Good morning, ladies and gentlemen, 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. If you should require assistance during the call, please press star key followed by one. As a reminder, this call 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, estimate, 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, Mr. Eduardo Couto, Director of Investor Relations. I would now like to turn the conference over to Mr. José Filippo. Please go ahead, sir.
Okay. Thank you. Good morning, thanks everybody for joining our second quarter 2015 earnings call conference. As usual, we'll go through the presentation, we'll be ready for the questions after that. Going to the presentation, we start on page three, the financial highlights for the second quarter. We reached our record ever backlog of $22.9 billion in the end of the second quarter. We had the positive free cash flow of $73 million in the second quarter. Also reported operating income of $102 million, net income of $129 million, and earning per share of $0.7096 in the second quarter, almost $0.71.
An important event in the quarter was the issuance of a $1 billion note due in 2025 with a coupon of 5.05% 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 the important information about that we just released 2015 guidance adjustment, especially related to the Defense business revenue revision, rate our EBIT and EBITDA range estimate. We're going to be elaborating more about that during the presentation. Next page four. In relation to the Commercial Aviation highlights, we delivered 27 E-Jets in the second quarter, accumulated of 47 this year, with 102 firm orders announced in the quarter, combined with 124 year to date.
In relation to commercial activities, we recently announced several orders, including the Azul firm order for 30 E-Jets, the Tianjin Airlines order for 22, split between the current generation and the E2 model. 8 E175 for SkyWest, that will operate the Alaska Airlines. Aircastle firm order for 25 E-Jets new generation. Colorful Guizhou Airlines firm order for 7 E190 and the 10 E175 for United Airlines. Finalizing commercial aviation highlights regarding the E2 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 Executive Business highlights. The delivery of 33 executive jets in the quarter, split by 36 lights and seven large, that accumulated the 45 in the year.
An important achievement of our industrial activity in our Florida facility was the delivery of the Phenom number 100 assembly at the Melbourne facility. In terms of new orders, we announced the firm order of 4 Phenom 100 to Etihad Flight College in this quarter. Finalizing executive jets, in relation to the development of the Legacy 500 and the 450 program, we had another important achievement for the Legacy 500. Which was the four new world speed records. Regarding the 450 program, we also remain on track and the entering to service is scheduled for the last quarter of this year. Moving to the next page six, in terms of defense and security highlights. Starting with commercial announcements in the second quarter, which was the sale of 5 Super Tucanos to the Ghana Air Force and 6 Super Tucanos to the Republic of Mali.
Regarding the LAS program, we continue to advance with the delivery of three aircraft in this quarter, which now returns it to eight aircraft to date. 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-390 program, we'll start the flight test campaign now in the third quarter of this year. For a program update, we expect now certification for the second half of 2017 and the entering to service in the first half of 2018. With that, we conclude the highlights and get into the financial results. Next page, actually page eight. 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. This combined with the EBIT and EBITDA maintenance range, will return into a higher EBIT and EBITDA margin. With that, the new outlook would be, as we have on page eight, for net revenues consolidated, the new outlook will be from BRL 5.8 billion to BRL 6.3 billion, from BRL 6.1 billion to BRL 6.6 billion. In terms of defense revenues, the outlook for 2015, from $0.8 billion to $0.95 billion revenue, from $1.1 billion to $1.25 billion. In terms of EBIT, remain the range of BRL 490 million to BRL 560 million, but now the range increased to 8.4% to 8.9%. Sorry, to 8.5% to 9%, from 8% to 8.5%.
In terms of EBITDA, remain the range from BRL 730 million to BRL 860 million, with a new EBIT margin from 12.6% to 13.6%. The other estimates for investment and free cash flow remain unchanged. Going next page 9. In terms of financial results, now showing our firm order backlog. We are reaching the end of the second quarter, as we mentioned before, BRL 22.9 billion. This is our all-time high information. Next page 10, in terms of aircraft deliveries. On the left side, we delivered 27 aircraft in commercial aviation in the second quarter, and we have a total of 47 accumulated to date in the year. In terms of Executive Jets, we delivered 33 in the second quarter, broken by 36 light jets and nine 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 35-100 E-Jets, 35-400 Executive large jets, and 80-90 Executive light jets. Next page 11, in terms of revenues, consolidated and by business unit. We had, in the second quarter, the consolidated of BRL 1.5 billion in terms of revenue, which accounts now for BRL 2.57 billion accumulated in the year. In terms of commercial aviation, BRL 883 million in the second quarter, accumulated of BRL 1.54 billion. Executive Jets, BRL 404 million in the second quarter, accumulated of BRL 0.57 billion. In defense, BRL 216 million, accumulated of BRL 0.43 billion in the year. On this page, we already show the adjusted defense revenues and consolidated revenues estimate as indicated. Defense now from BRL 0.8 billion to BRL 0.85 billion, and consolidated now from BRL 5.8 billion to BRL 6.3 billion.
