Analysts. At this time, the company will present its fourth quarter 2014 results. Afterwards, 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 zero. 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 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, anticipate, intend, 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 events and circumstances discussed on this conference call may 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. Luciano Froes, and 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. Good afternoon for the ones that are here, and good morning for the Americans that join us. We're going to go to our presentation of the conference call for the fourth quarter in 2014 results. Before I go into the presentation, I'd like to take this opportunity to share with you some important announcements internally here. We're happy to announce that. It's an organization announcement, which Luciano Froes, that you know, had been dealing with you for quite some time, I think three years now. He's assuming new responsibilities in the company. He's taken over the position of marketing director for executive jet business. He's going to be moving to Florida. He's going to be based in Melbourne, where we're developing our excellent center for executive jet business. Starting next week, Luciano will take that responsibility. We're very happy with that opportunity.
It's a policy of the company to really try to give opportunities, especially for talents like Luciano. We're very happy with that possibility. At the same time, we are introducing Eduardo Couto, who has taken over the position of IR. New business development and mergers and acquisitions. Eduardo comes from Morgan Stanley. He used to be an equity analyst, he knows the dynamics of the market. He knows the company, he knows probably some of you. We're happy as well to have this replacement. We understand that we're continuing to a high level people dealing with the market, representing Embraer. Again, good luck, Luciano. Hope, of course, you'll be available, we know. Welcome, Eduardo, with us. We're starting. I think it's a good opportunity that we have this event as we can announce this and do this transition. Okay.
With that said, we start the presentation, we go to page three for the ones that are remote. Recapping the 2014 and the fourth quarter highlights. In terms of the corporate highlights, we had the celebration of the 45th anniversary of Embraer last October. We also remain committed with sustainability, we are recognized by that with the fifth consecutive year in the Dow Jones Sustainability Index, as well, we are part of the ISE in Brazilian Stock Exchange. In terms of management process and best practice, we were awarded by the National Brazilian Quality Award, which is the PNQ, very important recognition in the Brazilian industry, presented by the National Quality Foundation, the FNQ. Also finalizing this page, several other recognitions related to people management as ranked as best place to work in Brazil in ABRH. Moving to next page four.
Terms of the commercial business highlights. First, in the fourth quarter, we had the delivery of 30 E-Jets in the last quarter. One of which was the E-Jet production number 1,100. It was delivered to Aeroméxico last year. In terms of sales activity, we have the order for SkyWest for seven E175, which represents actually an option conversion. Related to the E2 program development, we had the first metal cut of the E2 program. We are in line with that development. Page five. In commercial business, now the highlights of the year. We had a delivery of 92 E-Jets in 2014. In terms of sales activity, we had the 258 E-Jets sold in the year, concluding only in the E2, 590 commitments. This includes orders, options, and LOIs.
As a confirmation of the E-Jet program success, at the end of 2014, we had over 1,500 orders with customer base of 65 airlines in 45 countries. We maintained our leadership in commercial jets in the segment of 70 to 130 seats. Moving on to Executive Jet business. The fourth quarter, we had the delivery of 52 executive jets, broken by 38 light and 14 large jets. In terms of sales, we had the conversion of 10 Phenom 300 options to firm order from NetJets, also an important milestone in our Legacy 500 program. We delivered the first three aircraft in the end of the year. The highlights of Executive Jets in next page for the year 2014. Total delivery of 116 airplanes, 92 light and 24 large jets.
In relation to the Legacy 500 program, we had achieved certification in Brazil, in the U.S., in Europe, and Australia. Another important achievement in the Executive Jet business was that for the second consecutive year, the Phenom 300 was the most delivered executive jet in the market, 73 units. As a result of our commitment to customer satisfaction, we are ranked as number one in AIN annual survey. Page eight, the highlights for defense and security business. Fourth quarter, we signed the firm order for the first 28 KC-390 to the Brazilian Air Force. The Brazilian fighter program, we confirmed our participation with the signing of an MOU with Saab for the development. The LAS program in the U.S., we remain on track, we delivered the first four aircraft to the U.S. Air Force. Page nine.
