Morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter 2015 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 and instructions to participate will be given at that time. As a reminder, this call is recorded and webcasted at rimbrayer.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 believes, 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 Corrado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO Mr.
Eduardo Cottu, Director of Investor Relations. I would now like to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Okay. Thank you. Good morning and thanks everybody for joining our Q2 2015 earnings call conference. As usual, we'll go through the presentation and then we'll be ready for the questions after that. So going to the presentation then, we'll start on page 3, the financial highlights for the Q2.
We reached our record backlog of $22,900,000,000 in the end of the second quarter. We had the positive free cash flow of $73,000,000 in the second quarter. Also reported operating income of $102,000,000 net income of $129,000,000 and earnings per share of €7096 in the 2nd quarter, almost €0.71 dollars Also an important event in the quarter was the issuance of $1,000,000,000 notes during 2025 with a coupon of 5.05 percent per year, which was important in terms of meeting our requirements in terms of capital structure and demands in terms of investment going forward. We finalized the financial results sorry, the financial highlights with important information about that we just released 2015 guidance adjustment, especially related to the defense business revenue revision, but reiterating our EBIT and EBITDA range estimate. We're going to be elaborating more about that during the presentation.
Next page, Page 4, in relation to the commercial aviation highlights. We delivered 27 ejets in the 2nd quarter, accumulated of 47 this year, with 102 full orders announced in the quarter, combined with 124 year to date. In relation to commercial activities, we recently announced several orders including the Azul film order for 30 jets, Tianjin Airlines order for 22 split between the current generation and the E-two model. Also 8, E175 for SkyWest, we operate the Alaska Airlines. AirCastle film order for 35 e Jets new generation Colorful Gizoom airline, the motor for 7E190 and the 10E175 for United Airlines.
Finalizing commercial aviation highlights. Regarding the E-two program development, we had an important milestone in this quarter, which is the start of the assembly of the first prototype of the E190 E2. Moving to next page regarding effective business highlights. The delivery of 33 executive jets in the quarter split by 36 lights and 7 large, accumulated of 45 in the year. An important achievement of our industrial activity in our Florida facility was the delivery of the FEMA No.
100 assembly at the Melbourne facility. In terms of new orders, we announced the full order of 4 Pheno 100 to H. A. Half Life College in this quarter. And finalizing its active jets in relation to the development of the Lagos 50450 program, We had another important achievement for the Lagos 500, which was the 4 new world speed record.
And regarding the 450 program, we also remain on track and enter into service schedule for the last quarter of this year. Now moving to next page, page 6, in terms of defense and security highlights. Starting with commercial announcements in the Q2, which was the sale of 5 Super Tucanos to the Ghana Air Force and 6 Super Tucanos to the Republic of Miley. Regarding the LAS program, we continue to advance with the delivery of 3 aircraft in this quarter, which now returns into 8 aircraft to date. Also in terms of the modernization program for the Brazilian Navy, we delivered the first AF-1B jet fighter to that customer.
Finalizing the defense highlights in relation to the KC-29 program. We'll start the flight test campaign now in the Q3 of this year. And for a program update, we expected now certification for the second half of twenty seventeen and the entry into service in the first half of twenty eighteen. So that we conclude the highlights and get into the financial results. Next page actually page 8.
Before we get into the numbers for the quarter, we would like to inform about our guidance revision. We are maintaining our EBIT and EBITDA estimates, but in order to reflect primarily the devaluation of the Brazilian real, we are reducing our defense and security business revenues range for 2015. In a consolidated basis, this reduction will also impact, of course, the total revenues of the company. But this combined with the EBIT and EBITDA maintenance range we will turn into a higher EBIT and EBITA margin. With that, the new outlook would be as we have in page 8 for net revenues consolidated.
The new outlook would be from 5.8 to 6.3 from 6.1 to 6.6. In terms of defense revenues, the outlook for 2015 from 0.8 €1,000,000,000 to €0.95,000,000,000 revenue from €1,100,000,000 to €1,250,000,000 in terms of EBIT, remained in the range of 4.90 to 6.50 to $560,000,000 But now the range increased to 8.4% to 8.9% sorry, to 8.5% to 9% from 8% to 8.5%. And in terms of EBITDA, remain in the range from 7.30% to 8.60% with a new EBIT margin from $12,600,000 to $13,600,000 The other estimates for investment in free cash flow remains unchanged. Going next page, Page 9, in terms of financial results, now showing our firm order backlog. We're reaching the end of the second quarter as we mentioned before 22.9%.
