Afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's 4th 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 Q4 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.
As a reminder, this conference is being recorded and webcasted at ri.mbrear.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. Federico Curado, President and CEO Mr.
Jose Filippo, Chief Financial Officer and IRO and Mr. Eduardo Coto, Director of Investor Relations. I would like now to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Okay. 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. So glad to start this presentation, Page 3, with the highlights, the financial highlights for the year. We had, as we anticipated in some quarters before, our record ever backlog of $32,500,000 in the end of the year, of free cash flow generation in the year of $178,000,000 net cash position as of December of $7,200,000 and revenues of $5,900,000,000 Also, we had an important nonrecurring event, which was the filing of Republic Airways Chapter 11, which led us to record a provision of $101,000,000 that impact the results. We'll do more details during the presentation, and we show the figures also with and without those that impact. In terms of result, we reported an EBIT of 332 $1,000,000 with margin of 5.6 percent.
Adjusted for the Republic impact, it would be $432,000,000 and a 7.3 percent margin. In terms of net income, reported a $69,200,000 of profit and without the Republic, dollars 372,000,000 Moving to next page and starting the highlights for each business units. And first, Commercial Aviation for the year 20 15. We had delivery of 101 E Jets and net for models 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 1700 aircraft delivered in the jet program. Also an important milestone of the E-two development program was the rollout of the first E190, which happened last week. Next page, still in Commercial Aviation, but more focused on the Q4. We had the delivery of 33 jets in the quarter, including the delivery of the aircraft number 1200 for Azul.
Regarding new orders, we had the SkyWest order for 2019, E175 that will fly for Delta. And the options, 2 options confirmed by KLM City Hooper, 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 next page, highlights for Executive Jets in the year.
In 2015, we delivered 120 Executive Jets, broken by 82 light and 38 large jets. And 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 CNM 300 was again the most delivered aircraft in executive jet business in the year. This is now 2 years in a row of that performance.
Finalizing the highlights for Executive Jets, the program of the Lagos 5 100 and 450, we had the certification entered into service of the Lagos 450 in the end of 2015, which we delivered 3 last year. Next page, in terms of the Q4, 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 10 Finno 100 and also the delivery of 2 Lineage 1000 in the U. S. Market.
Also in the Q4, as we mentioned, the legacy 450 entry into service, and we will deliver 3 aircraft in that quarter. Next page, defense for 2015. Regarding the KC-three ninety program, first flight of the KC-three ninety happened early last year. It was in February. And 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 Air Force, U. S. Air Force, 11 of those delivered last year. Regarding the Gripping program, we already started the works in Brazil and Sweden, and we now have 46 engineers working in Sweden in the preparation of the program. Finalizing the defense highlights, the SysPhrom project advanced and reached over 50% of execution.
Next page, Q4 for defense, an important order of 6 Super Tucano's for the Lebanese Air Force. And in relation to the defense programs, ATEC completed its first phase of aircraft management system to be implemented in India. And the Brazilian GEL Special Networks satellite began the integration and testing phase. Concluding the highlights, the U. K.
Armed Forces select the Finland 100 to train their crew. Okay. Now with that, we close the highlights and we enter in the financial results. Starting in Page 11 with the backlog. As we already mentioned, we have the $22,500,000,000 in the end of December, a record level of the company in a year end position.
That has been broken by 7% of that amount related to commercial aviation, 21% related to defense and 9% for effective jets. Next page. As far as deliveries, we have already mentioned the 101 deliveries for each 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 $5,900,000,000 in 20.15, within our guidance range. In the next page, it's probably 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. And now represented last year actually 13% of the revenues from 23% in 2014. We saw participation of 60 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 65% delivered to the North American market base related to the orders and deliveries to United States. Next page, revenues by segment.
All business reported the revenues within the guidance range, but 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, just to sorry, SG and A expenses. No, that's okay. SG and 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, Page 17. Just information broken by quarter, the SG and A expenses, and we see how it worked.
It's almost the same trend throughout the year in Brazilian reals and U. S. Dollars. Next page, Page 18. And here's to elaborate a little bit more because of the impacts that we have here.
We reported a total of $332,000,000 with a margin of 5.6%. This number was negatively impacted by a nonrecurring event of the mentioned Chapter 11 of Republic Airways. And excluding that amount, the EBIT would have been $432,000,000 with a margin of 7.3%. But also, as we've been indicating and we mentioned that when we reported the 3rd 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.