Still in Defense & Security for the year. We reach annual revenues of $1.5 billion, up more than 20% when compared to 2013. Also, an important milestone of Embraer KC-390 program, was that last month, we had the first flight of that product. Regarding the programs in our controlled subsidiaries, we continue to advance on the SISFRON project through Savis. We had important contracts of supply of radars and equipment through Brazilian government on radar. The Brazilian satellite program was an important step, which was the critical design review of the program. Finalizing the highlights on defense, we signed a contract to supply new air traffic management systems for Brazilian and Indian government. Next page. We're turning to the overview of the financial results, and we can move to page 11. Starting with the backlog.
We saw important growth on our backlog throughout the year of 2014, reaching in the end of the third quarter, our all-time high level. In the end of the year, we had almost $21 billion in backlog, which were broken by 65% on commercial aviation, 26% on Defense & Security, and 9% in executive aviation. Next page, in terms of aircraft deliveries. In commercial aviation, in the left side, we delivered 92 aircraft, in the lower end of the guidance range, of which the great majority were the E175 model. In terms of executive jet business, we surpassed our light jet guidance range with 92 delivered. Had a reduction on the large jet deliveries with 24. We had a range of 25 to 30 in the large.
Next page, in terms of revenues, net revenues, as a result of those deliveries and the revenues with defense, we ended the year with almost $6.3 billion in terms of revenues, within the guidance range of $6 billion-$6.5 billion. Next page 14. The breakdown of the revenues was consistent with our expectations. In the left side, in terms of business, we saw a relative reduction in commercial aviation related to the growth of defense. Commercial aviation was from 2013, came from 53% to 50%, where we saw defense growing from 19% to 23%. Executive jet business almost remained the same in terms of 27% in the previous year to 26% now. When we see these revenues broken by region, on the right side, the highlight for the American market, especially because of the deliveries in the commercial aviation.
The second participation of Brazil, which was more related to the defense activities. Next page 15. We see the same information now broken in a quarterly view. We mentioned, we confirmed that we had a more balanced year. Remember that last year, we had a concentration in the last quarter. This year, although we still see that the last quarter is the strongest, we saw more balanced revenues throughout the year. We had this $6.3 billion and BRL 14.9 billion, in terms of net revenues. In page 16, in terms of SG&A, our ongoing focus on the cost control, reflected a reduction this year in dollar, and not only in dollar terms, but also in the percentage of revenues. We saw in 2014, the total of $628 million compared to $665 in 2013. The percentage of revenues coming down from 11% to 10% in 2014.
In terms of EBIT, operating results, page 18. Here we show, before we go into the details of this chart, just to call attention about the information that we have 2013. You remember that we had this positive impact of the reverse of provisions from American Airlines. As American Airlines recovered from the Chapter 11 position, we recovered provisions that we had. We are taking that information out here to have the fair comparison. When we see what we had in the year, we reached $543 million in 2014, within the guidance range from $540 million-$620 million. In terms of margin, we had 8.6%, a little below the guidance range. The main drivers of that were basically, coming from the lower end of the deliveries, and also the higher than expected mix of the E-Jet deliveries in E175 concentration. The next page 19.
Information broken by quarter. You see that actually the fourth quarter of 2014 was below the previous year, even excluding the non-recurring effect. Again, basically because of the mix in both commercial and executive jet business. Next page, EBITDA. Page 20. Had a total of BRL 830 million with a 13.2% margin, within our guidance range for the year. What you see next page, the EBITDA broken by quarter. The same comments the previous one. In a quarterly basis, increase in the last quarter, but not as strong as we had in 2013. The next page, the net income. We had a total of BRL 335 million of net income and a margin of 5.3%. Just remember that this number is impacted by the deferred income tax, which is impacted by the FX fluctuation. Next page, this net income broken by quarter.
We see here that, especially in the end, in the last two quarters of the year, the lower amount was basically reflected by the effect that we just mentioned, the deferred income tax, because of the U.S. dollar increase against the Real. In page 24, the earnings per ADS and payout as a consequence of net income, the earnings per ADS was $1.82, and the payout was 27%, which complies with the Brazilian corporate law and also reflects our anticipation that we've been paying every quarter. Continuing next page, inventories. We end the year with a total of BRL 2.4 billion, which was an increase compared to the previous year, as we prepare for the 2015 deliveries. Going forward, in terms of investment, we had a total of BRL 430 million in 2014, broken by 47 in research, 230 development, and 153 in CapEx.
