs as we expect. Next page 23. Free cash flow. We had a positive free cash flow of $178 million in 2015, primarily due to the strong cash generated in the last quarter as a consequence of lower investment and working capital reduction.
That allowed us to have in the total year, $178 million, with $895 million generated by operating activities, $290 million negative of additions to PPE, and $428 million in tangible assets, additional negative due to the investment in the programs or development of our programs. Next page, before we talk about the guidance 2016, our capital structure. We reported a net cash of $7 million in December 2015, coming from net debt in previous quarters. In relation to our debt, it is still very comfortable and adapted to our profile, which has a maturity average of 6.2 years. Okay. With that, we finalize the results, we now get into the presentation of the 2016 outlook. Page 36, outlook for revenues. Consolidated revenues estimated in the range of $6 billion to $6.4 billion, which include Commercial Aviation, $3.45 billion to $3.65 billion in 2015. Executive Jets, $1.75 billion to $1.9 billion.
Defense, $0.7 billion to $0.75 billion, other revenues, $100 million. That sums up to the $6 billion to $6.4 billion. In terms of percentage, that represents 57% to Commercial Aviation, 30% for Executive Jets, and 12% Defense. In terms of deliveries for Commercial Aviation, we estimate deliveries in the range of 105 to 110 E-jets in 2015. In terms of Executive Jets, 115 to 135 airplanes, broken by 75 to 85 light jets, and 40 to 50 large jets. The next page, operating results and investments. Our forecast for EBIT, the range of $480 million to $545 million, with an EBIT margin between 8% to 8.5%. In terms of EBITDA, the range of $800 million to $870 million with the EBITDA margin from 13.3% to 13.7%. The free cash flow is expected to be a use of less than $100 million.
Regarding investment, a total of BRL 650, broken by BRL 50 million in research, BRL 335 million development, and BRL 275 million in CapEx. With that, we finalize the presentation. Now we're ready for the questions. We'll open now for the audience first, but the people outside, they can also put their questions. We're ready to answer. Thank you.
Thanks, Mario. Myles Walton, Deutsche Bank. Could you touch on the margins in the fourth quarter by segments, in particular within the area that seems to be the big surprise business, executive aviation, touch on what the effect is of any trade-ins and kind of what the underlying clean margin would've been in executive aviation?
In terms of margin for 2015, we had 10.4% in commercial, 3.4% executive, a negative 11.5% for defense. It's good to recall that commercial aviation already reflect the impact of the Republic provision. Without Republic provision, commercial would report 13.4% margin.
The question was on the executive aviation at 3.4%. I imagine that means in the fourth quarter, it was pretty low. Can you touch on what was driving that in the fourth quarter?
Yeah. In the fourth quarter, we had a situation where we had a number of trade-ins larger than we normally have. That impacted, because some of those trade-ins were, most of them, not our aircraft. We had that situation in that quarter. When we sold those used aircraft and also reported the impairment of them, that returned in the end of the year, a provision right there. That's mostly what impacted the last quarter of executive aviation.
Myles, to your question, yeah, we had this glut of used aircraft. Many of them were not Embraer-made. We prioritized reduction in inventory and cash generation. Operating margin, Eduardo, I think is close to zero in executive aviation, fourth quarter.
0.5%.
Yeah.
Just to clarify the margins per business for the quarter, we had 6.3% margin on commercial aviation. That includes the Republic impact. If we exclude the Republic impact, EBIT margin for commercial was 15.3%. On business jets, the margins were 0.5% in the fourth quarter. On Defense & Security, -5.5%. Consolidated margins, 3.2%, excluding Republic, 8%.
Okay. Just to wrap up that line of questioning, what's left in your glut of non-Embraer aircraft in inventory that you have to liquidate, and what's implied in your 2016 guidance for the business jet margin profile?
Yeah. I think we pretty much Really, if I may use this term, used aircraft. I would not know by heart how many airplanes we have in inventory, but it's much, much lower than what we had. Because as we concentrated the delivery in the fourth quarter, we had this concentration also of the trade-ins, and we decided to move them quickly. Looking forward, looking towards 2016, our guidance, we have historically resisted market share versus margin. We always favored margin and cash generation vis-a-vis market share. Implicitly in our forecast for next year, we probably could think about a little bit higher volume. We believe the volume that we are setting is more adequate to resist the pricing pressure, which there is out in the market. Combination of better organized ramp up, a relatively lower than what could be volume.