And in fact, those negative impact actually happened, which was where the impairment of used aircraft, coupled with the cost base revision in defense due to the devaluation of the real in the end of the quarter, especially in the middle of last quarter of last year. If we take those effects out in a pro form a basis, we would have been reporting EBIT of $494,000,000 and 8.3% margin in 2015. Next page, in terms of EBITDA, the reported amount of $648,000,000 with a 10.9% margin. Excluding the nonrecurring Republic effect, that amount would have been 7.49 dollars with a 12.8% margin. In terms of net income, next page, Page 20.
We reported a $69,000,000 net income with a 1% 1.2% margin. Here are the 2 important effects that we would like to detail and adjust on the calculation. The first event was the Republic effect, as we already mentioned. And the other was the devaluation of Rial that caused us to have income tax deferred income tax while we had that in previous quarters. But in this quarter, we also had and the combination of everything returning to the year impact.
So if we return to those nonrecurring effects, the net income would be $272,000,000 with a 4 0.6% margin. Next page, earnings 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%. But if we adjust for the republic nonrecurring effect, the earnings per ADR would be $1.49 Next page, Page 22, in relation to investments. We had a total of $518,000,000 in 20 15, broken by 42,000,000 in research, 2 188,000,000 development and 188,000,000 in CapEx. The weaker real 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 $178,000,000 in 20.15, primarily due to the strong cash generated in the last quarter as a consequence of lower investment and working capital reduction. So that allowed us to have in the year total year $178,000,000 with 895 $1,000,000 generated by operating activities, 2.90 negative of additions to PPE and 428,000,000 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 20 16. Our capital structure, we reported a net cash of $7,000,000 in December 2015 coming from net debt in previous quarters.
In relation to our debt, it's still very comfortable and adapted to our profile, which has a maturity average of 6.2 years. Okay. With that, we finalize the results, and we now get into the presentation of the 2016 outlook. Page 26, outlook for revenues. Consolidated revenues estimated in the range of $6,000,000,000 to 6.4 $1,000,000,000 which include commercial aviation, dollars 3,450,000,000 to 3,650,000,000 in 2015 effective jets, dollars 1,750,000,000 to $1,900,000,000 for defense, dollars 700,000,000 to 0.75 and other revenues, dollars 100,000,000 That sum up to the $6,000,000,000 to $6,400,000,000 In terms of percentage, that represents 57% to commercial, 30% for executive and 12% defense.
In terms of deliveries for Commercial Aviation, we estimate deliveries in the range of 105 to 110 ejets in 2015. And in terms of effective 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 $480,000,000 to $545,000,000 with an EBIT margin between 8% to 8.5%. In terms of EBITDA, the range of $800,000,000 to $870,000,000 with the EBITDA margin from 13.3% to 13.7%.
Free cash flow is expected to be a use of less than $100,000,000 And regarding investment, total of $650,000,000 broken by $50,000,000 in research, dollars 335,000,000 in development and $275,000,000 in CapEx. With that, we finalize the presentation, and 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 and be ready to answer. Thank
you.
Myles Walton, Deutsche Bank.
Could you touch on the margins in the 4th quarter by segments, in particular within the area that seems to be the biggest prize business, Executive Aviation, and touch on what the effect is of any trade ins and kind of what the underlying clean margin would have been in Executive Aviation?
Yes. In terms of margin for 2015, we had 10% 10.4% in commercial, 3.4% is active and a negative 11.5% for defense. It's good to recall that commercial aviation already reflect the impact of the Republic provision. So without Republic provision, commercial would report 13.4% margin.
So the question was on aviation at 3.4%. And I imagine that means in the Q4, it was pretty low. Can you touch on what was driving that in the Q4?
Yes. In the Q4, 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. So we had that situation in that quarter. So we miss when we sold those used aircraft and recorded also recorded the impairment of them, That returned in the end of the year a provision last year. So that's mostly what impacted the last quarters of Commercial Vehicle of Executive Aviation.
Tomas, to your question, yes, we had this glut of used aircraft. Many of them were not Embraer made. We prioritized reduction in inventory and cash generation. Margin operating margin, Eduardo, I think, is close to 0 in the Exact Aviation 4th quarter.
25%. Yes. Maybe 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, margin EBIT margin for Commercial was 15.3%.
On Business Jet, the margins were 0.5% in the 4th quarter. On Defense and Security, minus 5.5%.
