Morning, ladies and gentlemen, and 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. As a reminder, this conference is being recorded and webcasted at ri.
Embrayer.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, anticipate, 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 materially from the anticipated in the forward looking statements. Participants on today's conference call are Federico Corrado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO Mr.
Eduardo Coteau, Director of Investor Relations. I would now like to turn the conference over to Jose Filippo. Please go ahead, sir.
Okay. Thank you. Good morning, everybody, and thank you for joining Embraer Q1 2015 results. As we usually do, we go through the presentation and then we'll be ready for questions in the session. So starting on Page 3 and the highlights of the business for the quarter and starting with the Commercial Aviation business, we had a delivery of 20 ejets in the Q1 of this year.
Including in that in the number, the first 175 related to the direct order of American Airlines out of the 60 in that order and also related deliveries, sorry. Now in terms of orders, we have the KLM Air France order for up to 34 ejets including 17 firms and 17 options, which includes the current generation of the E Jet, 175 and 190. Also continue with orders, the Republic Airways ordered additional 5 E175. As far as our customer base, we had inclusion of Calstar Aviation, which became our first e jet operation in Indonesia. And finally, in relation to the E2 program, we received an important award, which was the Crystal Cabin Award related to our largest bin and individual seats in 1st class.
Now on slide 4, moving to Executive Aviation highlights. We had the delivery of 12 executive jets in the Q1 of this year, split by 10 light jets and 2 large. In relation to our legacy 450 program, we continue to advance and we expect to enter into service in the Q4 of 2015. And related to the LAGUS 500 programs, we had additional three important recognitions by the Aviation Week Magazine, the National Aeronautics Association and also FLYING Magazine. Moving to next page, defense and security highlights.
Starting with an important milestone of the KC-three ninety program, which was the first flight that happened early February this year. In terms of the LAS program development, we had a delivery of 2 aircraft in this quarter and now 5 already delivered. Regarding Brazilian fighter program, we signed the partnership contract with SARB in the middle of this month. And in relation to our the Brazilian satellite program, it was concluded the Critical Design Review Report in this quarter. Now moving into the financial results, starting with page 7.
The firm order backlog reached $20,400,000,000 in the end of March, more than $1,000,000,000 over the same period of last year. Page 8, next page in relation to deliveries. We had in commercial aviation, the delivery of 20 ejets in the quarter. And regarding the executive jet business, delivered 12 aircraft in the Q1 broken by 10 light jets and 2 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 is active large jets and 80 to 90 is active light jets.
Next page, Page 9, revenues by segment. The total in the high left chart, we had a total of almost $1,100,000,000 of revenues in the Q1. And when we break these revenues by business, we need to the right side. The commercial aviation business, total of 6 MXN662 1,000,000 in the Q1, the Executive Jet business of MXN 167 1,000,000 dollars and defense for $213,000,000 in the Q1 of this year. In the next page, the consolidated figures as we indicated 1,100,000,000 return to a BRL 3.1000000000.
But important here is that we are already already mentioned that we are maintaining and confirming our 2015 revenue guidance between $6,100,000,000 $6,600,000,000 Moving to next page, now talking about SG and A expenses. We reported a total of $129,000,000 in the Q1 of this year, including $43,000,000 in G and A $86,000,000 in selling expenses. We remain focused on keeping those expenses under control and monitoring them. Moving to next page, page 12. As far as operating results, reported a total of $80,000,000 in the Q1 of 2015 with a 7.5% margin in line with the margin of the Q1 of last year.
We are maintaining our guidance for 2015 for the amount range of $490,000,000 to €560,000,000 in 8% to 8.5% margin. Next page, page 13. In terms of EBITDA, we had a total of $149,000,000 in the first quarter with a margin of 14.1 percent. Our outlook for the year remains unchanged with a range of 7.30 dollars to $850,000,000 and the margin of 12% to 13%. Page 14, next page regarding net income.