It's going to be higher than 2015 anyway. Maybe somebody could argue could be a higher volume. That would give us pricing power. That would give us more resilience against the pricing pressure and also trade-ins, which in the end, historically, the last several months have shown the secondary market to be a little bit depressed. I would just add that we still are positive on the U.S. market, which is the market which fundamentally is demanding executive jets right now. What we have seen in this first 60 days of the year is due to the volatility of the markets, we have seen a delay in decisions of acquisition of executive jet aircraft. Is that a trend? Maybe not necessarily, but it is better this year than with last year.
Although the voyage would not radically enhance our skyline, I can tell that it is better than what we had last year. I think the fundamentals are there for us to have a better 2016 in the business aircraft market.
Hi, Josh Humber from Goldman Sachs. Thanks for the question. I was just hoping you could give your perspective on what the future holds for Republic Airways, and perhaps what the larger implications of its Chapter 11 could be for the overall regional aircraft market in the U.S. One other concern that we had was that potentially part of its existing fleet of E-Jets could eventually re-enter the market. What is your impression?
The regional jets or the 145 jets? Paulo, you want to take this? I can do that.
Okay. Good afternoon, once everyone. We see the regional aviation market in the U.S., so it's very strong right now. Of course, after the change in scope clauses from 50 seaters to 70 seats, some consolidation that happened in the last few years. That has brought in markets that we are seeing three or four major regional lines.
Go on, Miguel.
Our allies from the majors, especially American Airlines and Delta Air Lines. We have smaller players being important player also, Trans States Airlines, based in St. Louis. The major airlines, they do depend upon the regional airlines, vice versa. I think it's definitely an important part of their business model, to buy CPAs from the regional airlines, to fly smaller jets. Regional airlines fly regional jets, smaller jets, much more efficiently than the majors would do. It's an integral important part of their business plans. Regarding Republic, my take on Republic Airways is that they are very important for American Airlines, for Delta Air Lines, and for United Airlines. Republic Airways nowadays operate about 250 aircraft. When we talk to the three major airlines, they like Republic Airways, they believe Republic Airways plays a very good service. They have, I would say, a cost structure, which is okay.
Of course, now they'll have to negotiate the CPA given the pilots issue. The pilot issue, I'd say the pilot requests for increase in salary. This is not only on the regional airlines. This is across the board in the U.S.A., given that airlines are making money, in the U.S. now. Apart from that, Republic Airways has a very good service, very good, reliable service, and Republic Airways is very important. It has a meaningful business for these airlines. I believe Republic Airways will survive. I believe I don't know exactly which format Republic Airways will take going forward, but I believe Republic Airways will be a survivor given the importance of Republic Airways in the system. I also believe that some consolidation in the regional airlines in the U.S. may be necessary going forward. We are seeing the majors very strong.
We are seeing some regionals, not very weak, but somehow a little bit in need for muscle in order to negotiate, be in a better position to negotiate with the majors.
Thanks very much. A related question just pertains to your mix on the commercial side. You did have a very good evolution in terms of your E175s, we saw a decline in your E190 and E195, could you give us some sense of, first off, what's built into your numbers, your forecast for 2016, and when we might see a recovery in demand for the E190 and E195? Thanks.
For 2016, the book of our deliveries will be in the U.S. It's regarding the E175, of course. There will be also some E190s, E195s outside the U.S., but by far, the book will be in the U.S. We are seeing good demand for the E190, E195 outside the U.S. We are involved now in transactions that involves these two right types. I mean, for both, E1s and E2. When we look our sales last year, 176 aircraft were sold last year. When we look at that, we see a very good combination of E190s, E190 family, and the E175. Also a good combination of E1s, E2. I think we continue to see a good market. Of course, a good market for our market size. We are talking about segments between 70 and 136.
Thank you. Turan Qadervala from Scotiabank. My question is on the D&S segment. I'm just wondering what the total cost-based revisions were in 2015 on that segment, what the BRL assumption is for 2016, and I guess, how do you expect the cost-based revisions to flow through in 2016?
In terms of 2015, was about BRL 130 million impact. As we said, there was not the only impact there. This is one of the major, of course. There were, of course, the revision of the programs that we had last year. For this year, this [cost route], which is the devaluation of the Brazilian real, although still we cannot anticipate, but we don't see the volatility that we had last year. Maybe this will still be something that we'll have to consider and to be aware of, but we don't expect to see that situation that we had last year. It's more now to really focus on the development of programs and cost, in terms of discipline, in terms of cost. It's more like we see this year. I think the programs are already adjusted for the pace that we agree with the customer, in that case.