In terms of R&D, the depreciation of the Real, along with the good execution, allowed us to end the year below our outlook. As far as CapEx, we manage also our cash disbursement, trying to avoid pressure on cash. We end up with the BRL 430 million as we give an outlook of BRL 650 million in the beginning of the year. Going forward, next page, free cash flow. As we previously announced early this year in revising our guidance, our cash flow was negative in BRL 404 million. As already indicated, the main driver actually was the higher working capital requirements, mainly due to the accounts receivable increase, the inventories, and also advance from customers. This was, of course, partially offset by the reduction in investments we just mentioned in the previous sheet. In finalizing the results before we get into the outlook, our capital structure.
Debt profile remains in line with our business cycle needs. We have 5.4 years in terms of average terms and also only 4% of the debt maturing in the short term, in the next 12 months. In relation to net debt position, as a result of the negative free cash flow generation, we reported a slight negative debt of BRL 85 million in the end of the year. Okay. With that, we conclude the financial results highlights. Getting into the 2015 outlook, as we published in our earnings release, the outlook will be as follows. On page 30, the consolidated outlook. Net revenues for the year from BRL 6.1 billion-BRL 6.6 billion. EBIT from BRL 490 million-BRL 560 million, with margin from 8%-8.5%. EBITDA from BRL 730 million-BRL 860 million, with margin from 12%-13%.
In terms of free cash flow, we forecast that will be a use of no more than BRL 100 million. This number does not consider the recovery of accounts receivable impact that we experienced last year. Going forward, next page, by business unit. In terms of Commercial Aviation, we forecast the deliveries of between 95-100 E-Jets and net revenues from BRL 3.2 billion-BRL 3.4 billion. In Executive Jets business, deliveries from 80-90 light jets and 35-40 large jets, which will return to revenues in the range of BRL 1.7 billion-BRL 1.85 billion. In terms of Defense & Security, the guidance range for revenue is between BRL 1.1 billion-BRL 1.25 billion. To balance the total consolidated we showed before, we have the forecast for BRL 100 million for other businesses' revenues. On last page, finalizing part of presentation.
In terms of investment outlook, we forecast to invest BRL 650 million in 2015, broken by BRL 50 million in research, BRL 300 million in development, and another BRL 300 million in CapEx. Primarily, those investments will be related to the E2 development program. Okay. With that, we've finished the presentation. Now we open for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, 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. Once again, to ask a phone question, please press star then one. Our first question comes from Cai von Rumohr from Cowen and Company, your line is now open. Please go ahead.
Thank you very much, gentlemen. Your guide of 35 to 40 large jets, I think, is a little bit less than many of us were looking for. Could you give us some color there in terms of what that assumes about Legacy 500 and 450s, how they're doing, and what that implies for your other larger biz jets? Thanks.
Yes. Thank you, Cai. This is Fred. Fundamentally, we are seeing a relatively stable Legacy 650 and Lineage. We have a background noise here. I don't know where.
Not myself.
Legacy 650 and Lineage 1000, relatively stable activity, and the addition being the Legacy 500s. Probably, we'll have a couple of deliveries of Legacy 450. Can you guys hear this background noise, or it's just me? Yeah, can you fix this, please? Cai, do you hear a background noise, or is it okay for you?
It's cutting in and out.
Okay. The addition to our last year numbers, they're coming from the Legacy 500. One could argue that we should be seeing larger numbers of Legacy 500s. We really want to make sure that we have a smooth entry into service. We also have to acknowledge that the market, it's not booming in the sense that we have a very strong backlog yet. It is building up nicely, the combination of market demand. Yeah, it's much better now. Market demand and assuring a smooth entry into service.
Okay. Thank you very much. Your margin in the fourth quarter looked a little bit lighter given the very strong volume that you displayed. Could you comment, were there any negative adjustments? Secondly, maybe give us some color in terms of where the margins for each of the business groups were and maybe some trend as we go into 2015.
There was a cell phone on. Apologize.
Not mine.
Thank you.