This is our all time high information. Next page, page 10 in terms of aircraft deliveries. In the left side, we delivered 27 aircraft in commercial aviation in the 2nd quarter and we have a total of 47 accumulated to date in the year. In terms of executive jets, we delivered 33 in the 2nd quarter, broken by 36 light jets and 9 large jets and accumulated of 45 aircraft in the year. In terms of our outlook, we take the opportunity to confirm our expectation for 2015, which is a range of 35 to 100 ejets, 35 to 400 as active large jets and 80 to 90 as active light jets.
Next page, page 11 in terms of revenues consolidated and by business unit. We had the in the 2nd quarter, the consolidated of $1,500,000,000 in terms of revenue, which accounts now for $2,570,000,000 accumulated in the year. In terms of commercial aviation, euros883,000,000 in the 2nd quarter accumulated of €1,54,000,000 dollars Executive jets, dollars 404,000,000 in the 2nd quarter, accumulated of dollars 0.57 billion and in defense, 216,000,000 accumulated of €0.43,000,000,000 in the year. In this page, we already show the adjusted defense revenues and consolidated revenues estimate as indicated. Defense now from €800,000,000 to €0.85,000,000 and consolidated now from €5,800,000,000 to €6,300,000,000 Continue the presentation next page, page 12.
The consolidated net revenues in Brazilian reals and U. S. Dollars. We said that the 2.6000000000 accumulated in dollar terms turns into a BRL7.7 billion in terms of revenues. For 2015, the outlook indicates the range of $5,800,000 to $6,300,000 already reflection on the new guidance as we said before.
Going forward, page 13, in relation to SG and A expenses, we had 147,000,000 dollars SG and A expenses in the 2nd quarter split by $47,000,000 of general and administrative expenses and $100,000,000 for selling expenses. It represents a decline when compared with the same quarter of last year, reflecting our cost control focus coupled with a more favorable exchange rates. In terms of percentage of revenues,
we are in line with
the previous year, 9 point 7% in 2015 Q2 compared to 9.5% in the Q2 for 2014. So going next page, page 14. As far as EBIT, we had a total of $102,000,000 in the 2nd quarter with a margin of 6.8%. And in terms of year to date figures, the total EBIT reached $182,000,000 with a 7.1% margin. For 2015, we are maintaining our guidance range for $490,000,000 to $560,000,000 but increasing our margins range to 8.5% to 9% as we said before.
Next page in terms of EBITDA. We reported a total of $178,000,000 in the 2nd quarter with an 11.7% margin. Turning to accumulated in terms of EBITDA for 2015 of $327,000,000 with a margin of 12.7%. In relation to the outlook, as we said, we are maintaining our expectation for the range from $730,000,000 to $160,000,000 but increasing the margin to 12.6% to 13.6% for the whole year. In expectation, in terms of net income, we reported net profit of $129,000,000 in the 2nd quarter with a margin of 8.5 percent to net margin and accumulated of $68,000,000 in 2015.
In terms of Brazilian reals, the net profit of BRL 400,000,000 in the second quarter was accumulated of BRL 203,000,000 euros in the year. Going next page as far as free cash flow generation. We had a positive free cash flow of BRL 73,000,000 in the 2nd quarter with BRL 245,000,000 positive from operating activities. This was primarily due to the positive EBITDA coupled with the better figures for working capital requirements, especially lower inventories and increased events from customers. As far as we mentioned before, we are maintaining our outlook for the year, which represents less than consumption of $100,000,000 in terms of free cash flow.
Next page in relation to inventories sorry, to investments, page 18. We had a total investment in the first 6 months of $196,000,000 broken by $94,000,000 investment in CapEx, dollars 84,000,000 in development and $18,000,000 in research. We expect to see the higher numbers in the second half for development and CapEx primarily due to the development schedule of the E2 program. At this point, we are keeping our estimate of $650,000,000 for 2015. Next page, Page 19, finalizing the presentation before we go into the Q and A session.