Basically, that's what we'd expect to see this year, the same situation.
Is the cost-based revision zero in your guidance?
Yes. That's what we work on, a flat exchange rate. Yeah.
Thank you.
You're welcome.
Good afternoon, guys, and thank you for the time. It's Stephen Trent from Citi. Just one or two questions, if I may. The first is, I was wondering, in the commercial segment, are you seeing any shift, so to speak, when you think about your competitors with respect to the amount or maybe the undue amount of help that some of your competitors are getting from their home governments? I'm wondering if you've noticed any difference in that over the last year. That's my first question.
Some competitor. One specific, the northern hemisphere. Yeah, of course, we are watching that closely. I mean, following up. We do not have any other information other than what we read in the press.
It is, of course, a matter of concern that an artificial imbalance may be introduced in the marketplace. We, of course, are not in a position to say that the state aid is being done in an adequate or inadequate way. We have to wait and see. If it is equity, as we have seen, probably something which is within the framework of the WTO. Brazilian government is obviously following up this development. There has been great discipline since the panels in the last decade, which affected Brazil and Canada, but also was followed by U.S., Japan, also a signatory of the ASU, the Aircraft Sector Understanding. We have not seen in the last several years, probably a decade, any disrespect to sales finance. What we see now, a $2.5 billion investment, something new, we're watching.
You may recall, our last capital increase was back in the year 2000. We have not increased our capital for the last 16 years. We have fundamentally financed our development, our strong R&D, and CapEx with cash generation of the company. That's how we plan to continue to do.
Great. Thank you very much, Frederico. Just one other question for now. When I think about the defense segment and what seems to be a very successful deployment of the A-29 program by the United States and Afghanistan, to what degree do you think there's a possibility that other foreign militaries are maybe taking a look at the product?
Yeah. We are very bullish on the A-29. A-29 is a Super Tucano. Very bullish. This aircraft has been, I think, very well specified. The spec was very good, done by the Brazilian Air Force. I think Embraer also did a good job in developing and producing a superior aircraft for that mission. The U.S. Air Force is a huge endorsement to the product. The first collateral result of our 20 aircraft order for the U.S. Air Force, out of which, how many have we delivered, Jackson? 16? 15. We have, I think, eight already in Afghanistan. The Lebanon order. That came as a result of that operation in Jacksonville. The airplanes will be produced also in Jacksonville. There is a second tranche, second batch, for the U.S. Air Force, which we hope maybe will be confirmed.
We don't have that information yet, but that's our expectation. We believe that out of that facility, out of Jacksonville, we may actually have a strong export. For the wrong reasons, unfortunately, the world has more and more conflicts, which are typical of requiring aircraft of that size and that agility and that low cost also. Yes, we are bullish on Jacksonville , in his presentation, will detail how spread our customer base is becoming in the A-29.
It's been very helpful. I'll get back in the queue. Thank you very much.
Yeah.
Pete Kopitski. Pete Kopitski, Jefferies. Just curious how conservative you feel your free cash flow guidance is for 2016. If the BRL stays where it is there another opportunity to undercut on the development expenses? If you can manage working capital again, is there an opportunity to outperform on free cash?
Jackson.
Yes. I think that what we saw in 2015 was the phase of the investment was pretty much related to the labor, the engineering phase. We benefited the exchange rate half a lot without affecting the development capacity. I think that this is still an opportunity that we may have. However, now we enter in different phases of the development, more related to dollar-denominated costs of the development. I don't think this will be something that could be very clear that's going to be impact. You have to understand the difference between what we faced last year and this year with following phases of the development.
Maybe just following up on that question, probably to benefit of everyone. We have assumed a flat exchange rate of 3.9 BRL per dollar. The plan that you see in front of you has this assumption.
Is there any remaining cash payments on the KC-390 or other defense programs that you're still awaiting from the Brazilian government? Is that customer caught up with all the payments that were expected?
