Good morning, ladies and gentlemen. Welcome to the audio conference call that will review Embraer's first 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, followed by 0 on your touch-tone telephone. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about the 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 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 obligation to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking statements and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from the anticipated and the forward-looking statements. Participants on today's conference call are Frederico Curado, President and CEO. Mr. Jose Filippo, Chief Financial Officer and IRO. Mr. Eduardo Couto, Director of Investor Relations. I would now turn the conference over to Jose Filippo. Please go ahead, sir.
Okay. Thank you. Good morning, everybody, and thank you for joining Embraer first quarter 2015 results. As we usually do, we'll go through the presentation, and then we'll be ready for questions in the session. Starting on page three in the highlights of the business for the quarter, and starting with the commercial aviation business. We had a delivery of 20 E-Jets in the first quarter of this year, including in the number, the first E175 related to the direct order of American Airlines out of the 60 in that order, and also related delivery. Sorry. In terms of orders, we had the KLM Air France order for up to 34 E-Jets, including 17 firms, and 17 options. Which includes the current generation of the E-Jet, 175 and 190. Continuing with the orders, the Republic Airways order additional five E175.
As far as our customer base, we had inclusion of Kalstar Aviation, which became our first E-Jet operation in Indonesia. Finally, in relation to the E2 Program, we received an important award, which was the Crystal Cabin Award related to our larger bin and individual seats in first class. In slide four, moving to executive aviation highlights. We'd had the delivery of 12 executive jets in the first quarter of this year, split by 10 light jets and two large. In relation to our Legacy 450 program, we continue to advance, and we expect to enter into service in the fourth quarter of 2015. Related to the Legacy 500 programs, we had additional three important recognitions by the Aviation Week Magazine, the National Aeronautic Association, and also Flying Magazine. Moving to next page, Defense & Security highlights.
Starting with an important milestone of the KC-390 program, which was the first flight that happened early February this year. In terms of the LAS program development, we had a delivery of two aircraft in this quarter, and now, five already delivered. Regarding Brazilian fighter program, we signed the partnership contract with Saab in the middle of this month. In relation to the Brazilian satellite program, it was concluded the critical design review report in this quarter. Moving into the financial results, starting with page seven. The firm order backlog, reaching $20.4 billion in the end of March. More than $1 billion over the same period of last year. Page eight. In relation to deliveries, we had in commercial aviation, the delivery of 20 E-Jets in the quarter.
Regarding the executive jet business, delivered 12 aircraft in the first quarter, broken by 10 light jets and two large jets. With that information, we are maintaining our guidance figure for the year in the range of 95 to 100 E-Jets, and 35 to 40 executive large jets, and 80 to 90 executive light jets. Page nine. The revenues by segment. The total in the top left the chart. We had a total of almost $1.1 billion of revenues in the first quarter. When we break these revenues by business, going to the right side, the commercial aviation business, a total of $662 million in the first quarter, the executive jet business of $167 million, and the defense for $213 million in the first quarter of this year. In the next page, the consolidated figures, as we indicated, $1.1 billion returned to almost 3.1 billion BRL.
Important here is that we are already mentioned that we are maintaining and confirming our 2015 revenue guidance between $6.1 and $6.6 billion. Talking about SG&A expenses. We reported a total of $129 million in the first quarter of this year, including $43 million in G&A and $86 million in selling expenses. We remain focused on keeping those expenses under control and monitoring them. Page 12. As far as operating results, reported a total of $80 million in the first quarter of 2015, with a 7.5% margin, in line with the margin of the first quarter of last year. We are maintaining our guidance for 2015 for the amount range of $490 million-$560 million and 8%-8.5% margin. Page 13.
In terms of EBITDA, we had a total of $149 million in the first quarter with a margin of 14.1%. Our outlook for the year remains unchanged, with a range of $730 million-$850 million and a margin of 12%-13%. Page 14, regarding net income. Actually, net result, we reported a net loss of $62 million in the first quarter, mainly due to the recognition of $110 million of deferred income taxes. This already happened before when we have an appreciation of the dollar against the BRL. We had to do some considerations in terms of income tax. It's a provision. It's not a cash impact. It's a deferred income tax, and that impacted our results in this quarter. Excluding this specific effect, we would have a gain of $48 million in this quarter. The next page.