Okay. Cai, let me give you the detail. I think that in terms of the margin for the last quarter, we didn't have any specific adjustment that could impact. It was more related to the margins of each business, and the lower end of the guidance range, and the mix, like we mentioned, in terms of the commercial aviation and also the mix in the executive jet. Do you want to give the.
Yeah. Cai, giving you a little more color, Luciano speaking here. Gross margins for commercial aviation and executive jets were right around the range of 18.5%-19%. Defense & Security was closer to 10%. For the quarter, totaled around 17.5%.
Talk about the adjustment. Why was that so low, the adjustment? Yeah.
For?
Defense. Yeah.
Yeah. It's important to mention that, for Defense, as we've explained in the past, it's best to look at an annual basis rather than a quarterly basis. There's a few factors that can influence that in terms of quarterly performance, such as the stage in the programs in which we are, the composition of the revenue within that quarter from the various programs, as well as potential FX variation. We can see, for example, in the first quarter of this year, as a reference, we had a bit of a deviated effect as well to the upside. Looking at an annual basis, the margin came in pretty much as expected, for the Defense & Security segment and higher year-over-year.
Okay. This is Derek at RBC Capital Markets. The Free Cash Flow guide of 2015, that doesn't include the recovery of accounts receivable. Is that correct?
Correct. It does not.
Technically, that could be a lot higher. One second. How confident are you that you would recover this year, the Brazilian accounts receivable?
You mean, regarding this fiscal year or previous years?
This fiscal, 2015.
Well, I think nobody in Brazil at this stage can say that we are comfortable with any receivables, because of course, the situation is of public knowledge. Having said that, the KC-390 is a priority program for Brazil. It's part of the PAC, which is that selected group of projects which have the highest priority in the government, and it is, above all, a real need for the Brazilian Air Force going forward. Taking all that into account, and also take into account that we are on time and on budget, below receivables but on budget, we are performing. We have to believe that we'll be one of the projects which probably will have highest consideration as far as receivables.
We are in discussions with the customer, in particular with the Brazilian Air Force, to make sure that we do not incur into an increasing accounts receivable as we go forward. That may or may not result in a reshelve of the program. Too early to tell. We are not just blindly going forward, although we are, at this stage, maintaining the rhythm of the programs.
That's great. One follow-on. From a CapEx perspective, are your new programs falling relatively in line with your planned budget when you launched them, or are they tracking ahead better? Where do you see CapEx over the next few years trending?
Okay. If I may, I'll split the answer in two. The R&D part of it has a strong contents in Reais. We are tracking that in U.S. dollars, and we are relatively okay. Actually, a little bit below budget. We do have some tailwinds in that respect going forward. That's a question which I'm going to anticipate the answer. Probably some of you will ask, we are referencing our planning, and the basis for this outlook is a FX of 2.8. We do not know where the currency will stabilize, yeah, there may be some headwind there. In the most recent programs, in the Legacy 450 and Legacy 500, we are above budget, because we had, you may remember, a delay in the program.
If you take the overall program since the launch in 2008 to the very end, there'll be a little bit of an overshoot in the budget. The E2, the E175+, the new E175, was actually below budget, and the E2 is a little bit better or lower than budget. I think the quality of our planning and control of costs is improving as we speak. The 450, particularly our 450 piece, is actually below budget as well. The CapEx side, we talk about machines and tooling and the hardware side, which is mostly denominated in US dollars. We are right there. The lower number that you saw in 2014 was much more a postponement of investments which did not impact the critical path of the programs rather than better performance.
Probably, there will be some improvement there as far as a lower cost, better negotiation, et cetera. That's mostly dollar denominated, it's really a question of managing the cash flow, obviously, without impacting the critical path of the program. I hope I have answered.
Thanks. Myles Walton, Deutsche Bank. I think Kai had asked about the margin trends into 2015. I'm not sure I got the margin trends by segment into 2015, if you could do that. It does sound like you said 280 was your peg, seems like there's some margin opportunity on the upside there, if the current FX rates held. Could you just give a little detail by segment, kind of what you're looking for from margin trends, please?
Yeah, sure, Myles. You didn't get because we didn't give them, that's why.
I'm a little slow.