Not all, as we said mid last year, we would make a strong effort not to let the accounts receivable increase, and we did that. Actually, I think there was a little bit of a decrease. It was still
A large number there, not accounts receivable from. Owed by the government. This first 60 days, we did receive payments regarding the KC-390. We, of course, are aware of the increasing difficulties of the Brazilian budget. A recent announcement of a further cut in the budget, which we do not know whether or not it's going to affect our programs. We are much more prepared to face this situation now than we were, let's say, 12 months ago, when we were really hit without much advance notice. Again, what we are going to present represents a BRL 3.9. If the Real further devaluates to four and a half, of course, that's going to impact the defense business again. Probably to a much lower extent than we had last year.
If I could sneak one last in. On segment margins in 2016, commercial seems to be doing really well, even at a worse mix for the 175s. I'm just wondering what you're assuming in your even margin guidance in jets, and especially defense. Are we assuming breaks even on defense in 2016, or just wondering what the calculus is there?
I think probably we can think about the commercial jets again, pulling the average upwards, probably again, a low double-digits for commercial. Defense, from low to mid-single digits margin, and executive jets from mid-to-high single-digits margin. That's roughly what we would expect averaging out this eight and a half that we clearly presented.
Maybe if we have some questions from the broadcast. That would be a chance.
Certainly. Thank you. Ladies and gentlemen, if you wish to ask a question over the telephone, please press star followed by one. Once again, star and one.
Go ahead, Glen.
All right. Yeah, Gustavo Gregori from HSBC. I have a quick question regarding the backlog. Given everything that's going on with Republic, do you believe that there's any risk in terms, going forward, that we get in 2016 perhaps with a decrease in the backlog, or do you not see any risk? Furthermore, a second part of the question would be, is everything that's going on, does that create any risk in terms of deliveries looking forward for 2017 while you're trying to bridge the gap to where you want them to?
Paul, would you like that?
The first part of the question, Republic deliveries backlog. We have this year nine deliveries to Republic from August to December, and we have 15 additional next year. All of them in connection to a contract, a CPA agreement between Republic and United Airlines. United has a big need for this aircraft. It's been said already by United to us that they do need this aircraft. Being a Republic or being other regional airline, we believe that we'll deliver this aircraft. Still a little bit early stage to say what will be the structure, the format, because of the Chapter 11 imposed last Friday. We are working on this now, and as the next delivery is in August only, we have enough time to structure something.
I'm very, I'd say, confident that these aircraft will be delivered given the need that United has right on them.
I think it's fair also to add that Republic has already represented to us, they do want the aircraft. The question is whether or not, which format we'll be able to deliver. I think that the first question was related to that. We do not see airplanes exiting the Republic fleet. Actually, we do not see them even waiving the deliveries that they have in backlog. We really believe those airplanes will be delivered, hopefully, to Republic. If not, I think, other alternatives will show up because the airplanes, they are tagged to fly for United and American. In this case, just United, but also American in other part of the contracts.
Important. Hello? Yes. Important to mention that Republic Airways restructuring is all about the 50-seater. It's not at all about the 76-seater. There will be a single aircraft operator going forward. That's where they find that would be more efficient. Going forward now, given the pilot issue. Flying a slightly bigger aircraft.
All right. Thank you.
We're going to take a question from the phone.
Certainly. Thank you. Our first question comes from the line of Cai von Rumohr from Cowen and Company. Please go ahead.
Yes. Thank you very much. You said you expect low double-digit margins in commercial, but looking at your guidance, it looks like the margin would be down in commercial from the 13.4% in 2015. You had very good margins in the fourth quarter. You look for higher deliveries, and you say the mix is about the same. Why are the margins down? Are you assuming any residual value guarantees in there, or why do they appear to be lower?
No, not RVG. Probably, mix. We still had, in 2015, some E190, 195 contracts, which helped to boost the margin up. I think it's fundamentally mix, Paulo. Any other specifics?
No. That's it. It's basically about mix. Not only more 190s, 195s in 2015, but also very good margins, certain specific wide-body business.
Excellent. The last one, you talked a little bit more in your release about the FCPA investigation and your negotiations with the DOJ. Is it your hope and expectation to kind of resolve that matter in this next calendar year?
We don't really have any specific comments. Hope, yes. Expectation, no. We cannot have any expectation. We have to abide by the disclosure that we have made. Only thing we can do, keep collaborating in full and waiting for the results.
Terrific. Thank you very much.
Thank you. Your following question comes from the line of Darryl Genovesi from UBS. Please go ahead.