In terms of inventory, we end the quarter with a total of $2.7 billion, an increase of $291 million from the end of the year, reflecting the preparation of higher deliveries in the coming quarters. Next page 16. In terms of cash flow, we reported a negative cash flow of $440 million in the first quarter of 2015, compared to a negative $404 million in the same period of last year, confirming the seasonality of the business. The main reason of this negative figure was the increase of inventories, as indicated before, coupled with a slightly higher accounts receivable, primarily related to Defense & Security segment. Despite the cash consumption in the quarter, we are maintaining our outlook for 2015 of use of less than $100 million in the year. Next page.
As far as investments, we had a total of $106 million in the first quarter, broken by $7 million in research, $27 million in development, and $72 million in CapEx. We are maintaining our indication of $650 million as total investment for the year 2015. Next page 18. Finalizing the presentation before the Q&A session, our capital structure. We ended the quarter with a net debt figure of $581 million, reflecting the cash consumption in the quarter. In relation to our debt, we remain with a comfortable profile, with average terms of 5.3 years maturity and 85% portion in the long term. We will conclude this part of the call, which was the presentation. I am now ready for the questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the one key 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 Pete Skibitski of Drexel Hamilton . Your line is now open.
Good morning, guys.
Morning.
I want to ask you, I am guessing that you did not collect on the large KC-390 receivable from last year during the quarter. Can you update us on your expectations for collecting that? Is there any contemplation to slowing the program down?
Oh, yes. Pete, actually, this program goes as we expected. As we indicated before, we are focused on maintaining and avoid to increase this accounts receivable. That's basically the pattern that we have for the first quarter. We had actually a little bit increase in the accounts receivable for the quarter, which was actually the snapshot of that in the end of March. We received a portion, about BRL 50 million in the beginning of April, which returned back to the level of the end of the year. Basically, that's the profile of that account.
Okay, understood. Thank you. Just one follow-up. Could you give us a sense of how the segment operating margins trended in the first quarter?
Yes. It's Eduardo here. We had a consolidated operating margin of 7.5% in the first quarter. Commercial aviation was around 12%, business jets around 6%, and Defense & Security was around negative 9%.
Okay. Just on that Defense & Security, that's the lowest I recall for Defense & Security in a while. Would any particular one-timer impact that?
Yes, Pete. Actually, the defense, as it has its revenues or its contracts more exposed to the BRL, we have to do an adjustment of FX base every quarter. We usually do this. We do this every quarter. In this quarter, as we had an appreciation of the U.S. dollar, which was actually about 20%, that impacted negatively. It's a non-recurring effect. It shouldn't be repeated going forward.
Okay, great. Thank you so much.
Thank you. Our next question comes from the line of Tarun Kodali of Scotiabank. Your line is now open.
Yes, good morning. I guess maybe just as a follow on there, could you give us a sense of what that non-recurring item was? How big it was?
What non-recurring?
On the D&S business, you said there was an adjustment on FX that was non-recurring.
About BRL 30 million.
Okay. That's helpful. Thank you very much. Okay. I guess my next question, just when I look at the sort of the longer-term strategy of the company, I guess if I look back two to three years, your defense business was supposed to be, I guess, the growth leg here. E-Jets were kind of getting into a bit of a holding pattern, obviously that seems to have come true here with E-Jets kind of flattening out a little bit. Obviously, the defense business is coming in a little bit weaker. My question, I guess, is, are there any other levers that you can pull here? The bizjet seems to be getting a little bit better, but certainly not as strong as maybe you would've liked.
Have the cards certainly been dealt, and I think you kind of have to just make the best of the situation here. I'm just trying to figure out what kind of earnings levers you have over the next 2 years here.
Yeah. This is Fred. Our commercial aircraft, it's doing good. We have been able to sustain and actually increase quantity a little bit. Also have been able so far to offset pricing pressures with efforts with lower costs and try to preserve margins as much as we can. That's a sound business. Business jets, we had a particularly weak quarter. We missed a few deliveries. That's why we are optimistic about increasing the numbers in next few quarters and meeting the guidance as far as deliveries and revenues in that business. Again, that's also a growth engine for us because we are still ramping up the Legacy 500, and we have the Legacy 450 joining our portfolio at the end of the year. There is growth in that segment for us. In Defense, we have, of course, a strong dependence of the Brazil's armed forces.
