Analyst. At this time, the company will present its fourth quarter twenty fourteen results. Afterwards, 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 events or circumstances which have not occurred.
Embraer has based these forward looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, 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 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. Federico Corrado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO Mr. Luciano Toews and Mr.
Eduardo Pozzo, Director of Investor Relations. I would now like to turn the conference over to Mr. Jose Filipo. Please go ahead, sir.
Okay. Good afternoon for the ones that are here, and good morning for the Americans joining us. We're going to go to our presentation of the conference call and the conference call for the fourth quarter and twenty fourteen results. But before I go into the presentation, I'd like to take this opportunity to share with you some important announcements internally here. We were happy to announce that.
It's an organization announcement, which Luciano Frost, 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 excellence center for Executive Jet business.
And starting next week, Luciano will take that responsibility. So we're very happy with that opportunity. It's policy of the company to really try to give opportunities, especially for talents like Luciano. So we're very happy with that possibility. At the same time, we are introducing Eduardo Cotto, 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, so he knows the dynamics of the market. So he knows the company. He knows probably some of you. So we're happy as well to have this replacement.
So we understand that we'll continue to a high level people dealing with the market representing Embraer. So again, luck, Luciano. Hope, of course, you'll be available, we know. And welcome, Eduardo, with us. So we'll start we'll take this I think it's a good opportunity that we have this event as we can announce this and do this transition, okay?
So with that said, we start the presentation, and 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 fortieth anniversary of Embraer last October. We also remain committed with sustainability, and we are recognized by that with the fifth consecutive year in the Dow Jones Sustainability Index as well as with 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 P and Q, very, very important recognition in the Brazilian industry, presented by the National Quality Foundation, the F and K. Also finalizing this page, several other recognitions related to people management as ranked as best place to work in Brazil and abroad.
Moving to next page, Page four, in 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, which was delivered to Aeromexico last year. In terms of sales activity, we have the order for SkyWest for seven E175, which represents actually an option conversion. And related to the E2 program development, we had the first metal cut of the E2 program, so we are in line with that development. Next page, Page five, in steel and commercial business, now the highlights of the year.
We had a delivery of 92 E Jets in 2014. Also in terms of sales activity, we had two fifty eight E Jets sold in the year, concluding the only in the E2, five ninety commitments. This includes orders, options and LOIs. And as a confirmation of the E JET program success, at the end of twenty fourteen, we had over 1,500 orders with customer base of 65 airlines in 45 countries. And with that, we maintain our leadership in commercial jets in the segment of 70 to 130 seats.
Next page, moving on to executive jet business. In the fourth quarter, we had the delivery of 52 executive jets, broken by 38 light and 14 large jets. In terms of sales, we have the conversion of 10 Finon 300 options to firm order from net jets. And also an important milestone in our Lagos 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. Still in relation to the LEGAS 500 program, we had achieved certification in Brazil, in The U. S, in Europe and Australia. Another important achievement in this active jet business was that for the second consecutive year, the Fino 300 was the most delivered executive jet in the market, 73 units. And as a result of our commitment to customer satisfaction, we are ranked as number one in AIN annual survey.
Moving to next page, Page eight and the highlights for Defense and Security business. Fourth quarter, we signed the firm order for the first 28 KC-three 90 to the Brazilian Air Force. Regarding the Brazilian fighter program, we confirmed our participation with the signing of an MoU with SAB for the development. And regarding the LAS program in The U. S, we remain on track, and we delivered the first four aircraft to the U.
S. Air Force. Next page, Page nine, Steel, Defense and Security for the year. We reached annual revenues of $1,500,000,000 up more than 20% when compared to 2013. Also an important milestone of Embraer KC-three 90 program was that last month, we had the first flight of that product.
And regarding the programs and our controlled subsidiaries, we had we continue to advance on the SeaStrong project through Saviz. We had important contracts of supply of radars and equipment through Brazilian government on Braddar. The Brazilian satellite program was an important step, which was the critical design review of the program. And finalizing the highlights on defense, we signed a contract to supply new air traffic management systems for Brazilian and Indian government. Okay, next page.
Now 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 $21,000,000,000 in backlog, which were broken by 65% on commercial aviation, 26% on defense and security and 9% on 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 175 module.
In terms of executive jet business, we surpassed our light jet guidance range with 92 delivered, but 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 $6,300,000,000 in terms of revenues, within the guidance range of EUR 6,000,000,000 to EUR 6,500,000,000.0. Next page, Page 14.
The breakdown of the revenues 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 and the increase the second participation of Brazil, which was more related to the defense activities.
Next page, Page 15. We see the same information now broken in a quarterly view. As we mentioned, we continue we confirm 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.