Continuing the presentation, next page Consolidated net revenues in Brazilian reais and U.S. dollars. We said that the almost $2.6 billion accumulated in dollar terms turns into a BRL 7.7 billion in terms of revenues. For 2015, the outlook indicates the range of BRL 5.8 billion to BRL 6.3 billion, already a reflection on the new guidance, as we said before. Going forward, page 13, in relation to SG&A expenses, we have the BRL 147 million SG&A expenses in the second quarter, split by BRL 47 million of general and administrative expenses and BRL 100 million for selling expenses. It represents a decline when compared with the same quarter of last year, reflecting our cost control focus, coupled with the more favorable exchange rates. In terms of percentage of revenues, we are in line with the previous year of 9.7% in 2015 second quarter, compared to 9.5% in the second quarter for 2014.
Going next page 14. As far as EBIT, we had a total of BRL 102 million in the second quarter, with a margin of 6.8%. In terms of year-to-date figures, the total EBIT reached BRL 182 million, with a 7.1% margin. For 2015, we are maintaining our guidance range for BRL 490 million to BRL 560 million, but increasing our margins range to 8.5%-9%, as we said before. Next page, in terms of EBITDA, we reported a total of BRL 178 million in the second quarter, with an 11.7% margin, returning to a cumulative in terms of EBITDA for 2015 of BRL 337 million, with a margin of 12.7%. In relation to the outlook, as we said, we are maintaining our expectation for the range from BRL 730 million to BRL 860 million, but increasing the margin to 12.6%-13.6% for the whole year.
Next page, in terms of our net income, we reported net profit of $129 million in the second quarter, with a margin of 8.5%, the net margin, and accumulated of $68 million in 2015. In terms of Brazilian reais, the net profit of BRL 400 million in the second quarter, with accumulated of BRL 203 million in the year. Going next page, as far as free cash flow generation, we had a positive free cash flow of $73 million in the second quarter, with $245 million 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 advances from customers. As we mentioned before, we are maintaining our outlook for the year, which represents less than consumption of $100 million in terms of free cash flow. Next page in relation to investments, page 18.
We had a total investment in the first six months of $196 million, broken by $94 million investment in CapEx, $84 million in development, and $18 million 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 million for 2015. Next page 19. Finalizing the presentation before we go into a Q&A session. Our capital structure showed an improvement in our net debt position, 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 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 second quarter. We now have the figure of $511 million in terms of net debt, coming from $581 million in the end of the first quarter. With that, we close this part of the presentation, now we're ready to open for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Noah Poponak from Goldman Sachs. Your line is now open. Please go ahead.
Hi. Good morning, everyone.
Morning.
Did you give us a new USD to BRL exchange rate in the revised EBIT margin range?
Yeah, go ahead. Yes. Hi, Noah, it's Eduardo. We are assuming now a BRL of 320 for the second half, which would imply an average BRL for the year of around 310, from 280 before, right? Just to remind.
Okay, great. With the used aircraft value impairments, can you give us a little bit more detail on where those occurred?
Yeah, okay. 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 evaluative reporting. In terms of the financials, you saw that reflected in other operating expenses. That typically, as you know, we work on a lead times there, and we have a little bit more, like, BRL 27 million in this quarter. That primarily reflect that impact, and that revision was the calculation the way we record.
Yeah, I guess I meant which aircraft type, and what are the implications of the related end market that's still occurring in those aircraft type.
It's more the ERJ 145 fleets.
Oh, okay. It was not anything in the business jet market?
No. It was commercial jets and more concentrated on 145.
Got it. Then, just the last one from me. Is there any ability to, maybe it's a little too early, but to start to discuss 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. At this point, I don't see 2016 much better than 2015. 2015 is the year of adjustment. 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, it would be just guessing. Flattish probably would be a nice guess at this stage. Again, as we go towards the end of the year, we'll be able to have a more educated guess as we see the budget proposal to be sent to Congress by the end of the year. Having said that, we are also working on the export side. We have several campaigns going on for the Super Tucano.