We have a lot of execution. We have a lot of contracts, which assures us a very stable outlook for the next few years. Most importantly, the KC-390, of course. That's a financial concern. We have payment problems. We have to believe that this will be solved soon. We see Brazil, in the next 2 years, regaining traction, and that we continue to be positive in the long term for Brazil. As a Defense business, is a long-term business. We are not really too much concerned about the long-term viability and growth potential of that business. As soon as we introduce the KC-390 in the market, we have another product for export. That should be an add-on, a step function in that business as well.
Okay. Thank you, Fred, for that clarity. I guess just 1 more question from my side. I know it's still early, there's been about a bunch of changes here at Bombardier. Just wondering if you've seen anything change from a competitive standpoint. I know there's been a lot of aggressive pricing there in a lot of your markets there from them. Just wondering if there's been any change there.
Well, they have been very aggressive for some time. I would not have noticed, not personally, any significant change. Alain is a capable guy, of course, but direct answer to your question, we did not see any specific change in that regard.
Great. Thank you very much.
Thank you. Our next question comes from Cai von Rumohr of Cowen and Company. Your line is now open.
Yes, thank you very much. Help me understand, your gross margin was a spectacularly good 23.7%, despite a pretty lean mix. You didn't have any 190s, 195s, you had all the lowest margin commercial aircraft. Where do you expect gross margins to be for the year? And while I understand the revenues may be under some pressure, do you feel that your EBIT margin number maybe has some opportunity?
Cai, thanks for the question. Yes, I think we had a situation in the first quarter, which shouldn't be the same for the rest of the year. If you think about the whole year, we should be back to the level of, as we indicated, like the high teens, as we indicated before. We shouldn't be at the same situation as the first quarter. I think there's a combination of things here. If you take the Executive Jet business in this first quarter, we had the lower deliveries, with specific good margin on the models that we delivered, combined with the higher participation of the service and parts that led us to this higher gross margin. Also services in commercial aviation also help. We shouldn't consider that as a trend for the whole year.
We'll be back to what we indicated before, throughout the guidance that we sent out. Basically, that's what we should work on.
Maybe help us understand. What you're talking about is the guidance of the EBIT margin, maybe help us understand some of the pieces. For example, the G&A was lower than it's been. Presumably, that's helped by the Real. Where should we expect this gross margin? Because just as we look at that quarter, the delivery mix is certainly going to get better as we go through the year. Is that gross margin going to be lower than the first quarter, even though the Real is basically going the right direction and the mix looks like it's going the right direction?
Yes. I think that the gross margin should be lower than what we had in the first quarter, like you said. Definitely, the expenses are being positively affected by the exchange rate. We said that before, that there is a potential benefit if the exchange rate remains in that higher level. That's what we expected. Basically, I don't think that the margins of the first quarter should be something that should remain when we take the whole year. Again, we are still in line with our expectation that we indicated early this year when we released the guidance figures.
You mentioned, this is the last one, you mentioned that service was a plus for both biz jets and commercial. Can you maybe give us a little bit of specifics in terms of how much the service business was up year-over-year in the quarter, and approximately where it would go for the remainder of the year?
Well, normally, again, I just mentioned that. Specifically, I think the higher impact was in the Executive Jet business. Typically, 10% of the revenues are service and parts. We had 24% in this quarter, and that brings a little bit higher margin. I think it's too much specific for the quarter, which again, we shouldn't expect. The seasonality of this business will probably be more into the deliveries itself rather than service and parts going forward. It's just like a situation that we had in the first quarter.
Thank you very much.
Thank you. Our next question comes from Noah Poponak of Goldman Sachs. Your line is now open.
Hi, good morning, everyone.
Morning.
Morning.
Can you just talk about how you're able to not change the total revenue guidance, given what transpired in the defense business and the impact from FX there?
I think that the guidance for the revenues, again, we're still maintaining that with the expectation that the defense business should be affected from the exchange effects. That already impact the guidance, if you compare to last year's figures of defense. This first quarter is something that we made this adjustment, like we mentioned, that impacted the revenues. We don't expect to see that in the current quarter. That's probably why you are seeing that, but we are still keeping this projection that we indicated before.
Maybe I could add, Noah.
We are still under the assumption that the main program, the KC-390, the three main programs, the KC-390 and the satellite. One way or the other, they will be kept integral. We are under that assumption. We will, for sure, have a reduction in the pace and maybe even the quantity of the modernization programs. That, yes, that goes straight to your question. There will be a reduced revenue there, but that's not the most important piece of it. On the other hand, we have some prospects of exports of Super Tucano, which, at this point, we believe, may offset any eventual reduction on the Brazilian side. I think the best view that we have at this moment is to maintain the guidance, again, with the big assumption those three main programs being kept intact.