Yes. Thank you for the gentle way of asking. In this year, 2015, you probably will see a much more homogeneous margin. In this band of 8%-8.5%, the business will probably vary maybe plus or minus half to 1% each extreme of the band. As far as gross margins, just to give you, they'll be between 18.5% and 20%. We're going to see margins. As far as operating margins, they'll be something between 7.5% and 9%, or 8.5%-9%. It'll be very homogeneous going forward. That's how I see it. The other question was?
It just sounds like, number 1, FX, where we spotted today, would be a tailwind to your margin projection if you said 280.
If it stays at 290, it's a headwind for the Defense business, but it's a tailwind for the other two businesses. Yes.
Okay.
It's a tailwind for the cash flow. Mainly for the cash flow, because all of our R&D, which is very high, you don't see that in the P&L, but you do see that in the cash flow.
Just one other one. As you look to the mix in commercial aviation, is this the worst of the mix? It looks like it's maybe close to 80%, 75 seaters this year.
85.
Is this the peak of the worst?
Well, this is all relative because you have, of course, bigger aircraft tend to have higher prices, but not necessarily. It's hard to say it's worst. I think it's fair to comment that last year, Paulo mentioned a year ago in New York, we were seeing a pressure on the pricing side and the mix Price, not only on the lower tag price, but also in the competition, of about 200 base points, right? 2%. We are seeing a further pressure on pricing also. Of course, that associated with the mix, gives us a little bit more complicated outcome. That's why you saw, call it tepid, margins for 2015. FX and, of course, even stronger push on the cost side. There is that much we can do about cost. That, we will try to, of course, to recover that.
There is clearly a pressure on the top line.
Here.
Yeah.
Here. Joe Mora from Merrill Lynch. I have two quick questions. First, still on the margin levels. I know that you said that it's better to look on annual basis, but if you look specific to the segment this quarter, margins were very different from what we've seen in the previous nine months. If you could please give us some details on why was that? Second question on backlog. If you could elaborate on what growth, what could we expect for 2015, it would be great. Thanks.
Paulo, can you talk about the quarter message?
As far as the quarter, the main drivers here, commercial aviation, certainly the mix, right? We saw, especially compared with the fourth quarter of 2013, we saw a higher concentration from the E175 model. That was, I would say, one of the main drivers. In executive jets, we did not deliver as many of the large aircraft as we did in the prior year as a comp. Of course, the mix composition there again, was a little bit of an effect. For Defense & Security, obviously, it relates to the main programs that we have in the segment there. Programs such as KC or India or some of the modernization programs. Again, it's much more related to where we are in the stage of those programs than anything else, right?
As far as backlog or sales outlook, we don't provide any guidance specifically about sales outlook going forward. We're looking forward. We probably will achieve at least a book-to-bill ratio of 1, probably higher than that in commercial aviation. Paulo has some activity going on, which we hope to be successful, not in a distant future. That offsets a little bit that pricing, let's say, tailwind that I mentioned about. On business jets, definitely, we're trying to get a book-to-bill of at least 1. We have to build up a stronger backlog in business aviation. The industry is not very healthy enough. As we have a better portfolio, we should, and we work to assure at least a 1-to-1 book-to-bill ratio in business aviation as well. Defense, it will depend a lot on exports.
I think, the situation on the largest customer in defense, which is the Brazilian government, I'm more frankly concerned about managing the accounts receivable and making sure that we have our ongoing programs on time and on track and being properly paid. There may be new opportunities, yes. I think that that's probably second in priority at this stage for the government and therefore for ourselves. Exports may be a nice surprise because we have now a second product to offer, not immediately, but longer term, which is a KC-390, along with the Super Tucano. Having products in our portfolio, that helps. We may have some nice surprises in exports.
Turan Quettawala from-
No, who has been raising their hand? Sorry, go ahead. Please.
Turan Quettawala from Scotiabank. Fred, can you give us a bit of sense on the biz jet side? What kind of pricing assumptions are you using? Are you expecting some pricing improvement in 2015 when you provide your guidance for the year? Also, do you have any white tail sort of buildup at the end of the year in 2014 here, maybe on the Legacy side?