Consolidated margins,
3.2 percent, excluding Republic, 8%.
Okay. Just to wrap up that line of questioning, what's left in your glut of non Embraer aircraft and inventory that you have to liquidate? And what's implied in your 2016 guidance for the business jet margin profile?
Yes. I think we pretty much got rid of, if I may use this term, used aircraft. I would not know by heart how many airplanes we had in inventory, but it's much, much lower than what we had. Because as we concentrated the delivery in the Q4, we have this concentration also of the trade ins and we decided to move them quickly. Looking forward, looking towards 2016, our guidance, I mean, we have historically resisted market share versus margin.
So we always favored margin and cash generation vis a vis market share. So, in place today 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. So combination of better organized ramp up, a relatively lower than what could be volume. It's going to be higher than 2015 annually.
But maybe somebody could argue it could be a higher volume. That would give us pricing power. That will 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 should 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 debt 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 Jazz Aircraft. Is that something is that a trend? Maybe not, not necessarily.
So I think the fundamentals are there for us
to have a better 2016 in the business aircraft market.
We see the regional
virtual market in the U. S.
So it's very strong right now. Of course, after the change in scope clauses from 50 seaters to 50 seats, Our lines from the majors, especially America and Delta. And then you have smaller players being an important player also TSA, right, the business in Sao Luis. So the major airlines, it do depend upon the regional airlines, a rice or flying. So I think it's definitely important part of their business model to buy CPAs from the regional lines to fly smaller jets.
So regional lines fly regional jets, smaller jets, much more efficiently than the majors would do. So then it's an integral important part of their business plans. Regarding Republic, my take on the Republic is that they are very important for America, for Delta and for United. Republic nowadays operate about 250 aircraft. When we talk to the 3 major airlines, so they like Republic.
So they believe Republic is a very good service. They very they have, I'd say, a cost structure, which is okay. Of course, now they will have to renegotiate the CPA given the pilot issue, right? So but the pilot issue, the pilot I'd say the pilot requests for increasing salaries. So this is not only on the regional lines.
So this is across the board in the USA, given that airlines are making money, right, in the U. S. Now. So apart from that, Republic has a very good service, very good reliable by service. And Republic is very important.
So it has a meaningful business for these airlines. So I believe Republic will survive. I believe I don't know exactly which format where Proveco will take it going forward, but I believe Republic will be a survivor given the importance of Republic in the system. I also believe that some consolidation in the regional airlines in the U. S.
May be necessary. So going forward, so we are seeing the majors very strong, right, very strong. And we are seeing some regionals, not very weak, but somehow a little bit in need for Moscow in order to negotiate be in a better position to negotiate with the majors.
Thanks very much. A related question just relates pertains to your mix on the commercial side. You did have a very good evolution in terms of your E175s, but we saw a decline in your E190s and E195s. And I was just could you give some 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 E190s and E195?
Thanks.
For 2016, so the book of our deliveries will be in the United States. It's regarding the $195,000,000 of course. There will be also some 190s, 195s outside the U. S, but by far, the people will be in the U. S.
We are seeing good demand for the 190, 195 outside the U. S. We are involved in our transactions that involves these 2 right types. And we are I mean, for both, right, E1s and E2s. So when we look our sales last year, 176 aircraft were sold last year, right?
So when we look at that, so we see a very good combination of 190s, 190 family and 175. Also a good combination of E1s, E2s. So I think we are we continue to see a good market, of course, a good market for our market size, right? So we are talking about segments between 70 and 130 SEK 100
and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100 and SEK 100.
Thank you. Turam Kaithawala from Scotiabank. My question is on the D and S segment. I'm just wondering what the total cost base revisions were in 2015 on that segment? What the PRL assumption is for 2016?
And I guess, how do you expect the cost base divisions to flow through in 2016?
In terms of 2015, it was about $130,000,000 impact. As we said, it was not the only impact there. This is one of the major, of course, the world, of course, the revision of the programs that we had last year. For this year, this caused Brute, which is the devaluation of the Brazilian real, although it's still we cannot anticipate, but we don't see the volatility that we had last year. So maybe this will still be something that we'll have to consider and to be aware of.
But we don't expect to see in 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. So basically, that's what we would expect to see this year, the same situation.
Is the cost base division 0 in your guidance in line with your guidance?
Yes. Yes. That's what we work on a flat exchange rate, yes.