Our capital structure showed an improvement in our debt net debt position, but also a debt profile improvement reaching the average terms of 6.5 years coming from 5.3% in the first quarter, mostly, of course, reflected by a consequence of the issuing of the 10 year bond that we did recently last month, which brought us to a better profile in terms of being able to meet our investment requirements and also in terms of cost. This was important. In relation to net debt, we improved our first quarter figures basically because of the positive cash generation that we have in the Q2. We're now having a figure of $511,000,000 in terms of net debt coming from $581,000,000 in the end of the Q1. With that, we close this part of the presentation.
And now we're ready to open for questions. Thank you.
Thank And our first question comes from Noah Popnick from Goldman Sachs. Your line is now open. Please go ahead.
Hi. Good morning, everyone.
Good morning. Did you give us
a new USD to BRL exchange rate in the revised EBIT margin range?
Yes. Go ahead. Yes. Heino, it's Eduardo. We are assuming now a beer of 3.20 for the second half, which would imply an average BRL for
the year of around 3.10
from 280 before, right? So just to remind.
Okay, great. With the used aircraft value impairments, can you give us a little bit more detail on where those occurred?
Yes. Okay. So this as we have we follow the procedure that we've been doing in terms of the calculation. We have the process of the appraisers that do an average and we do a qualitative every quarter. In terms of the financials, you saw that reflected in other operating expenses that typically, as you know, we work on the mid teens there and we have a little bit more like $27,000,000 in this quarter that primarily reflect that impact and that revision was the calculation the way we record.
Yes. I guess I meant which aircraft type and sort of what are the implications of the related end market that that's still occurring in those aircraft type?
It's more the 145 fleets.
Okay. So it was not anything in the business jet market?
No, no, no. That's commercial jets and North Pacific in 145.
How we should think about the progression of Defense and Security segment growth beyond 2015 if we were to assume the exchange rate didn't change, obviously that's impacting revenues a lot. If we were to assume that doesn't change, how should we think about the ability for this segment to grow or not next year?
No. I at this point, I don't see a 20 16 much better than 2015. So 2015 is a year of adjustment. So of course, we were caught as everybody else in this adjustment effort. At this stage, of course, without knowing what is the planned budget for next year, we'd be just guessing.
Flattish probably would be a nice guess at this stage. But again, as we go towards the end of the year, we'll be able to get have a more educated guess as we see the budget proposal sent to the Central Congress by the end of the year. Having said that, we are also working on the export side. So we have several campaigns going on for the Super Tucano. We have not despite this little reprogramming on the KC-three ninety, which by the way it's also it has also, let's say, a little bit of a positive for us in the sense of giving us a little bit of slack, which was a very aggressive schedule.
But the campaigns are still going on. So the interest in the aircraft is there. So we're also working on the export side. So it's not only the Brazil's defense budget.
Got it. Okay. Thanks very much.
Thank you. Thank you. And your next question comes from Ron Epstein from Bank of America. Your line is now open. Please go ahead.
Hey, good morning guys.
Good morning.
On the defense side, in the quarter, it looks like margins were down a lot. If you could just kind of walk through why that happened? And then it looks like the receivables in the Brazilian government were up almost BRL200 1,000,000. And how we should think about how you are thinking about those receivables being recovered as we go into next year?
Yes. Okay. So I'm going to answer the receivables. Daniel talked about the buy margins. Receivables, they did go up.
More precisely, Ron, I think it was something in the range of $90,000,000 to $100,000,000 I mean, we have been reducing our costs and reducing the allocation of our resources to programs. But of course, the speed is different. The speed of the payments, the reduction in payments and the speed that we do expense. But we are absolutely adjusting as we said last quarter, our allocation of resources not to finance the program any further. Having said that, this outstanding balance that we have in accounts receivable, this has been this is part of this reprogramming of the we are negotiating our amendment as we speak to number 1, reprogram and smooth out a little bit the development and fundamentally postponing a year in the beginning of the serialization of the program.
But also this amendment shall reflect the costs associated to this reduction and this resumption in the absorption of this accounts receivable. So now in 2015, we do not expect any reduction. We expect to keep it at that level. We do expect to start recovering that from 2016
And Ron, in terms of the margins, as we indicated there, mostly comes from the cost base revision that we have to do. Defense programs typically, they are like the percent of completion type of contract and you have to do revisions as we have in terms of margin impact. Because of the exchange variation, this has to be done. It was about like $25,000,000 this year, the FX impact on those programs $20,000,000 was before actually. So this is primarily the reason for the margins, which we understand it's more in the Q2.