Actually net result, we reported a net loss of net loss of $62,000,000 in the Q1, mainly due to the recognition of $110,000,000 of deferred income taxes. This already happened before when we have an appreciation of the dollar against the real. 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 will have a gain of $48,000,000 in this quarter. Next page, in terms of inventory, we end the quarter with a total of $2,700,000,000 an increase of $291,000,000 from the end of the year, reflecting the preparation of higher deliveries in the coming quarters. Next page, Page 16.
In terms of cash flow, we reported a negative cash flow of $440,000,000 in the Q1 of 2015, compared to a negative $404,000,000 in the same period of last year, confirming the seasonality of the business. But 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 and Security segment. Despite the cash consumption in the quarter, are maintaining our outlook for 2015 of use of less than $100,000,000
in the year.
Next page, as far as investments, we had a total of $106,000,000 in the Q1, broken by $7,000,000 in research, dollars 27,000,000 in development and $72,000,000 in CapEx. We are maintaining our indication of $650,000,000 as total investment for the year 2015. Next page, Page 18, finalizing the presentation before the Q and A session. Our capital structure, we ended the quarter with a net debt figure of $581,000,000 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.
With that, we'll conclude this part of the call, which is the presentation. I'm now ready for the questions. Thank
Our first question comes from the line of Pete Skibitski of Drexel Hamilton. Your line is now open.
Good morning, guys. Good morning. Good morning.
I want
to ask you, I'm guessing that you didn't collect on the large KC-three ninety receivable from last year during the quarter. Can you update us on your expectations for collecting that? And is there any contemplation to slowing the program down?
Yes, Pete. Actually this program goes as we expected. As we indicated before, we are focused on maintaining and avoid to increase these accounts receivable. So that's basically the pattern that we have for the Q1. 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.
But we received a portion about $50,000,000 in the beginning of April, which returned back to the level of the end of the year. So basically that's the profile of that account.
Okay, understood. Thank you. And then just one follow-up. Can you give us a sense of how the segment operating margins trended in the
Q1? Yes. It's Eduardo here. We had consolidated operating margin of 7.5% in the Q1. Commercial Aviation was around 12%, Business Jets around 6% and Defense and Security was around negative 9%.
Okay. Just on that Defense, that's the lowest I recall for defense in a while. Any particular one timer impact that?
Yes, yes, Pete. Actually the defense as it has its revenues or its contracts more exposed to the real, we have to do an adjustment of FX base every quarter. We usually do this. We do this every quarter. But in this quarter, as we had an appreciation of the dollar, which is actually about 20%, that impacted negatively.
But 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 Taran Kudwala 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 is?
On the D and S business, you said there was an adjustment on FX that was nonrecurring?
About $30,000,000
Okay. That's helpful. Thank you very much. Okay. And 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 2 to 3 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 and obviously that seems to have come true here with E Jets kind of flattening out a little bit. But obviously, the defense business is coming in a little bit weaker. So my question, I guess, is are there any other levers that you can pull here? The biz jet seems to be getting a little bit better, but certainly not as strong as maybe you would have liked or have the cars 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 couple of years here?
Yes. This is Fred. We our commercial aircraft, it's doing good. We have been able to sustain and actually increase quantity a little bit. Also have been able to so far to offset pricing pressures with efforts with lower costs and try to preserve margins as much as we can.
So that's a sound business. Business jets, I mean, we had a particularly weak quarter. We missed a few deliveries. So that's why we are optimistic about increasing the numbers in the next few quarters and meeting the guidance as far as deliveries and revenues in that business. And 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.
So there is growth in that segment for us. In defense, we have of course a strong dependence of Brazil's Armed Forces. We have 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-three ninety of course. But that's a financial concern.
I mean, we have the payment problems. I mean, we have to believe that this will be solved soon. And we see Brazil in the next couple of years regaining traction and we continue to be positive in the long term for Brazil. And so as a defense business is a long term business, We are I mean, it's 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-three ninety in the markets, then we'll have another product for exports.
So that should be an add on step function in that business as well.
Okay. Thank you, Fred for that clarity. I guess just one more question from my side. I know it's still early, but 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. Wondering if there's been any change there?