Pricing wise, Marco, when we close the call and then we have the presentation, Marco can elaborate a little bit more. Stability, is that a fair assumption? I think stability. We are not seeing price relief as we expected. The used aircraft market is not getting worse, but it is not getting much better either. I mean, to sell new aircraft. There is a strong competition out there, and the demand is not that robust yet. Pricing is an issue going forward, but I don't think it is going to deteriorate further. Marco can elaborate a little bit more. And?
Are you getting any benefit from the Learjet at all, or from the Learjet 85?
It's hard to say. The Phenom is doing quite well, as you saw. The 500, I think, my friend to my side here, we have a beautiful case to show. I think we have to market the aircraft better. I had the chance to fly the aircraft yesterday, personally. It is really a breakthrough. I don't think we're getting the message across as efficiently as we could and should.
Just lastly, on the white tail inventory, is there any white tail inventory?
Maybe a handful of other, I don't know. Any white tails in the ?
No.
No. Yeah. Just maybe a very small amount. On the Legacy side of more Phenom. I think Phenom 100, right? Yeah. Demo aircraft, nothing material, I think. Marco, again, can maybe give you a better, more precise answer.
That's perfect. Thank you.
Okay.
Hey, guys. It's Noah Poponak from Goldman. Fred, I just wanted to make sure I understood what you were saying about pricing and commercial jets going forward. I understood you to be saying it should be an incremental headwind for a few more years because you'll be layering in incrementally more airplanes that came out of fairly difficult or aggressive competitions, and then presumably you would need to potentially change price a little bit in the final years before you're bridging to E2. That would all suggest pricing is an incremental headwind sort of the next three or four years. Is that fair, or is that inaccurate?
No, I apologize. I don't think I said that.
Okay.
Thank you for the question. The question is, will it get worse? I said, it's hard to say. It got worse already. This outlook already reflects.
It's pretty bad
worsened environment. Will it get worse than that? It's hard to imagine that we can get much worse than that. We work on the cost side to brace for impact, whichever is the scenario. Personally, today, I don't see it getting worse. I don't. We didn't see that coming either a year ago, so.
Okay. Can you talk about what unit margins would look like in the first few years of E2? Because, typically, a newer program can have lower margins for other reasons. It also sounds like pricing is probably a lot better. Will margins be better, worse, or the same as you transition?
All we have at this stage is planned figures. They look good in the sense that, reasonably good pricing for launch orders. Nothing tells us that our recurring costs and our learning curve will be worse than what we're predicting. Pretty much the same picture we saw before. The program is going nicely. As I said, a little bit below budget. I do attribute this harder pricing environment now to a combination of issues. Of course, as we get closer to the E2, the E1 becomes less and less attractive. Number 2, the bulk of the demand is coming from the U.S. large orders. Number 3, there are competition very much starved for cash, which gets the whole equation more complicated. It's a combination of issues. I think Paulo is doing a really nice job in managing volume and margins, and then pricing margins.
Cost variable, it's a relentless effort on our side. You saw the SG&A coming down, and that will continue, of course, as well as the recurring, the COGS side of it, to the extent that we can.
Okay. Just one other one on the cash flow statement. Inventory was a source of cash, I think, for the second or third year in a row. You talked about that being because volume's going up, but volume's pretty flat across the business. Is there any way to do better on inventory going forward? Can you also elaborate on why advances were a source of cash?
Okay. Can we switch to get less boring, just me speaking?
Yeah.
You want to take?
Inventory. Inventory, I think, was more the picture on the end. I think in average terms, we're not really seeing that. It's more like in the end of the year, just making the calculation that we had this year. We don't expect to see inventories necessarily going down, but it's been a working capital requirement this year. What we mentioned about the advance for customers, basically when you sell, we had an amount of cash related to the advance of customers that were not replaced by new sales, especially in the executive jet business. That's why it was a source of cash, because it reduced. As we delivered, we compensated that advance, so we didn't generate the cash when we delivered.
Okay.
It was not replaced by new sales.
Okay. Thank you.
Maybe as a suggestion, take maybe one or a couple of more questions from the call.
No problem.
We can end the call and then turn back to the audience here.
Just one or two?
Yeah, one or two. I don't know how many people are in line.
No. Sorry. No.
From the call.
The two online now.
Two online. Yeah.
Yeah.