Despite this little reprogramming on the KC-390, which by the way, 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. The campaigns are still going on, the interest in the aircraft is there. We also work on the exports side. It's not only the Brazil's defense budget.
Got it. Okay. Thanks very much.
Yeah.
Thank you. Your next question comes from Ron Epstein from Bank of America. Your line is now open. Please go ahead.
Yeah. 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 walk through why that happened. It looks like the receivables from the Brazilian government were up almost BRL 200 million, and how you are thinking about those receivables being recovered as we go into next year?
Yeah. Okay. I'm going to answer the receivables, then you're going to talk about the margins. Receivables, they did go up, or more precisely, Ron, I think it was something in the range of BRL 90 million-BRL 100 million. We have been reducing our costs and reducing the allocation of our resources to programs, of course, the speed is different. The speed of the reduction in payments and the speed that we do expense. 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 is part of this reprogramming. We are renegotiating an 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.
Also, this amendment shall reflect the costs associated to this reduction and this resumption and absorption of this accounts receivable. Not 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 on.
In terms of the margins, as we indicated there, mostly comes from the cost-based revision that we had to do. Defense programs, typically, if they are like the percentage of completion type of contract, then you have to do revisions as we have in terms of margin impact. Because of the exchange variation, this had to be done. It's about BRL 25 million this year, the effects impact on those programs, BRL 20 million was before, actually. This is primarily the reason for the margins, which we understand it's more in the second quarter. If we excluded that impact, it would be a positive margin. That's basically the explanation for the impact margin that you saw there in the defense business.
Okay, great. Maybe one last question, if I may. How is 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 business jets are good, business jets are bad. It's kind of all over the place. I was just kind of curious how you guys see the end market now, and in particular, how it's going for Embraer in the U.S.
I'll say the middle ground. It's not good, not bad. It's okay. It's similar to what it has been the last several months. U.S. remains strong, we see activity in the U.S. We have been able to sell small-size cabins, particularly the 300 and the 500. We have been a lot of interest in the 500. At this stage, sitting now at the end of the second quarter, 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. We are a little bit better than we were a year ago. 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.
This is pretty much the picture that we have seen the last several months.
Okay, great. Thank you so much.
Thank you. Your next question comes from Alexander Falco 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, or are they sort of kitchen sink, everything that we should see in defense? That's the first question. 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 a FX thing. Is that a correct reading from the changing guidance? Thank you.
On defense, we believe that once now, the reduction and the cuts in the budget have been defined. We sincerely would not expect any further reductions. I think there is a commitment from the government side to whatever level they have defined. The only impact, as far as activity, I think we're from now on, we 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. The Real keeps going down, and significantly, that's going to affect revenues, again, will affect our program accounting. That will turn into potential headwinds in defense. That same effect is going to cause a positive effect on commercial jets and business jets, where the Real cost will be lower. As far as the company, we are pretty much hedged naturally.
As Eduardo said, we are forecasting a 320 FX for the next semester, for the second half. It may be higher because it's now 330, 332. Again, we believe with this reduction in the guidance of defense by $300 million, we have some margins to accommodate. Even if it goes a little bit beyond 320, we'll be okay. The second part of the question was?
Was that the compensation? I think I already mentioned.
Oh, it's already there.
Initially, like, the same effect that is negative, if we're talking about the effects impact, the impact to 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. Just so the devaluation on tax is not neutral for you in terms of margins. That's the understanding here?
No, it's positive, and overall, it's positive for the company. 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 real costs in BRL that we have in the company.
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. The benefit that we mentioned, the other business, they come with the manufacturing and going through the inventories and delivering the aircraft. There's a timing, maybe, a difference on the positive and the negative impact sometimes.
Yeah. Just to complement, keep in mind that defense is about 20% of our overall business and 80% is the other two businesses that [audio distortion] announced.
Fantastic.
Yeah. If I may, just to clarify one thing. Was KC the only program revised here, or was SGDC and the others were also impacted?
That's a good question, Richard. We had, on the SGDC satellite, I would 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 Ariane. At this stage, a delay in the program will certainly delay the launch of the satellite, and SGDC is moving on as well. The modernization programs, 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. 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. Just wanted to clarify. That was deliveries to date. What about your order uptake and intake and maybe some color on book to bill in the quarter?
Yeah. I meant more looking forward, not backwards. I'm not sure we did talk about books? We don't, right? Just to give a qualitative answer, Myles, we still have to sell a few airplanes to meet our guidance for 2015. It's not that the skyline is already full. In that aspect is what I meant, that we feel a little bit better now than we felt about a year ago. In other words, what I'm saying is that we feel comfortable at this stage about fulfilling our delivery guidance for both small cab and large cab. There's a lot of activity in the Legacy 500, and that's helping us towards that end.