Good afternoon, guys, and thank you for the time. It's Deepth Trent from Citi. Just 1 or 2 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. And I'm wondering if you've noticed any difference in that over the last year. And that's my first question.
Some competitor. One specific, the Northern Hemisphere. Yes, 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. And 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 signatory of the AESU, the aircraft sector understanding.
So we have not seen in the last several years, probably a decade, any disrespect to sales finance. What we see now, a $2,500,000,000 investment, something new, we are watching. So and you may recall, our last capital increase was back in the year 2000. So we have not increased our capital for the last 16 years. We have fundamentally financed our developments, our strong R and D and CapEx with cash generation of the company.
And we that's how we plan to continue to do.
Great. Thank you very much, Freddie. And just one other question for now. When I think about the Defense segment and what seems to be very successful deployment of the A29 program by the United States and Afghanistan, To what degree do you think there's possibility that other foreign militaries are maybe taking a look at the product?
Yes. I absolutely we are very bullish on the A29. A29 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. So 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. And we have, I think, 8 already in Afghanistan.
The Libya, Lebanon order, so that came as a result of that operation in Jacksonville. The airplanes will be produced also in Jacksonville. So there is a second trench, 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. And we believe that out of that facility, out of Jacksonville, we may actually have a strong export because 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. So yes, we are bullish on the Jackson, his presentation will detail how spread our customer business is becoming in the A29.
It's very helpful. I'll get back in the queue. Thank you very much.
It's Chris, Keyursey, Drexel Hamilton. Just curious how conservative you feel your free cash flow guidance is for 2016. If the real stays where it is, is there another opportunity to undercut on the development expenses? And if you can manage working capital again, is there an opportunity to outperform on free cash? 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. So we benefit the exchange rate has a lot without affecting the development capacity. I think that still 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. So I don't think this will be something that could be very clear that's going to be impacted.
But that you have to understand the difference between what we faced last year and this year or the 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 BRL3.9 per dollar. So the plan that you see in front of you has this assumption.
Is there
any remaining cash payments on the KC-three ninety or other defense programs that you're still awaiting from the Brazilian government? Or is that customer caught up with all the payments that are expected?
Not all. But we have, as we said mid last year, we would make a strong effort not to let the accounts receivable increase, and we did that. Actually, there was a little bit of a decrease, But still a large number there, non accounts receivable from owned by the government. So this 1st 60 days, we did receive payments regarding the KC-three ninety. We, of course, are aware of the increasing difficulties of the Brazilian budgets, recent announcement of a further cut in the budget, which we do not know whether or not it's going to affect our programs.
So but I mean, we are much more prepared to face the situation now than we were, let's say, 12 months ago when we were really hit without much advanced notice. So again, what we have presented represents a BRL 3.9 if the real further devalues to BRL 4.5, of course, that's going to impact the defense business again, but probably to a much lower extent than we anticipated 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 kind of what you're assuming in your EBIT margin guidance in business, especially defense? Are we assuming great spin on defense in 2016? Or just wanted to know what the calculus is there?
Yes. I think probably we can think about the commercial jets again pulling the average upwards, probably again low single low double digit for commercial. Defense from lowtomid1digitmargin and exactly just from mid to high single digits margin. That's roughly what we would expect averaging out this 8.5% that we presented.
Go ahead, Len.
All right. Yes, this
is Doug Rivory from 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 can end 2016 perhaps with
decrease in the backlog or do
not see any
risk? And furthermore, 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? Do you want to talk about
that? The first part of the question, so Republic deliveries backlog, so we have this year 9 deliveries to Republic from August to December, and we have 15 additional next year, all of them in connection to our contract CPA agreement between Republic and the United Airlines. So United has
a
big need for this aircraft. So it's being said already by United to us that they do need this aircraft. So being a republic or being other regional line, so we believe that we will deliver this aircraft. So still a little bit early stage to say what will be the structure, right, the format because the Chapter 11 was last Friday, right? But we are working on this now.
And as the next delivery is in August only, so we have enough time to structure something. But 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. But I think the first question was related to that. We do not see airplanes exiting the Republic fleet. We actually do not see them even waiving the deliveries that they have in backlog.
So we really believe those airplanes will be delivered, hopefully, to Republic. But if not, I think other alternatives will show up because the airplanes are meant they are bagged to fly for United and America. In this case, just United, but also American in other part of the contract.