Four.
There are four questions on the call. Let's take those four and close.
Let's clean the list there.
Okay.
Okay.
Please press star 1. Your next question on the phone lines comes from Alexandre Falcão from HSBC. Your line is now open. Please go ahead.
Thanks, guys. The line is really bad, so I'm not really sure that you actually answered this or not. Please forgive me if this is already answered. First, in what FX did you guys base your guidance for this year? That's the first question. The second question is, can you run down on the defense programs, which are the ones that should not be impacted by any budget cuts? What could be impacted? I know that you're probably maintaining the same programs there, but if you could give us some granularity on what are the ones that are basically not going to be touched and the ones that could be delayed, would be perfect. Thank you.
Thank you, Alexandre. I apologize for the poor connection. On FX, the reference of our planning outlook is 2.8 BRL per USD. To your second question, we don't know. What we do expect is that the KC-390, which is, of course, the most important program of our portfolio, enjoys priority within the government, and it's part of the PAC. At this stage, we don't know. We talk to the customers, and frankly, I don't think they know exactly how this whole thing will unfold. The whole thing by meaning the fiscal adjustment that the government is trying to perform. I think we feel good about the relatively quality of our programs vis-a-vis the other investments of the Brazilian government.
At this stage, we're maintaining our pace in the program, we are indeed in conversations with the Air Force to make sure that, if there is, let's say, an affirmative trend to reduce the rhythm of the program, we have to adapt. Of course, we will. That's premature at this stage to make any assumption to that regard.
Okay. Just to follow up on that, specifically on the KC. I'm assuming that you already had your first flight. Development is basically done. We're talking about more or less, at least in our calculations, neighborhood of around $500 million that are needed to finish the project, then you enter production. Is that really the case? Is this pretty much developed as you need, something like that? If there's a delay there, you're not going to be able to do your first delivery in 2016. Thank you.
Well, as far as what's left to invest, I can comment on the physical terms. We have the whole flight test campaign ahead of us, which is significant. I sincerely do not know. I probably should take this question offline about, is it 500? I don't know. I sincerely don't know, we can address that offline later. We have the flight test campaign. Most of the tooling's already there. We're talking about something in the range of 2,000 hours, that's a big deal. The second prototype, by the way, also. We are building the second prototype. The program is very tight. We launched the program in 2008 and said we would fly this aircraft by the end of 2014, and we were 40 days late. Very tight, and quite frankly, our performance has been amazingly on time.
There is no slack in planning. If there is a delay, if there is a reduction in the pace of development, there's absolutely no way we can get this airplane certified by the end of 2016. This is all part of the discussion.
Fantastic. Thanks so much.
Thank you. Your next question comes from Kevin Cavinta from Citigroup. Your line is now open. Please go ahead.
Hi, guys. I'm also not really getting great quality on this side. A lot of cutting out. I guess one of the questions that we'd have, does your 2015 margin guidance assume any payroll tax or REINTEGRA export help getting eliminated? I don't know if anybody addressed that yet.
No, that's actually a new question for everybody, and I think that's about BRL 20 million negative for us. Those latest changes, which, as you may or may not know, Congress has sent back to the executive branch. Assuming it's going to be approved by Congress, that's going to be a minus BRL 20-ish million negative for us.
Okay.
Sorry. This is already incorporated in the guidance, so if it's not there, we should have a better BRL 20 million. It's a relatively low impact either way.
Very helpful. Also, could you maybe talk a little bit about what happened on the Tianjin Airlines order that you announced in July for jets, and why it hasn't been appearing in the backlog yet?
We are still waiting fundamentally for the final approvals of the Chinese government. Paulo may have more. Paulo, Just a second.
I'm sorry. You cut out there as well.
Yeah, there is nothing. Fundamentally, we're waiting on the approvals, or the customer is waiting on the final approvals of the Chinese government.
There has been.
All right.
A recent state-to-state, Brazil to China, discussion or forum, and this item was on the agenda, and the Brazilian officials got the assurance from the Chinese officials that they should not be concerned. The order will be confirmed this year. We are fundamentally waiting and, of course, pushing the delivery dates as we wait. We're not building white tails for Tianjin . We are comfortable. We're confident that that's going to happen.