Okay. Fred, I know you don't want to comment specifically on a specific customer in the regional jet category, but Republic Airways is 20% of your annual E-Jet deliveries over the next few years, and they've gone through a couple of things right now. As you read it, how do you evaluate that situation? Do you see any risk behind it? Is it not going to encumber their ability or desire to take the E175 over the next few years?
Well, at this stage, Myles, we're not seeing any change to our plan. The airplanes are contracted, financing is in place, at least me, I have not heard anything from the airline. In the end, at least if I speak for myself, I expect that common sense will prevail. Ultimately, we have to think that those airplanes are not speculative. Those airplanes, they have a clear address. They'll be flown by Republic Airways' partners.
They are in the fleet plans, not only of Republic Airways, the fleet plans of United Airlines and American Airlines and Alaska Airlines. Not Alaska Airlines, American Airlines.
Mm-hmm. Yeah.
I think eventually the solution will come out. At this stage, this year, I think we have something between 10 and 15 deliveries still to go this year. Most of those airplanes are way down to production. I do not anticipate any impact this year. Next year, you're probably right. Maybe 20-plus airplanes to be delivered. Unless there is a major problem, which again, I think common sense will prevail. We may have an impact. We don't know now. What gives me really good comfort is that those airplanes, they are committed for the major airlines to replace older 56 jets. I think that's the underlying warranty that we have that this thing will happen.
Okay. Thanks, Fred.
Thank you.
Thank you. 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. Could you 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, Cai. Yes, sure. Commercial jets, we achieved 12.8% of operating margin. Business jets was 6.5%. Of course, the defense, which it is what brought us down, because we registered -20.3% in the defense business. For the year, what we'll see is probably the commercial jets helping us on the upper side to keep this 8.5%-9% range. Business jets improving, because they're much more volume in the second semester than the first. 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. That's more or less the logic going forward.
Shouldn't you see a good uptick with the greater volume, in biz jets 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. On the business jets, yes. We've seen, 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 8.5 plus or minus 1.5%." What we see now is that commercial jets 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. 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, Cai. I don't have the precise numbers here, but it's probably something like 50/50. 50% problem is currency, 50% problem is activity.
Got it. While next year 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. Assuming the Brazilian Real is stable, we should get some nice carryover next year. Because you mark to market immediately on the government side, borrowing further execution issues shouldn't, the defense number, which looks like it's going to be modest at best this year, should be a better number next year. All of this bodes fairly well for next year. Is that a reasonable thought?
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 thought. The solidness, the skyline on the commercial jets is very strong for next year as far as when I say very strong towards maintaining the current levels that we have today. We have been saying consistently that we see a stable outflow in the next several years until the E2 comes into the market. We are strongly well-positioned towards that end. Business jets, it continues a challenge, but again, we have a new product, which has received a tremendous acceptance in the market. That's the Legacy 500. Defense, of course, we're going to adjust our cost base.
We do not expect the BRL to keep going. This year it's devalued 50%. This can't keep going like this forever. That may result in a better picture. Of course, as you said, Cai, we have to wait some more time to be able to nail that to numbers.
Thank you very much.
Thank you. Your next question comes from Tarun Khetarpal from Scotiabank. Your line is now open. Please go ahead.
Yes, good morning. I'm sorry if I missed that, could you provide a clean defense margin? Did you say it was a BRL 25 million kind of revision in this quarter?
That's right. Yeah. Correct.
Okay, this is in addition to the BRL 30 million that you had last quarter, is that right?
Yes, correct.
Okay, I'm sorry if I'm repeating stuff here, but did you, I guess it should've, now it's pretty much flushed through, assuming the Real stays constant, is that the right way to think about this?
Yes. It shouldn't have any impact if 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. At this level, a little bit higher today, but in this level, we should expect no further impact coming from this type of review in terms of the contracts.
Great. 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-390?
Well, not beyond what has already been used. We are carrying some $350 million-$370 million in accounts receivable. This is it. As part of our amendment discussions, in the several different programs, but in particular, in the KC-390, which is by far the largest program that we have, is the reprogramming, both development and the serialization, and the recovery of those accounts receivables and, of course, the cost of the impact of those reprogrammings. 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. The commercial margin is really strong here, obviously. Is there really room to raise that next year? It seems unlikely though, right? If this continuing, it is so high already.