Well, they have been aggressive very aggressive for some time. So I would not have noticed not personally any significant change. I think it's Alain is a capable guy of course. And 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 the line of Kai Van Rumer of Cowen and Company. Your line is now open.
Yes. Thank you very much. So help me understand your gross margin was a spectacularly good 23.7% despite a pretty lean mix. You didn't have any 190s, 195s. So you had all the lowest margin commercial aircraft.
So 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?
Okay. Thanks for the question. Yes, I think we had situation in the Q1, which shouldn't be the same for the rest of the year. I think that we would have if you think about the whole year, it should be back to the level of as we indicated like level for the high two digit sorry the high teens as we indicated before. But we shouldn't be the same situation in the Q1.
I think the combination of things here is to take like executive jet business in this Q1, we had the lower deliveries with specific good margin on the models that we delivered combined with a higher participation of the service and parts that led us to this higher gross margin. And also services in commercial aviation also helped, but we shouldn't consider that as a trend for the whole year. We'll go back to what we indicated before throughout the guidance that we sent out. But basically that's what we should work on.
Maybe help us understand. So if you what you're talking about is the guidance of the EBIT margin, but maybe help us understand some of the pieces. For example, the G and A was lower than it's been presumably that's helped by the real. And 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.
So is that gross margin going to be lower than the Q1 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 Q1 like we 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. And that's what we expected.
But basically, I don't think that the margins of the Q1 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 release the guidance figures.
You mentioned this is the last one. You mentioned that service was a plus for both bizjets and commercial. Can you maybe give us a little bit of specifics in terms of how much the service business would was up year over year in the quarter and approximately where it would go for the remainder of the year? No,
higher impact was in the Executive Jet Business. 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. But I think it's too much specific for the quarter, which again we shouldn't expect the season ality of this business will probably be more into the deliveries itself rather than service and parts going forward, Just like a situation that we had in the Q1.
Thank you very much.
Thank you. Our next question comes from Anup Poponak of Goldman Sachs. Your line is now open.
Hi. Good morning, everyone.
Good morning. Good 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?
Well, no, I think that the guidance for the revenues at the end, This we're still maintaining that with the expectation that the defense business should be affected from the exchange effects that already impacted the guidance if we compare to last year's figures of defense. But this 1st quarter is something that we made this adjustment like we mentioned that impact the revenues that shouldn't be we don't expect to see that in the current quarter. So that's probably why we remain you are seeing that, but we are still keeping this projection that we indicated before.
Maybe I could add. We are still under the assumption that the main program the KC-three ninety the 3 main programs, the Cisron, KC-three ninety and the satellite, they will be one way or the other, they will be kept integral. So we are under that assumption. We will for sure have a reduction in the pace and maybe even the quantity of the modernization programs. So that yes, that goes straight to your question.
So 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. So I think the best view that we have at this moment is to maintain the guidance again with the 3 big assumption with the big assumption of those 3 main programs being kept intact.
Okay. And there's no change to your assumption for the real in the outlook. Is that correct?
Yes. We're still to we base as we disclosed to you at 2.8. It bringing all the way up to 3.2. It's now back to 2.9 or something, right? I didn't
see it.
Yes. 2.99. Yes.
So the forecast in Brazil, they're all over the place from 280 to 310. So we should be so if we have any risk there, it's probably a little bit of an upside risk.
Okay.
And 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?
We had to be totally transparent, we had I think 2 or 3 airplanes with customer just kind of a few weeks deferral. We also missed I think a couple of airplanes in production, believe it or not, which is not haven't happened for some probably some supply chain issue or something. But so we should see probably 4 or 5 airplanes that's what we missed in the quarter. So we're talking about $100,000,000 100 and $20,000,000 more or less, which should be added on to the revenues of the Q1. So that of course impacted negatively.
Okay. So will all of the legacy 650 Phenom 300 and Phenom 100 have deliveries down this year? And anything you could say about what you think those do next year just kind of the legacy airplanes?
I'm not sure I get the question, Noah.