Okay. There's no change to your assumption for the real in the outlook, is that correct?
Yeah. We base, as we disclosed to you, at 2.8. It's bring all the way up to 3.2. It's now back to 2.9 or something, right? I didn't see.
Yeah. 2.9.
Yeah. The forecasts in Brazil, they're all over the place from 2.8 to 3.10. If we have any risk there, it's probably a little bit of an upside risk.
Okay. Fred, you mentioned that you missed a few executive jet deliveries in the quarter. Can you just elaborate on that? Is that just purely random timing, or was that customer choice to defer, or, what happened there?
To be totally transparent, we had, I think, two or three airplanes, with customer, just a few weeks deferral. We also missed, I think, a couple of airplanes in production, believe it or not, which hasn't happened for probably some supply chain issue or something. We should see, probably four or five airplanes. That's what we missed in the quarter. We're talking about $100 million and $120 million, more or less, which should be added on to the revenues of the first quarter. That, of course, impacted negatively.
Okay. Will all of the Legacy 650, Phenom 300, and Phenom 100 have deliveries down this year? Anything you could say about what you think those do next year, just the Legacy airplanes?
I'm not sure I get the question, Noah.
Yeah. I guess the executive jets, excluding the 500 and 450, are they down this year? Are they down or up next year?
Yeah. We don't really disclose that, in a forward way. We really group them together, the four models, the 450, 500, the 650, and the Lineage 1000. We would prefer to stay as a block, large aircraft. We never disclose, and I don't think anybody does disclose model by model as far as giving forecast for deliveries.
Yeah. Okay. Thanks very much.
Thank you. Our next question comes one of Derek Neldner of RBC Capital Markets. Your line is now open.
Morning. My first question is on the business jet side. Are you seeing any improvement in the used business jet market in terms of both pricing and inventory levels?
Hello, Myles.
Derek.
Oh, Derek, I'm sorry. A little bit of a recovery in the U.S. market. Not substantial, though. The rest of the world, no real change to our last report, which is, of course, China was a very important market, which significantly slowed down. Brazil, particularly for us, was also an important market, which also slowed down. What has been offsetting this is the U.S. market, which has been growing. It's pretty much the same picture as we reported a few months ago.
Okay. The Legacy 500, how is that resonating with your customers? In particular, what regions are you finding the most, I guess, interest on that product right now?
As far as a percentage, the U.S. for sure. Last week we closed one in Brazil, one in Australia, it's really getting traction. If you remember, when we disclosed our guidance for the year, some people were a bit frustrated by the number. They expected higher numbers. We are really trying to have a very solid ramp-up, and in-service support, this entry-into-service support. It's, frankly, it's all over the world. As far as the bulk of demand, it is also in the U.S.
If I could, the Phenom product line, has been very successful, and you've sold quite a few. Pricing reflected that as well in terms of, you're getting the good value for your money, and as such, gathering quite a bit of market share over the past few years. Is that the same sort of strategy you're going to roll out with the Legacy 500 and 450, or are you going to try to be a little bit stickier on the pricing front?
Yeah, that's a good question, Derek. The Phenom 300 is the market leader in its segment by far, and it is the most expensive airplane in the segment. This is the perfect, when you find the perfect sweet spot for a product. It's a desired aircraft. The 500, we see with the potential to become exactly the same in its segment. We are indeed, and I have commented on that before, facing price aggressiveness from some competitors with larger aircraft than the 500, coming down to, let's say, the 500 segment. We have been very disciplined to hold our pricing. This is a brand-new product. It's probably the most updated, most modern aircraft out there today. We are really trying to hold our price to the value of the airplane. We will not jeopardize an airplane which has decades of perspective for this short-term pressure.
Having said that, we are getting a very good resonance about the acceptance of the aircraft. People see the value of the aircraft, and they are gradually coming to accept, to pay what we think is the right price for it.
Yeah, that's a great color. If I could just quickly on the regional, the commercial side. I know the E190, 195 doesn't compete directly with the CSeries. There obviously would be some overlap in some of the tender activity out there for the airlines. As the CSeries becomes more closer to launching into production, are you seeing the airlines shifting a little bit more positive towards that program? Or is it becoming more competitive? Also, how is Bombardier positioning that from a pricing perspective? Are they being as aggressive with the pricing as they have been with their CRJ lineup?