Hi, guys. Thanks for the time. Just looking at your margin profile from 2015, I think you said, excluding the used inventory charge and excluding the adjustment of the defense business, you did about a 0.3% EBIT margins in 2015. Your guidance overall would embed a relatively flat margin profile in 2016 from that level. Just wondering, if you're counting on a BRL at BRL 3.9 per USD, which is where we are today. That still embeds a 15%-20% weakening relative to the average level from 2015, and just wondering why we're not seeing any incremental margin upside as a result of that.
There's a combination of variables. Defense, for example, we are having a further reduction in activity. Of course, the more you reduce the revenues, the harder it is to absorb the fixed costs. We just explained also about a slight reduction in the commercial jets, although it's still robust 2-digit margins. We hope to have some recovery on the business jets. I think the effect of BRL is more pronounced in the cash flow, specifically on the R&D, on the, let's say, engineering part of R&D expenses. As Filippo said, that also in 2016, we will have a higher dollar-denominated expense portfolio because of the campaign, tooling, et cetera. I guess it's a combination of several different things.
Thanks for that. Fred, just as a follow-up, it may be a little bit bigger question on roughly the same topic. Historically, we've seen a very high degree of correlation between your EBIT margin you reported, and the BRL/USD exchange rate. That correlation seems to have broken down this cycle, not just in 2016, but basically since 2008, 2009. Should we still think of you longer term as a beneficiary of a weaker BRL, or does the downside of the Defense business essentially offset any gain that you get at the commercial and executive jets business?
We really tend to look at the exchange rate as a tailwind or as a headwind, not as a definition of our competitiveness. We are, for example, moving the whole assembly line of Phenoms to the U.S., to a higher labor cost environment, because we believe this makes all sense, strategic sense, supply chain logistics sense, risk, et cetera. We see our business as a global one. We see Embraer in its endeavor to become more and more a global company, it's not by arbitrating labor costs, which, as everyone knows, is not a significant part of the cost. The supply chain, the equipment is the significant portion of our COGS or any OEM COGS. That's how we see. Yeah, the weaker BRL, it's a tailwind. It's welcome. It is not what define our competitiveness.
We have to be competitive regardless of the stronger or weak BRL. We were in an upside situation three or four years ago, we were competitive, we are now. We have benefited, yes, from this devaluation.
Great. Thank you.
Thank you.
We'll come back to the audience here. Question. Yeah. Okay. I think it's time to finish this piece of the event today. We'll be ready now to go to the presentation of each business unit. I don't know if I have to turn back to the phone there. Are we done with the conference call? Hmm?
We may have time for one more question.
Yeah, maybe we take a final question and conclude the Q&A. If there is one.
Thank you. We have a question on the phone. It comes from the line of Derek Spronck from RBC Capital Markets. Please go ahead.
Thanks for taking my questions. When we consider your CapEx spend levels over the next few years, would you consider 2016 as the high point of your annual CapEx spend? The Legacy 450/500 are now launched. Should we start to think about it coming down in 2017 and beyond?
With the current programs, probably. I mean, maybe 2017 will still be significant. Probably right, under the existing programs.
Okay. Thanks. Just quickly on the KC-390, are you seeing any increase in international demand for that program?
We've seen a lot of interest. Many air forces visiting and taking questions and getting acquainted with the product. The second prototype will join the flight test campaign very soon. The airplane's flying really well. I think Jackson is going to talk about it in a minute. We are all set to go to have this airplane certified by end of next year and start delivering units in 2018. So far, so good.
Okay, thanks.
Okay, I think we have the last question here in the audience.
Leandro Fontanesi, Bradesco BBI. If you could talk about the cash flow generation for Q. You have sort of a positive number, and you said that you reduced CapEx maybe by BRL 100 million. Was there any other factor you could see? Thank you.
Basically, the fourth quarter is the most active quarter, where we have a lot of activity and commercial activity levers are concentrated, if you take the split by quarter. That is exactly what happened last year again. There's a combination of that with the lower investment, not that we didn't invest in terms of the advance of the programs. It's more like an opportunity because of the exchange rate that affected positively there. There was working capital gains as well that we realized there in terms of advance from customers because of the sales increase. We were able to reduce a bit of inventory if you compare to the end of 2014. It was a good combination that we had, but basically, it didn't change in terms of the pattern that we see, which is the more activity in the last quarter of the year.
That's basically why you see a cash generation positive in the last quarter.
Thank you.
Thank you. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.