Okay. That's very helpful. Finally, can you elaborate on any potential order activity from any of the U.S. carriers this year? Like SkyWest has a bunch of conditional orders, but only confirmed seven, related to Alaska Air. Do you see any others getting done? What kind of activity do you see from Europe or Asia?
Yes, we expect to have something done. For the U.S., we are engaged in a few campaigns, and we are optimistic that we're going to capture some opportunities which are out there. Probably not in the distant future. There's also another order in Europe, which we are also optimistic that we can bag. Paulo's been very active. We have several campaigns, of course, but more short term. We feel better about this one in the U.S. and this one in Europe.
Okay, great. Thank you very much. I'll let somebody else ask a question now.
Thank you. That does conclude today's Q&A session for today's conference. I'll turn the call back over to José Filippo for any further remarks.
Oh, okay. Thanks, the ones that joined through the conference. We're still available for further questions as we do through the IR team. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. That does conclude Embraer's audio conference for today. Thank you very much for your participation, and have a good day.
Thank you.
Thank you.
Okay. Okay.
Okay.
Let's continue here.
Back to the room.
I just want to make sure I understand the issues on fourth quarter margin better. Going into the fourth quarter, you didn't change your margin guidance. Did you just have maybe a couple of 190s move to the right, and maybe you didn't deliver as many 650s as you expected? Is that the fundamental dynamic, or was there something else going on as you headed into the fourth quarter?
Yeah, we had that. Yes.
That's what I was going to say. Okay.
Yeah.
Okay.
Yeah. To be more clear, to be totally clear, we probably would have reached the bottom of our guidance, in 2014, had we delivered a couple of airplanes which were not delivered, and they are in inventory, and we do expect to deliver this year.
Okay. On the KC-390, with all the flux, your defense guidance for next year, are you assuming in your guidance that KC-390 revenue is down in 2015?
No. We are assuming this budget that we're going to get paid for the 2015 budgets. Does not assume anything from what is already in our accounts receivable. It does assume that the full budget for 2015 will be paid.
Okay.
Yeah. If there is any reprogramming, there is a potential downside risk there.
On a pre-FX basis, defense revenue should rise in 2015, but you get the pressure from FX year-over-year?
Flat.
In terms of revenues, flat.
Yeah.
Yeah. If you just take the last year, which was close to $1.5 billion, you just bring the average FX, that we had last year, to 2.8, that number should be about $1.25 billion, which is the highest band of our guidance. Why are you showing a lower band of our guidance? This year, we're going to have probably two-thirds of the revenues in BRL and one-third in USD, and last year was half and half. As far as activity, it's pretty much flat. Fundamentally, it's the effect of FX and the mix of Brazilian content, and U.S. content. Brazilian-denominated contracts and U.S.-denominated contracts.
Understood. Last question. Brazil wage inflation in 2015, is that incrementally worse or the same or?
It's hard to tell. Inflation does not look good. The central bank just raised the primary tax again, the reference interest rate again. I think it's going to be very unlikely that's going to go above the devaluation of the currency. We are probably capped, of course. Devaluing the currency is probably going to be better for us than any increase in wages, at least in this year. Over time, it tends to catch up. This year, probably, I don't see the US dollar coming below 2.8 at all, and maybe higher.
Thank you.
Let's take one more question, please, we break for the next stage.
Just remember that after this, after the presentations, we will be back, and we'll be for the whole afternoon, we can always be available for further questions. Any further questions at this stage? Should it
Yeah.
Sorry.
Well, I just wanted to ask on the defense again. You're not taking the BRL 300 million account receivable in your guidance, and you obviously said that there might be some risk to your overall revenue numbers. Can you give us a sense of what percent of the revenue is just coming from the KC-390 in 2015 on the D&S side?
No. It ought to be more.
This will be more clear in the presentation. I think we could.
Jackson Schneider will detail that.
Yeah.
Okay. That's it. Thank you.
Should we take a break then?
Yeah. Fred, just confirm the schedule. Can you put on the-
On agenda
the agenda for [audio distortion]
What we have now as a schedule, we're going to have a break, 15 minutes, and then we gather together back here to the presentation of the business units.
In 10 minutes.
Okay.