If we exclude that impact, it will be a positive margin. So that's basically the explanation for the impact margin that you saw there in the defense business.
Okay. Great. And then maybe one last question if I may. How is the business the Business Jet business going for you guys particularly in North America? We've heard some different commentary in the last week from different companies as they reported that biz sets are good, biz sets are bad, it's kind of all over the place.
So I was just kind of curious
how you guys see the end market now and then in particular how it's going for Embraer in the U. S?
I'll stay in the middle ground. It's not good, not bad. It's okay. It's similar to what it has been in the last several months. U.
S. Remains strong. So we see activity in the U. S. We have been able to sell small sized cabins, particularly the 300 and the 500.
We have been a lot of agents in the 500. So at this stage, feeling now at the end of the Q2, we are a little bit better than what we were last year comparing. That does not mean that second half is going to be an easy semester, but we are a little bit better than we were a year ago. So around the world, not much activity. South America very weak.
China also has not recovered. The U. S. Is where the activity is and the rest of
the world is not great. So this is pretty much
the picture that we have seen in the last several months.
Okay, great. Thank you so much.
Thank you. And your next question comes from Aleksandra Falcao from HSBC. Your line is now open. Please go ahead.
Good morning. Just wanted to understand what's the coming quarters regarding defense? You guys did a lot of adjustments. Are we going to see more of those going forward already sort of kitchen sink everything that we should see in the sense? The first question.
And the second question is, if you look at the new FX or the new FX assumptions, you actually didn't change the actual guidance. It's more of FX thing. Is that a correct reading from the changing guidance? Thank you.
On the defense, I mean, we believe that once now the reduction and the cuts in the budget have been defined. I mean, at least sincerely, we would not expect any further reduction. So I think there is a commitment from the government side to whatever level they have defined. So the only impact so as far as activity, I think we are from now on we'll be adjusted to this new ability of the customer to pay for that. The only thing which can impact margins further is a continued devaluation of the real.
Real keeps going down and significantly that's going to affect revenues. Again, we're factoring our program accounting. So that's going to turn into potential headwinds in defense. But that same effect is going to cause a positive effect on commercial jets and business jets where the real costs will be lower. So as far as the company, I mean, we are pretty much I think hedged naturally.
And as Eduardo said, we are forecasting a 3 20 FX for the next semester for the second half. It may be higher because it's now the 3.30%, 3.32%. But again that is we believe with this reduction in the guidance of defense by $300,000,000 We have some margins to accommodate even if it goes a little bit beyond 3.20, we'll be okay. The second part of your question was?
Was that the compensation I think
I already mentioned because I
was actually like it because the same effect that is negative. We were talking about the FX impact this impact of the defense business. It has a positive impact in the other businesses. That's why we kept the EBIT and EBITDA range and that with the lower revenues it increased the projection for the margins. That's basically how we assess this.
Okay. So just so the devaluation effect is not neutral for you in terms of margins. That's the understanding here.
No. It's positive in the it's positive and overall it's positive for the company. And that's why we were able to that's why we were able even with a lower revenue in the company now, we can actually increase the margins and this comes exactly from the devaluation, which affects positively our costs in reals that we have
in the company. And so let me make sure you understand. I don't know if the question was there because defense when you do a revision on the cost on the percentage of completion contract, you recognize that in one moment. But the benefit that we mentioned in the other business, they come with the manufacturing and going through the inventories and delivering the aircraft. So there's a timing maybe difference on the positive and the negative impact sometimes.
And just
to complement, keep in mind that the sense about 20% of our overall business and 80% is the other 2 businesses.
Yes. And if I may just clarify one thing. Was KC the only program revised here or Cisron and the others were also impacted?
That's a good question, Ashok. We had on the SysPhron satellites, I will say the changes were negligible, so pretty much preserved. The satellite the launching service is already hired for the second half of next year with IAN. So at this stage, a delay in the program will certainly delay the launch of the satellite. And Cisron is moving on as well.
The modernization programs in several areas, there will be a reduction in scope and also some reprogramming, but those are minor programs. So the impact is not very material for us.
Thank you so much.
Thank you. And your next question comes from Myles Walton from Deutsche Bank. Your line is now open. Please go ahead.
Thanks. Good morning. Fred, you made the comment that things in the Executive Aviation were a bit better than where you were a year ago. I just wanted to clarify that was deliveries to date. What about kind of your order uptake and intake?