Yeah. Well, if we separate for, just for a moment, let's say, the regional market. Let's say the typical regional market, 70, 80-seater to the larger aircraft. There is activity going on for the E1, let's say, our E1, and, of course, the CRJ. There is activity going on. We are optimistic with a few campaigns, and we see campaigns actually all over the world, not only in the U.S. We have this great success that KLM announced, it was last month, I think. We may have a couple of other contracts which we will be able to announce, sometime not in the distant future. Boeing and Airbus, they have really been very successful in securing a long backlog for its CEO and new versions, or current and max versions.
What we see is that the airlines, there's a huge commitment as far as narrow-body for the next several years with Boeing and Airbus. The impetus of looking at into smaller planes, such as our E2 or the CSeries, it's more or less, maybe, closer to the Boeing and Airbus than what we are. I think that's the real issue. There's a lot of capacity already taken by the A320 family and the 737 family. Airlines, they don't need to make a strong move at this very moment. That fits nicely for us because we will not be in the market until 2018 anyway. It's an uphill for anybody trying to get new orders from airlines, which have their hands full with huge orders from Boeing and Airbus. This is more or less how we see the competitive market.
That's a great color. Thanks a lot. I appreciate it.
Yeah.
Thank you. Our next question comes from Myles Walton of Deutsche Bank. Your line is now open.
Thanks. Good morning. Hey, Fred, I was hoping to just follow up on that last comment you made around the campaigns in the near term. It was good to see one non-U.S. campaign hit with KLM. Are these also outside of the U.S., and would they come as soon as Paris?
Hopefully, Myles. As you know we cannot probably say too much already. Yeah, we are optimistic about at least one outside the U.S. Maybe something in the U.S. as well. Timing always depends on the customers, but it is at the point that it makes us feel good about it.
The other, you mentioned about the business jets missing a couple of deliveries. Production maybe didn't click the way it plan to this quarter on the supply chain. Was that on the 500 or was it on one of the more mature programs?
I don't know. Does anyone know? I think, Myles, well, I should probably get you a more precise answer later on.
I think it was a Legacy and a Phenom, I think. It was a question of days or maybe a couple of weeks, so it's not a big deal. I was just trying to be precise in what I was saying.
Yeah.
Yeah.
Well, I appreciate the transparency, Fred. The last one was on the BRL 30 million in D&S in the quarter that you called out as being a true up to the FX effect on your program. Just want to clarify, that was revenue, not profit, correct?
Yeah. Revenue.
Okay. What was the profit impact or the EBIT impact?
No, the BRL 30 million is profit. It's profit. Profit. Profit.
Okay. Well, is the okay. Was there a drop here on both?
Yes
an EAC?
Actually, it reduces revenues and profits.
Okay.
The amounts are very close to 30 both.
Okay. All right. Thanks, guys.
Thank you, Myles.
Thank you. Our next question comes from Ronald Epstein, Bank of America Merrill Lynch, your line is now open.
Hi. Ron is actually on an airplane right now. This is Kristine Liwag calling in for him.
We have change of voice, Ron.
The question we have is, the development work on the KC-390 rolls out this year, and if all goes along to your schedule, development work on the E2s should also end by 2020. With a very experienced engineering team, where do you think the opportunities will be next? Is it large cabin business jets, next generation turboprop, small twin aisle, small tactical fighter jet? Where do you think future growth for the company will come from?
That's the million-dollar question, right? That's an issue that my team and my board are all, of course, thinking about. We will see. I really cannot tell you now. We have, of course, ideas, and we have plans and possibilities. We really have to focus on execution. We have a lot on our plates at this stage. We have never done that many number of programs in parallel. Be sure that it's top of my list, what do we do with this capacity going forward? I'll just benefit from your question to say, for example, in business jets, maybe I can give a little bit more color. My real focus there for the short-term, short and mid-term is really to consolidate the business, make sure that our Melbourne operation achieves its full potential. As you know, we are also going to produce the 450 and 500 in Melbourne.
Consolidate our customer support infrastructure, and frankly, boost our cash generation from that business. We have to have that cash generation to support our investments in the commercial jets. That is as far as I can tell you. Beyond 2017, 2018, when we start to have some availability, that's something we have to sort out in the next, probably 18 to 24 months.