So we had like this BRL 6,300,000,000.0 and BRL 14,900,000,000.0 in terms of net revenues. Page 16, in terms of SG and A. Our ongoing focus on the cost control reflected the reduction in the SG and in dollar and not only in dollar terms, but also in the percentage of revenues. We saw in 2014, the total of $628,000,000 compared to $665,000,000 in 2013, and 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 a call attention about the information that we have in 2013. You remember that we had this positive impact of the reverse of provisions from the American as American recover from the Chapter 11 position, we recovered provisions that we had. So we are taking that information out here to have the fair comparison. So when we see what we had in the year, we reached $543,000,000 in 2014, within the guidance range from $540,000,000 to $620,000,000 But in terms of margin, we had 8.6%, a little below the guidance range. And 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 175 concentration.
Next page, Page 19, information broken by quarter. You see that actually, the fourth quarter of twenty fourteen was below the previous year, even excluding the nonrecurring effect. Again, basically because of the mix in both commercial and executive jet business. Next page, EBITDA, Page 20. We had a total of $830,000,000 with a 13.2% margin within our guidance range for the year.
When you see next page, the EBITDA broken by quarter, the same comments of the previous one. In a quarterly basis, increase in the last quarter, but not as strong as we had in 2013. Next page, the net income. We had a total of $335,000,000 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 may just mention, the deferred income tax because of the 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 pay anticipation that we pay we'll be paying every quarter. Continuing next page, inventories.
We end the year with a total of EUR 2,400,000,000.0, which was an increase compared to the previous year as we prepare for the 2015 deliveries. OE4 in terms of investment. We had a total of $430,000,000,000 in 2014, broken by 47,000,000,000 in research, dollars $230,000,000,000 development and $153,000,000,000 in CapEx. In terms of R and D, the depreciation of the real, along with the good execution, allowed us to end the year below our outlook. And as far as CapEx, we manage also our cash disbursement, trying to avoid pressure on cash.
So we end up with the EUR $430,000,000 as we give outlook of EUR $650,000,000 in the beginning of the year. Going forward, next page, free cash flow. As we previously announced early this year and revising our guidance, our cash flow was negative in $4.00 $4,000,000 As already indicated, the main drivers of this figure 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 getting to the outlook, our capital structure, debt profile remains in line with our business cycle needs.
We have five point four years in terms of average terms and also only 4% of the debt maturing in the short term in the next twelve months. In relation to net debt position, as a result of the negative free cash flow generation, we reported slight negative debt of $85,000,000 in the end of the year. Okay. With that, we conclude the financial results highlights and coming 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 $6,100,000,000 to $6,600,000,000 EBIT from EUR $490,000,000 to EUR $560,000,000, with margin from 8% to 8.5% EBITDA from €730,000,000 to €860,000,000 with margin from 12% to 13%. In terms of free cash flow, we forecast that will be a use of no more than $100,000,000 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 to 100 E Jets and net revenues from €3,200,000,000 to €3,400,000,000 In Executive Jet business, deliveries from 80 to 90 light jets and 35 to 40 large jets, which will return to revenues in the range of 1,700,000,000 to $1,850,000,000 In terms of defense, the guidance range for revenues between 1,100,000,000.0 to $1,250,000,000 And to balance the total consolidated we showed before, we had the forecast for $100,000,000,000 for other businesses revenues. In last page, finalizing part of the presentation.
In terms of investment outlook, we forecast to invest $650,000,000 in 2015, broken by €50,000,000 in research, 300,000,000 in development and another €300,000,000 in CapEx. Primarily, those investments will be related to the E2 development program. Okay. With that, we finished the presentation. So now we open for questions.
Thank you. And our first question comes from Cai von Rumohr from Cowen and Company. Your line is now open. Please go ahead.
Yes. Thank you very much, gentlemen. So 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, Karl. This is Fred. Are fundamentally, we are seeing a relatively stable legacy six fifty and lineage. We have a background noise here.
I don't know oh, myself. So LEGAS six fifty and LENIGE 1,000, relatively stable activity and the addition being the Lagos five hundreds. Probably, we'll have a couple of deliveries of Lagos four fifty. Can you guys hear this background noise, or it's just me? Can you fix this, please?
Kai, do you hear a background noise, or is it okay for you?
It's cutting in and out.
Okay. So the addition to our last year numbers, they are they're coming from the LEGAS 500. And one could argue that we should be, you know, seeing larger numbers or larger numbers of LEGAS 500s. So this is we really want to make sure that we have a smooth entry into service. We also have to acknowledge that the market is not booming in the sense that we have a very strong backlog yet, but it is building up nicely.
And so the combination of market demand, yes, it's much better now, Market demand and assuring a smooth entry into service.
Okay. Thank you very much. And then 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? And secondly, maybe give us some color in terms of where the margins for each of the four each of the business groups were and maybe some trend as we go into 2015.
Okay.
Kai, 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 for the and the mix that, like we mentioned, in terms of the Commercial Aviation and also the mix in the Executive Jet. Do you want to get a view?
Yes. And Kai, giving you a little more color, Luciano speaking here. The margins gross margins for commercial aviation and executive jets were right around the range of 18.5%, 19%. And defense and security was closer to 10%. And so for the quarter totaled around 17.5%.