And maybe some color on book to bill in the quarter?
Yes. I meant more looking forward, not backwards. So I'm not sure we do we talk about we don't, right? But I mean just to give a qualitative answer Miles, we I mean we're not I mean, we still have to sell a few airplanes to meet our guidance for 2015. So it's not that the skyline is already full.
But in that aspect is what I mentioned or I meant that we feel a little bit better now than we felt about a year ago. So that in other words, I'm worried I'm saying that we feel comfortable about at this stage about fulfilling our delivery guidance for both small cab and large cab. There's a lot of activity the 500 and that's helping us towards that end.
Okay. And then Fred, I know you don't want to comment specifically on a specific customer in the regional jet category, but Republic is 20% of your annual each of deliveries over the next few years and they've gone few couple of things right now. As you read it, how do you evaluate that situation? Do you see any risk behind it? Is it kind of not going to encumber their ability or desire to take the $175,000,000 over the next few years?
At this stage, we are I mean, we're not seeing any change to our plan. The airplanes are contracted, financing is in place. And so at least me have not heard anything from the airline. In the end, we are at least, if I speak for myself, I expect that common sense will prevail. And ultimately, we have to think that those airplanes are not speculative.
Those airplanes they have a clear address. They'll be flown by Republic's partners. And so they are in the fleet plans not only of Republic, fleet plans of United and American and Alaska not Alaska, not American. And so they I mean, I think eventually the solution will come out. So at this stage, we're not this year, I think we have something between 10 15 deliveries still to go this year.
Most of those airplanes are way down into production. So I do not anticipate any impact this year. Next year, you're probably right, maybe 20 plus airplanes should be delivered. So unless there is a major problem with it, which again I think common sense will prevail, we may have an impact. We don't know now.
But what gives me really good comfort is that those airplanes they are committed for the major airlines to replace over 56 jets. And so I think that's the underlying warranty that we have that this thing will happen.
Okay. Thanks, Fred.
Thank you.
Thank you. And your next question comes from Cai von Rumohr from Cowen and Company. Your line is now open. Please go ahead.
Yes. Thank you very much. So could you give us tell us where your operating margin for Commercial Aviation and Executive Jets was in the second quarter and approximately where you expect it to be for the year?
Hello, Kai. Yes, sure. Commercial Jets, we achieved 12.8 percent of operating margin. Business Jets was 6.5%. And of course, the defense which it is what brought us down because we registered a minus 20.3% in the defense business.
So for the year, what we see is probably the commercial jets helping us on the upper side to keep this 1.5%
to 9%
range. Business just improving because there's much more volume in the 2nd semester than the first. In defense, we hope to be significantly better because the major impacts of both reduction in revenues and the FX sharp move, they already captured in the first half. So that's more or less the logic going forward.
So shouldn't you see a good uptick with the greater volume in bizjets and the fact that you have a more favorable real and the fact that you have kind of an inventory flow through delay, Shouldn't we see a nice lift particularly in both of those commercial businesses sequentially as we go?
On commercial jets, maybe not so much because we had a relatively good mix in the first half. We had some good deliveries as far as margins in the first half. So on the business jets, yes. We see a nice is a very subjective way to say, but some upside, yes. We have indicated towards the end of the year that when we did the guidance 6 months ago, we said, well, everybody should be around that same average of 8%, 3.5 plus or minus 1%, 1.5%.
What we see now is that commercial jets and will be on the upper side probably beyond the company average. Commercial jets will be coming pretty close to the company guidance and defense will be a detrimental factor to that consolidated figure.
Got it. And then so if I look at your defense revenue revision, it's about 30% and it looks like FX is maybe half of that, so that there was some slip even on a constant currency basis. Can you tell us in terms of your program adjustments, how much of that was execution related versus currency related?
I think you got it right. I don't have the precise numbers here, but it's probably something like fifty-fifty. So, 50,000,000 problem is currency, 50,000,000 problem is activity.
Got it. And while next year, I mean, is a long way away, certainly, the margin profile of the FX tailwind really helps you in the second half with both of your commercial businesses. And assuming the real is stable, we should get some nice carryover next year. And because you mark to market immediately on the government side, I mean, barring further execution issues shouldn't the defense number should which looks like it's going to be modest as best this year should be a better number next year. So all of this bodes fairly well for next year.