Okay, great. On biz jets, when you look at the orders that you have right now in your book, what % of that is in the U.S. versus international? In terms of where you think orders will come from, is it also U.S., or what's the split between U.S. and international?
I don't think we divulge a %, and I would not know anyway, but as far as new orders, the U.S. is the main source of new demand. A snapshot of our backlog today, I would not know.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Stephen Trent of Citigroup. Your line is now open.
Hi, good morning, guys, thank you for taking the questions. I guess firstly, what is your view of commercial aircraft demand from the U.S. airlines? You already touched on it, but in addition to the Republic order, do you see maybe United Airlines getting interested? Or do you see the legacy carriers more looking at used planes instead of ordering new ones? Do you have any color on this?
That's the first?
Yeah.
Yeah. Okay. [Non-English content] , Steve. Good morning.
Oh, I'm sorry. This is Kevin instead of Stephen Trent.
I'm sorry. I'm sorry, Kevin. That's why I didn't address in Portuguese. Waiting for the usual "bom dia" in Portuguese.
Yeah.
I'm sorry. Yeah, we see a continuous activity in the U.S., definitely for the E1. We cannot mention any names, of course. We announced those five [inaudible] for Republic recently, and there are an outstanding number of options there. The airlines, the faster they can replace their 50-seaters, the more they're going to order aircraft. We are probably bullish about the potential in the U.S. And our ability to compete. We believe we have a good product, and the experience in service of the recently delivered E175s with the improvements has been excellent. Everybody who's flying the airplane, this new version of the airplane, is really, really thrilled. That creates a virtuous circle, and hopefully will keep us in the lead to satisfy that demand.
Okay, great. I guess just coming back to the KC-390 development program, and all the other ones that you have on your plate. You said that you've never really had this many projects all online at the same time developing. If the payments from Brazil's government continue to get delayed, do you have any options to continue funding the development? Could you see something similar to what Bombardier had to do with the Learjet?
In the KC-390, KC-390 is a key program. I definitely do not see Embraer funding the program. Let's say the best picture we have today is the continuation of the program, as planned or close to as planned. Also, we have to consider a less optimistic scenario where there is a slowdown and a stretch-out of the development phase. That's a possibility. We are discussing with the government very openly and fundamentally with the standpoint that, either they are able to sustain the current pace of development, or if they are not, we really need to sit down and reprogram it. We do not see any scenario where the airplanes drop down. We are way down the road. Would be really not very smart to stop this program at this stage, having the first prototype already in flight and almost the whole development done.
What is there is the flight test campaign, two more years to go. We do not see a scenario where we're going to just stop the program. The worst-case scenario in our perspective, would be a slowdown and redimensioning of the program. Which of course, we would adapt ourselves, on the cost side, to cope with that. That's not what it is there today. Today, the discussion is to how to preserve the program as it is and how do we get the late payments, fundamentally.
Okay. Very helpful. Finally, just circling back on, I guess, EBIT margin. You talked about, I think, the biz jet side. On the commercial segment, margin change year-over-year, do you know what portion came from higher production levels versus any FX on, like, SG&A costs?
Combination of things. I think it's
We had a couple of things. We had the FX that helped us on commercial aviation. We also had the higher deliveries, right? We delivered 20 E-Jets versus 14 last year. We also had some efficiency gains, as we only deliver the E175s. We have mentioned that we increase the mix of E175s, even though it comes at a lower price. We have efficiency to gain as far as production, that's what we are showing in the results. I think it's a combination of facts, efficiency gains, and the higher deliveries that we had in the quarter.
Okay, thank you. How much would you say was from efficiency gains, and how much was from FX?
We can't disclose that. We don't have that prepared, basically, it's like we said, it's a combination of that. Depends on the number on the specific period that we deliver, it's all together. That's how we approach that.
Okay, great. Thank you very much.
Thank you. Our next question comes from Alexandre Falcão of HSBC. Your line is now open.
Hi, good morning. My question is regarding if there's any delays on Defense. In terms of accounting, how are we actually going to see this flowing through results? What I mean is, if we see some real contingency in the government, does this mean that you guys are going to cut the revenues from this, or you're going to maintain revenues and just book it as more receivables? Just want to see exactly if there's any delays specifically on the big programs, how we're going to see this flowing through results. Thank you.