Yes. Important to mention that Republic structuring is all about the 50 seater. So it's not at all about the 76 seater. So there will be a single aircraft operator by going forward. That's where they find that will be more efficient But going forward now, given the pilot issues of flying a slightly bigger aircraft.
All right. Thank you. Now we're going to take a question
from the phone.
Certainly. Thank you. Our first question comes from the line of Ki Rumohmer from Cowen and Co. Please go ahead.
Yes. Thank you very much. So you said you expect double digit, 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 percent in 2015. You had very good margins in the 4th 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 a mix we still had in 2015 some E190, E195 contracts, which helped to boost the margin up. So I think it's fundamentally mix, Carlo. Any other specifics?
So it's basically about mix. So not only more 190s, 195s in 2015, but also very good margins, right, certain specific deliveries.
Excellent. And then 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?
Yes. We don't really have any specific comments. Hope, yes, expectation, no. I mean, we cannot have any expectation. We have to abide by the disclosure that we have made.
So only thing we can keep collaborating in full and waiting for the results.
Terrific. Thank you very much.
Thank you. And your following question comes from the line of Daryl Genovese 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 8.3% EBIT margins in 2015. And your guidance overall would embed a relatively flat margin profile in 2016 from that level. And just wondering, I mean, if you're counting on a real R3.9 dollars per dollar, which is where we are today, that still embeds a 15% to 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?
Well, there's a combination of variables. Defense, for example, we are having a further reduction in activity. And of course, the more you reduce income in 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. So the combination of and we hope to have some recovery on the business jets.
So think the effect of real is more pronounced in the cash flow specifically on the R and D on the, let's say, engineering part of R and D expenses. But as Filippo said, that also in 2016, we will have a higher dollar denominated expense portfolio because of the that's why the podcast campaign, tooling, etcetera. So I guess it's a combination of several different things.
Thanks for that. Fred, just as a follow-up, I mean, 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 that you reported and the real dollar exchange rate. But that correlation seems to have broken down the cycle not just in 2016, but basically since kind of 2,008, 2,009. Should we still think of you longer term as a beneficiary real or does the downside as a defense business essentially offset any gain that you get at the commercial and executive jets business?
We really tend to look at exchange rates 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 United States to a higher cost, labor cost environment because we believe this makes all sense, strategic sense, supply chain, logistics sense, risk, etcetera. So we see our business as a global one. We see Embraer and its endeavor to become more and more a global company. And it's not by arbitrating labor costs, which as everyone knows, is a significant is not a significant part of the cost.
The supply chain equipment is a significant portion of our COGS or any OEM COGS.
So that's how we see it.
So yes, the real, the weekend real, 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 real. We were in an upside situation 3 or 4 years ago.
And we were competitive and we are now so but we have benefited, yes, from this devaluation.
Great. Thank you.
Thank you.
Let's go back to the audience here. Okay. So with that, I think it's time to finish this piece of the event today. So we'll be ready now to go to the presentation of each business unit. I don't know if I have turn back to the phone there, Nadia.
Are we done with the
We do have time for one more question.
Then we will take
the final question and conclude the Q and A.
If there is
Thank you. We have a question on the phone and it comes from the line of Derek Spronck from RBC Capital Markets. Please go ahead.
Thanks. Thanks for taking my question. When we consider your CapEx spend levels over the next few years, would you consider 26 as the high point of your annual CapEx spend? The legacy 450, 500 are now launched and should we start to think about it coming down in 2017 and beyond?
With the current programs, probably, maybe 'sixteen I mean, maybe 'seventeen, it still be significant. But probably right under the existing programs.
Okay. And just quickly on the KC-three ninety, are you seeing any increase in international demand for that program?
We've seen a lot of interest. Many airlines sorry, airlines, 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 is flying really well. I think Jackson is going to talk about it in
a minute.
So 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, Leonis. Leonis Fontaneres, Dales PEDR. If you could talk about cash flow generation in 4Q, so you have sort of a positive number. And you said that you reduced CapEx maybe by $100,000,000 Was there any other effect that you could
speak? Thank you.
Okay. Basically, the 4th quarter is the most active quarter where we have a lot of activity and commercial activity deliveries are concentrated if you take the split by quarter. So that is exactly what happened last year again. But that combined was 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. And we were able to reduce a piece of inventory if you compare to the end of 'fourteen. So it's a good combination that we have.
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 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.