Yes. I guess the executive jets excluding the 50450, are they down this year? And then are they down or up next year?
Yes. We don't really disclose that as a forward way. I mean we so we really group them together the 4 models the 4 feet, 500, the 6 feet and the Lineage 1,000. And we would prefer to stay as a block large aircraft. We never disclose and I think nobody does I don't think anybody does disclose model by model as far as giving forecast for deliveries.
Yes.
Okay. Thanks very much.
Thank you. And our next question comes from the line of Derek Spronik of RBC Capital Markets. Your line is now open.
Good 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?
A little bit of a hello, Miles. A little bit of a Derek, I'm sorry. A little bit of recovery in the U. S. Markets, not substantial though.
And the rest of the world, no real change to our last report, which is, of course, China was a important market, which significantly slowed down. And Brazil, particularly for us, was also an important market, which also slowed down. So what has been offsetting this is the U. S. Market, which has been growing.
So it's pretty much the same picture as we reported a few months ago.
Okay. And the legacy 500, how is that resonating with your customers? And then in particular what regions are you finding the most I guess interest on that product right now?
As far as the percentage, the U. S. For sure. But we the last week we closed 1 in Brazil, 1 in Australia. So it's really getting traction.
And we are not as if you remember, when we disclosed our guidance for the year, some people were a bit frustrated by the number. They expect the higher numbers. We are really trying to have a very solid ramp up and in service support entering to service support. But it's frankly all over the world. But as far as the bulk of demand, it is also in the U.
S.
And if I could, the Phenom product line has been very successful and you've sold quite a few. And I guess the pricing reflected that as well in terms of 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 $500,000,000 $450,000,000 or are you going to try to be a little bit stickier on the pricing front?
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. So this is the perfect when you find perfect sweet spot for a product. It's a desired aircraft. The 500, we see with the potential to become exactly the same in each segment.
We are indeed facing 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. But 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. And so 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. So but having said that, we are I mean, we're getting a very good resonance about the acceptance of the aircraft. People see the value of the aircraft and they are gradually coming through to accept to pay what we think is the right price for it.
Yes. That's great color. And if I could just quickly on the regional the commercial side. I know the E190, 195 doesn't compete directly with the C Series, but there obviously would be some overlap in some of the tender activity out there for the airlines. As the C Series kind of becomes more closer to launching into production, are you seeing airlines kind of shifting a little bit more positive towards that program?
Or is it becoming more competitive? And 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?
Well, we 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. So there is activity going on for the E-one, let's say, our E-one 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 at KLM announced last month I think. And 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 CO and new versions or current and MAX versions. So what we see is that the airlines that there's a huge commitment as far as narrow body for the next several years with Boeing and Airbus.
So the impetus of looking at into smaller planes such as our E-two or the C Series, it's more or less on the maybe closer to the Boeing and Airbus than what we are. So I think that's the real issue. I mean, there's a lot of capacity already taken by the A320 family and the 727 family. And their lines, they are still they don't need to make a strong move at this very moment. So that fits, I mean, nicely for us because we will not be in the market until 2018 anyway.
But 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 great color. Thanks a lot. Appreciate it.
Thank you. Our next question comes from the line of 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?
Well, hopefully, as you know, we cannot make probably say too much already. But yes, at least we're 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.
Okay. That's good. And then the other you mentioned about the business jets missing a couple of deliveries. The production maybe didn't click the way it planned 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 Miles well, I should probably should get to a more precise answer later on. But I think it was the legacy and the Phenom, I think. But it was a 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 we're saying.
I appreciate the transparency Fred. And then the last one was on the 30,000,000 dollars in D and S in the quarter that you called out as being kind of a true up to the FX effect on your programs. Just want to clarify that was revenue not profit, correct? Yes. Okay.
What was the profit impact or the EBIT impact?
No. The $30,000,000 is profit. It's profit. Profit profit.
Okay. What was the okay. So was it a drop through on both? Was
it an EAC?
Actually, it reduces revenues and profits.
Okay.