Alexandre, actually, the way it works, those type of contracts, they are recorded as a percentage of completion. Normally, as you advance in the development of the program, you recognize the revenue. The impact, if for some reason this program will review its schedule, for example, and it's going to be lower deliveries because of the percentage of the advance of the program. Which we don't expect, as Fred mentioned, that should happen. That's typically how it works. We're not invoicing, for example. It's just like more percentage of completion advancing, then it's recognized as revenues. That's how it works.
Because I know you guys are in the final stages. We're almost flying this aircraft right now. Would you continue the completion even if you don't receive any money from the government? I'm trying to understand, if that is, because, in the press, each and every day, there is a news that the finance minister and the planning minister are going to announce a big budget cut or at least a big budget contingency. Just wanted to see how, if any, if there's going to be any impact in the P&L here.
Well, the answer is no. We will not continue without the proper applicable payments. There is a delay, of course. When they stopped paying us, we did not stop the activities for a few months. We have not stopped so far under the belief that they will resume the payments, and eventually normalize that very important situation. If the cuts are permanent, we have no other option than to stop it. Again, I don't think this is the likely scenario. That's not a very smart place to cut, frankly, because this is a needed airplane, the potential source for exports. Theoretically, if that happens, we'll not fund. We cannot fund the rest of the development by ourselves. We will not do that.
Okay. Thank you so much.
Thank you. Our next question comes from George Ferguson of Bloomberg Intelligence. Your line is now open.
Thank you. Good morning. As I look at the backlog for the E2 program, it doesn't look like there's been any successful campaigns in the last two, three quarters. I was wondering if you could catch us up with how campaigns are going for the E2 program right now.
Yeah. Okay. That's a fair question. There's a lot of activity. I just refer back to a previous question. We had a very good start at the launch of the program with the bulk of launch orders. The airlines, as we are still relatively far from first deliveries, so it's still relatively three years from first deliveries. The airlines having a lot of orders for Boeing and Airbus product, they're comfortable in waiting a little bit more. That's kind of the background. Having said that, we do have a lot of activities. We have several campaigns going on around the world, at different stages. We are not particularly anxious about the very short term, because first, we have this bulk of launch orders, which take several slots from the initial deliveries.
Second, because we understand that there is this outstanding backlog for Boeing and Airbus, which reduces the appetite for the airlines for short-term commitments.
Okay, thank you. Is there a timeframe we should think about, where we'd start to see E2 orders be re-energized here? Is it a couple of years out, or how should we think about sort of the timeframe to
Yeah. As we approach the entrance of service, which is 2018 of the first model, probably it's reasonable to see some more activity within the 24 months before delivery. Sometime next year, probably. That sounds right.
Are you seeing your airline customers change any of their thinking around new generation technology versus older, less fuel-efficient technology? Do you see any sort of shifts there? How is that affecting things, do you think?
That's a point, actually, that I failed to remark. With the recent decrease in oil prices, that has also, let's say, slowed down the urge for replacing aircraft. I don't think we can call it a trend yet. It's a very short-term effect, very short-term development. The airlines, I think the industry is kind of in a wait-and-see mode to see where oil will go. Let's say if the oil stays at current levels, there will be, of course, less impetus from the airlines to raise and change aircraft. In the long term, mid to long term, I think it's an absolute certainty that the new airplanes, the new engines, and the new generation of aircraft will dominate the picture.
Okay. Thank you very much. I appreciate it.
Thank you. Our next question comes from Bruno Amorim of Santander. Your line is now open.
Hi, good morning. I'd like to know if, in your opinion, the 13% EBIT margin in commercial aviation could be seen as a floor for the full year. You said that what helped in this quarter was FX, higher deliveries, and efficiency gains. FX is Q3. You are going to deliver even more aircraft on a quarterly basis in the coming quarters, according to your guidance, I guess efficiency gains will still be there. That's my question. Thank you.
No, Bruno, I think that this is not a floor. I don't think we should consider that, although that should be considered that the important is the whole year. There's a combination of things that affect. Like, FX is also always important. Dilution, like we mentioned before, has some efficiency gains. Sometimes you can benefit more or less on that, depending on the activity on the quarter. I don't think that could be considered necessarily as something that should replicate going forward. I think that you should consider that back to the guidance range that we indicate in terms of revenues, I think, will be the best way of
Okay. Thank you.
Thank you. I'm showing no further questions at this time. I do now call back over to José Filippo for any closing remarks.
Okay. Again, I'd like to thank everybody to join us. Of course, our IR team is always available, if you want to go forward with some questions, we'll be ready to attend you. Thank you very much, and have a good day.
This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.