I would say it is much more market-driven than industrially driven. 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. If the demand is there are several campaigns going on. If the demand is there, we have the industrial capability to react. At this stage, I think it is premature to assume that.
That is very helpful. Thank you.
Sure.
Thank you. Your next question comes from Philippe Guez from Verde Asset. Your line is now open. Please go ahead. Please check your mute button.
On your left.
Thank you. 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? 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? Was there a fair amount of demand in sort of Russia and Middle East for those kind of airplanes, will continued weakness in oil prices have an effect on selling those airplanes?
Those are markets which are important. We have very important footprints in both Middle East and Russia. We have not counted, not expected a strong demand from those regions, in 2015, anyway. The answer is no. Most of our demand is expected to come from the United States. No worse impact than what has already been planned.
Got it. Okay, one more question on sort of the currency effect. Although you do say most of it's U.S., clearly when you're a U.S. buyer buying a biz jet in 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 biz jet sale when a soft local currency has to be converted into dollars to buy the airplane? You get a benefit from BRL 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?
Yeah, Brazil or Russia. If you were buying an airplane in dollars, and you had to convert 60 rubles to $1, which is today, compared to 30 a year ago.
This whole.
Doesn't that create softness? Go ahead. Sorry.
Yeah. It does. Again, it's already priced in the sense that our planning, we did plan for a much lower demand in those markets, because of several factors, including the valuation of the currency. The airline, the business jets and the industry is totally denominated in US dollars around the world. Yeah, it is more difficult for Brazilians, for Russians, for other developing country customers to buy, they became more extended. I think that, those customers, they never think about their local currency anyway. They think about dollars. What has happened is that their ability to have those dollars has diminished.
Okay. Thank you.
Thank you. 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 on a little bit late. On the KC-390 delay, you're going to be in testing for a few years now. Should we think that revenue from the KC-390 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 a shift to the right of a year. We are fundamentally pushing everything about a year to the right. I think that's the best way to think about it.
Okay. Revenue declines because the same revenue shifted over a longer time period?
Yeah, well, let's separate. You have the revenue coming from the development contract, which would end by end of next year. Now it's going to be another year, there'll be, of course, a reprogramming there. They'll say the real stream of revenue coming from the aircraft in production, which was planned to start in the first half of 2017, now is first half of 2018. That is the year that I mentioned that we showed this is a shift right of about 12 months as far as the whole, let's say, production aircraft or cash flow.
Okay, I think I understand now. When do you guys expect the 2 phase of SISFRON to be awarded?
It's hard to tell at this stage. Probably not this year. Maybe next year would be the good guess. 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. Yeah. Just last question, is the 450 on track to deliver in the fourth quarter?
Absolutely. Absolutely on track.
Got it. Thank you so much.
Thank you.
Thank you. We have a follow-up from Noah Poponak 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 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? If it is that, can you maybe talk about which specifications you have in the aircraft that, in particular, that customers really like?
Sure, Noah. You got the first and the last question, that's a full circle. Yeah. No. Thanks for the question because it helps to clarify. My optimism comes from the product itself. The 500 is indeed, without no arrogance, but the most modern airplane out there in the business jets arena, especially in the mid-cabin arena. Going forward, the specifications, the features, they are comfort, silence. This fly-by-wire has tangible benefits for the passengers, such as comfort, such as a better way to handle turbulence. Just the fact that it's something with the state-of-the-art technology. This, of course, also has an appeal with that kind of a sophisticated customer. We have broke ground of expansion work facility in Melbourne for the 450 and 500. We are producing those airplanes now in São José dos Campos.
From end of next year on, we have the second line in Melbourne. We are optimistic about those two products. Remember, the 450 will join its brother, its sibling, by the end of this year.
Okay. 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&L?
Just a second.
On the release. Lenders interest rate.
They are going through the-
Okay. We have, in terms of real cost, it's from 6.12%-6.24% because of interest grows here. In terms of-
Dollars.
Dollars.
Let me see, here. In the previous page.
It declined from $566 to $525.
I'm sorry, what is that referring to?
This is the dollar-denominated debt.
We're talking about costing debt, is that right?
Cost. Yeah.
Yes. My question is.
The blend rate, in the debt USD-related, comes from 5.56% down to 5.25%, and the indebtedness denominated in BRL, 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.
Yeah. Well, please do the calculation, then we can check with you, to make sure, was that what you want.
Okay. Thanks a lot.
Thank you, Noah.
Thank you. 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.