But the amounts are very close close to 30 both.
Okay. All right. Thanks guys.
Thank you, Myles.
Thank you. Our next question comes from the line of Ronald Epstein, Bank of America Merrill Lynch. Your line is now open.
Hi. Ron is actually on an airplane right now. So this is Christine Leeuwad calling in for him.
We have change of voice, Ron.
So the question we have is, so the development work on the three ninety rolls off this year. And if all goes along to your schedule, development work on the E2 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? I mean, where do you think future growth for the company will come from?
That's a $1,000,000 question, right? That's an issue that my team and my board are all, of course thinking about. So it's we will see. I mean I really cannot tell you now. I mean, we have, of course, ideas and we have plans and possibilities.
We really have to focus on execution. We have a lot in our place at stage. We have never done that many number of programs in parallel. But be sure that it's top of my list, what do we do at this capacity going forward. But we have 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 450500 in Melbourne, consolidate our support 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. So that is as far as I can tell you. But 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. And then on BIDS Jets, when you look at the orders that you have right now in your book, what percent of that is in the U. S. Versus international? And then in terms of where you think orders will come from, is it also U.
S. What's the split between U. S. And international?
I don't think we devote and I would not know anyway. So but as far as new orders, the U. S. Is the main source of new demand. But in snapshot of our backlog today, I would not know.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Stephen Chen of Citigroup. Your line is now open.
Hi, good morning guys and thank you for taking the questions. I guess firstly, what is your view of commercial aircraft demand from U. S. Airlines? I mean, you already kind of touched on it.
But I mean, in addition to the Republic order, do you see like maybe like 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?
And that's the first? Yes. Yes. Okay. Good morning.
I'm sorry. This is Kevin. I'm still not sure if Stephen is
I'm sorry. I'm sorry, Kevin. That's why he didn't address in Portuguese. We're waiting for the usual bondi in Portuguese. I'm sorry.
Yes, we see continuous activity in the U. S. Definitely for the EU. UN. We cannot mention any names of course.
We announced those 5 sorry, 5 for Republic recently and they are I mean, there are an outstanding number of options there. And the airlines as soon as the faster they can replace their 50 seaters, the more they're going to order aircraft. So we are probably bullish about still 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. So everybody who's flying the airplane, I mean, this new version of the airplane is really, really thrilled. So that creates a virtual circle. And hopefully, will keep us in the lead to satisfy that demand.
Okay, great. And I guess just coming back to the KC-three ninety development program and all the other ones that you have on your plate, you said you've never really had as many projects online at the same time developing. If the payments from Brazil's government continues to get delayed, do you have any options to continue funding the development? Or I mean, could you see something similar to what Bombardier had to do with Learjet?
We well, in the KC-three ninety, KC-three ninety is a key program. So I definitely do not see Embraer funding the program. So let's say the current the best picture we have today is the continuation of the program as planned or close to as planned. But 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.
And we are discussing with the government very openly and fundamentally within 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. I don't we do not see any scenario where the airplanes drop down. It's just we are way down the roads. We'll 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. So what is there is the flight test campaign 2 more years to go.
And so we do not see a scenario where we're going to just stop the program. So the worst case scenario in our perspective would be a slowdown and redimensioning of the program, which of course then we would adapt ourselves on the cost side to cope with that. But 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. Okay. Very helpful. And then 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 I mean any FX on like SG and A costs?
Combination, I think. I think it's We had a couple
of things, Matt. We had the effects that helped us on commercial aviation. We also had the higher delivers, right? We delivered 20 jets versus 14 last year. And also we also had some efficiency gains as we only delivered the E175s.
We have been mentioned that we increased the mix of E175s even though it comes at a lower price. We have efficiency to gain as far as productions and that's what we are showing in the results. So I think it's a combination effects, efficiency gains and the higher deliveries that we had in the quarter.
Okay. Thank you. And like how much would you say it was from like efficiency gains and how much was from FX?
We can't disclose that. We don't have that prepared. But basically, it's like we said, it's a combination of that. It depends on the number on the specific period that we deliver. So it's altogether.