Is that a reasonable thought? Yes.
I think it is a reasonable thought. Of course, with the benefit of 6 more months, we will be able to confirm or not or partially confirm that line of thoughts. But the solidness, we are the skyline on the commercial jet is very, very strong for next year as far as when I say very strong, very strong towards maintaining the current levels that we have today. So we have been saying consistently that we see a stable outflow in the next several years until the E2 comes into the market. So we are strongly well positioned towards that end.
Business Jet is a continuous challenge. But again, we have a new product which has received a tremendous acceptance in the market that's the Lagos 500. And the fans, yes, of course, we're going to adjust our cost base. We do not expect the real to keep this year as they've already 50%. So this can't keep going like this forever.
So that may result in a better picture. But of course, as you said, Kai, we have to wait some more time to be able to put some to nail that to numbers.
Thank you very much.
Thank you. And your next question comes from Taran Kwaitawala from Scotiabank. Your line is now open. Please go ahead.
Yes. Good morning. I'm sorry if I missed that. But could you provide a clean defense margin?
Was it did you say
it was a $25,000,000 kind of revision in this quarter?
That's right. Yes, correct.
Okay. And this is in addition to the $30,000,000 that you had last quarter. Is that right?
Yes, correct.
Okay. And I'm sorry if I'm repeating stuff here, but did you and I guess it should have now pretty much flushed through assuming the real stays constant. Is that the right way to think about this?
Yes. This shouldn't have any impact. The real remains in the level that we use for the revaluation of the contract as we did. It shouldn't be impact. Of course, this is something that we have still to for example, use as we mentioned the 3.2, which is very close to the market today.
So at this level, a little bit higher today, but in this level, we should expect no further impact coming from this type of revision in terms of the contract. Great.
And I guess Fred maybe one more question in terms of the defense business. Do you think there's a risk that the government sort of starts to use your balance sheet to develop the KC-three ninety?
Well, not beyond what has already been used. We are carrying some $350,000,000 $370,000,000 in accounts receivable. And I mean this is it. So we are part of our amendment discussions in the several different programs, but in particular in the KC-three ninety, which is by far the largest program that we have, is the reprogramming of both development and the serialization and the recovery of those accounts receivables and of course the cost of the impact of those reprogrammings. So I don't expect I do not expect 2016 to be much better than 2015.
What we do not expect is new surprises like what we had this year.
Okay, great. And I mean the commercial margin is really strong here obviously. Is there really I mean is there really room to raise that next year? It seems unlikely though, right, considering it's so high already?
It's much more market driven than industrially driven. So at this stage, we feel good about saying that we will not reduce the level of activity and the quality of our revenues and results. Probably too premature to talk about upside. But if
the demand is there, there
are several campaigns going on. So if the demand is there, we have the industrial capability to react. At this stage, I think it's premature to assume that.
That's very helpful. Thank you.
Thank you. And your next question comes from Felipe Yazzek from Verdi Asset. Your line is now open. Please go ahead. Please check your mute button.
Probably left.
Thank you. And we'll move to the next question. Our next question comes from George Ferguson from Bloomberg Intelligence. Your line is now open. Please go ahead.
Thank you and good morning. Question for you on the exposure to some of the oil related economies with business jets. Can you help me understand the demand in those regions? Is it do you have less exposure given the typical size of your business jet that you're sort of more concentrated in the smaller and medium size? Or
was there
a fair amount of demand in sort of Russia and Middle East for those kind of airplanes? And so will continued weakness in oil prices have an effect on selling those airplanes?
No. Those are markets which are important. We have important footprints in both Middle East and Russia. But we have not counted we have not expected strong demand from those regions in 2015 anyway. So the answer is no.
Most of our demand is expected to come from the United States. So no worse impact than what has already been planned.
Got it. Okay. And one more question on sort of the currency effect. Although you do say most of it's U. S.
And so clearly when you're a U. S. Buyer buying an efficient dollars there's no issue with currency. But in some of the other currencies that have weakened, how much of an effect or can you give me a sense for the overall effect on
a BizJet
sale when a soft local currency has to be converted into dollars to buy the airplane? I mean you get a benefit from real weakness, but isn't it more painful for the customer to buy the airplane because of the weakness in their local currency?
You mean a customer located in Brazil or abroad?
Brazil or Russia, right? So if you're buying an airplane in dollars and you had to convert RUB 60 to $1 which is today compared to RUB 30 a year ago. Doesn't that create softness? Go ahead, sir.
Yes, yes, it does. And again, it's already priced in, in the sense that our planning, we did not expect we did plan for a much lower demand in those markets because of several factors including the valuation of the currency. The airline I mean the business jets and industries is totally denominated in U. S. Dollars around the world.
So yes, it is more difficult for Brazilians, for Russians, for other developing country customers to buy. They became more expensive. But I think that those customers, they never think about their local currency anyway. So they think about dollars. So what has happened is that their ability to have those dollars has diminished.
Okay. Thank you.
Thank you. And your next question comes from Peter Skibitski from Drexel Hamilton. Your line is now open. Please go ahead.
Good morning, guys. I apologize if some of these were asked. I got a little bit late. But on the KC-three ninety delay, you're going to be in testing for a few years now. Should we think that revenue from the KC-three ninety is sort of on a downward glide path the next few years?
Or is it more stable because of the percentage of completion?
I think the best way to put it, what I would think would be to the right of a year. So we are fundamentally pushing everything about a year to the right. I think that's the best way to think
about it.
Okay. So revenue declines because same revenue shifted over a longer time period?
Yes. Well, let's separate. You have the revenue coming from the development contracts, which would end by end of next year. Now it's going to be another year. So there will be of course a reprogramming there.
But as I said, the real stream of revenue coming from the aircraft in production, which was planned to start in the first half of twenty seventeen. Now it's first half of twenty eighteen. So that is the year that I mentioned that we should this is a shift right of about 12 months as far as the whole, let's say, production aircraft cash flow.
Okay. I think I understand now. And then when do you guys expect the second phase of Cicerone to be awarded?
It's hard to tell at this stage, probably not this year. Maybe next year would be the good guess. But as you may imagine, things are a little bit fuzzy here as far as what's next on the budget for the Brazilian government.
Okay. Understood. Yes. And then just last question. Is the 450 on track to deliver in the
Q4? Absolutely. Absolutely on track.
Got it. Thank you so much.
Thank you. And we have a follow-up from Noah Popnick from Goldman Sachs. Your line is now open. Please go ahead.
Fred, you sound pretty positive when talking about your effort to sell the new legacies out of the executive segment. Just wondering if you could maybe talk about that a little more. Is there strength new strength in that segment of the market? Or do you feel like you're doing better than your competitors that also have new aircraft in that segment of the market? And if it is that, can you maybe talk about which specifications you have in the aircraft that in particular that customers really like?
Sure. No. So you got the first and the last question. So that's a full circle. Yes.
No, it is no, we are and thanks for the question because they help us to clarify. My optimism comes from the product itself. The 500 is indeed I mean, without no aerogrance, but the most modern airplane out there is in the business jets arena, especially in the mid cabin arena. So going forward, so it's and the specifications, the features, they are comfort, silence, this fly by wire has tangible benefits for the passengers such as comfort, such as less better way to handle turbulence. And just the fact that it's something with a state of the art technology, this of course also has an appeal with that kind of a sophisticated customer.
We are we have broad ground expansion of our facility in Melbourne for the 415-500. So we are producing those airplanes now in Sao Jose dos Campos. But from end of next year on, we have the 2nd line in Melbourne. So we are optimistic about that those two products. And remember the 450 will join its brother, its sibling in by the end of this year.
Okay. And what's the new blended interest expense rate we should be using and rate on cash for interest income we should be using on the P and L?
Just a second.
In terms of real cost, it's from $6,100,000 to $6,200,000 because of interest it grows here.
And in terms of dollars, dollars let me see here in the previous page.
It was from it declined from 556 to 525.
I'm sorry, what is that referring to?
This is a dollar denominated debt.
You're talking about costing debt, right? Yes.
So my question is
The balance rate in the debt U. S. Dollar related comes from 5.56 to down to 5.25 percent. And the indebtedness denominated in reais goes from 6.12 to 6.24%.
Okay.
Does that answer your question?
I think so. But I'll take a look and follow-up if it doesn't.
Yes. Well, please just have a do the calculation then we can check with you to make sure that's what you want.
Okay. Thanks a lot.
Thank you, Noah.
Thank you. And this concludes our question and answer session for today. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.