That's how we approach it.
Okay. Great. Thank you very much.
Thank you. Our next question comes from the line of Alexander Falcao of HSBC. Your line is now open.
Hi, good morning. My question is regarding the if there's any delays on defense. In terms of accounting, how are we going to actually going to see this flowing through results? What I mean is, if we see some sort of 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 receivable? So just want to see exactly if there's any delays specifically on the big programs.
How are we going to see this flowing through results? Thank you.
Actually the way it works those type of contracts they are recorded as a percentage of completion. So normally as you advance in the development of the program you recognize the revenue. So the impact if for some reason this program will review its schedule for example, then it's going to be like lower deliveries because of the percentage of the advance of the program, which we don't expect as Fred mentioned that should happen. But so that's typically how it works. It's not a question it's not we're not invoicing for example.
It's just like more percentage of completion advancing than it's recognized as revenues. That's how it works.
Okay. But would you stop the 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? Just trying to understand if that is because in the press each and every day there is news that the Finance Minister and the Planning Minister are going to announce a big budget cut or at least a budget contingency.
So just wanted you to see how if any, if there's going to be any impact the P and L here?
Yes. Well, the answer is no. We will not continue without the proper I mean, the applicable payments. I mean, there is a delay, of course. When they stop paying us, I mean, we did not stop the activities for a few months.
So we have not started stopped so far under the belief that they will resume the payments and normalize eventually normalize those that's a very important situation. If the cuts are permanent, I mean, we have no other option than to stop it. But again, I don't think this is the likely scenario. It would not be I mean, that's not a very smart place to cut frankly, because this is a needed airplane, the potential source for exports. But theoretically, if that happens, yes, we will 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 the line of George Ferguson of Bloomberg Intelligence. Your line is now open.
Thank you and good morning. As I look at the backlog for the E2 program, it doesn't look like the there's been any successful campaigns in the last 2, 3 quarters. I was wondering if you could catch us up with how campaigns are going for the E2 program right now?
Yes. Okay. That's a fair question. There's a lot of activity. And I just refer back to the to a previous question.
We had a very good start at the launch of the program with bulk of launch orders. And the airlines as we are still relatively far from first deliveries, so it's relatively 3 years from first deliveries. The airlines having a lot of orders for Boeing and Airbus product, they really I mean, they are comfortable in waiting a little bit more. So that's kind of the background. Having said that, we do have a lot of activity.
We have several campaigns going on around the world at different stages. But 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. And 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 time frame we should think about where we'd start to see E2 orders be reenergized here? Is it a couple of years out? Or how should we think about the sort of the time frame to
Yes. As we approach the entry into service, which is 2018 of the first model, probably it's reasonable to see some more activity within the 24 months before delivery, so sometime next year probably. That sounds right.
And are you seeing your airline customers change any of their thinking around new generation technology versus older less fuel efficient technology? Is I mean do you see any sort of shift there? What's 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 for short term development. But the airlines everybody is I think the industry is kind of in a wait and see mode to see where oil will go.
Let's say, if oil stays at the current levels, there will be, of course, less impetus from the airlines to raise and change aircraft. But in the long term mid to long term, it's I think it's an absolute certainty that the new airplanes, the new engines, the new generation of aircraft will be will dominate not dominate the picture.
Okay. Thank you very much. Appreciate it.
Thank you. And our next question comes from the line of 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, because you said that what helped in this quarter was FX, higher deliveries and efficiency gains. FX is still at 3. You are going to deliver even more aircraft on a quarterly basis in the upcoming quarters according to your guidance and I guess efficiency gains will still be there? That's my question.
Thank you.
Bruno, I think that this is not a floor. I don't think we should consider that. That should be considering 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. So 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 indicated in terms of revenues, I think will be the best way of.
Okay. Thank you.
Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Jose Filippo for any closing remarks.
Okay. Again, I'd like to thank everybody to join us. And of course, our IR team is always available. So if you want to go forward with some questions, we'll be ready to attend you. So 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.