UNIDENTIFIED should talk about the adjustment. Why was it so low, the adjustment for defense. Yeah.
Yeah. And 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 variations. So 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. So looking at an annual basis, the margin came in pretty much as expected for the Defense and Security segment and higher year on year.
This is Derek at RBC Capital Markets. The CapEx or the free cash flow guide of 2015, that doesn't include the recovery of accounts receivable. Is that correct?
Correct. It does not.
So 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 year
Well, '20 I think nobody in Brazil at this stage can say that we are comfortable with any receivables because, of course, situation is public of public knowledge. Having said that, the KC-three 90 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. So taking all that into account and also taking into account that we are on time and on budget, below receivables, but on budget, so we are performing.
We have to believe that we are will be one of the projects which probably will have highest consideration as far as receivables. So 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 rescheduling of the program. Too early to tell. But we are not just blindly going forward, although we are at this stage maintaining the rhythm of the programs.
Okay. That's great. One follow on. From a CapEx perspective, are your new programs falling relatively in line with your planned budget when you launch them? Are they tracking ahead better?
And where do you see CapEx over the next few years trending?
Okay. So that's if I may, I'll split the answer in two. The P and D part of it has a strong contents in reals. So we are tracking that in dollars, and we are relatively okay. Mean, actually, a little bit below budget.
And 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, but we are referencing our planning and the basis for this outlook is FX of 2.8. So if there is we do not know where the currency will stabilize, but yes, there may be some headwind there. So in the most recent programs, in the Lagos four fifty and Lagos 500, we are above budget because we had, you may remember, a delay in the program.
So if you take the overall program since the launch in 2008 to the very end, there will be a little bit of an overshoot in the budget. The E2, the 175 plus the new 175 was actually below budget, and the E2 is a little bit better or lower than budget. So I think the quality of our planning and control of cost is improving as we speak. And the four fifty particularly our four fifty piece is actually below budget as well. The CapEx side, we are talking about machines and tooling and the hardware side, which is mostly dominated in U.
S. Dollars. We are I mean, 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, etcetera, but that's mostly dollar denominated.
So it's really a question of managing the cash flow obviously, without impacting the critical path of the program. I hope I have answered it.
Myles Walton, Deutsche Bank. I think Kai had asked about the margin trends into 2015, and I'm not sure I got the margin trends by segment into 2015. If you could do that, it does sound like you said $280,000,000 was your peg. So it seems like there's some margin opportunity on the upside there if the current FX rates held. So could you just give a little detail by segment kind of what you're looking for margin trends,
Yes. Sure, Myles. You didn't get because we didn't give them.
That's right.
I'm a little slow.
Yes. So thank you for the gentle way of asking. But in this year, 15, you probably will see a much more homogeneous margin. So in this band of 8% to 8.5%, the business will probably vary maybe plus or minus 0.5% to 1% each extreme of the band. So as far as gross margins, just to give you they will be between 18.520%.
So we're going to see margins. And as far as operating margins, there'll be something between 77.59%. So pretty much or 8.59. So it will be very homogeneous going forward. That's how we see it.
And the other question was?
It just sounds like, number one, FX, where we spot it today, would be a tailwind to your margin projection if you said two eighty.
If it stays at two ninety, it's a headwind for the defense business, but it's a tailwind for the other two businesses, yes. And it's a tailwind for the cash flow, mainly for the cash flow because all of our P and D, which is very high, you don't see that in the P and L, but you do see that in the cash flow.
And then just one other one. As you look to the mix in commercial aviation, is this the last is this the worst of the mix? It looks like it's maybe close to 80%, 75 Is seaters this the peak of the worst?
Well, this is all relative because you have, of course, bigger aircraft tend to have higher prices, necessarily. So it's hard to say its worst. I think it's fair to comment that we did not 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 on the competition of about 200 basis points, right, 2%. And so we are seeing further pressure on pricing also. And of course, that's associated with the mix gives us a little bit more complicated outcome.
That's why you saw a, call it, tepid margins on the for 2015. FX and, of course, even stronger push on the cost side, but there is that much we can do about cost. But that we will try to, of course, to recover that. But there is clearly a pressure on the top line.
Here, Joe Mura 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 an 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? And second question on backlog. If you could elaborate on what growth, what could we expect for 2015, it would be great. Thanks.
So as
far as the quarter, I mean, the main drivers here, commercial aviation, certainly the mix, right? I mean, we saw especially compared with the fourth quarter of twenty thirteen, we saw higher concentration from the E175 model. So that was, I would say, one of the main drivers. And executive jets, we did not deliver as many of the large aircraft as we did in the prior year as a comp. So of course, the mix composition there again was a little bit of an effect.
And for defense and security, obviously, it relates to the main programs that we have in the segment there. So programs such as KC or India or some of the modernization programs. But again, it's much more related to where we are in the stage of those programs than anything else, right?
And 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 one to book to bill ratio of one, probably higher than that in commercial aviation. So Paulo has some activity going on, we hope to be successful in a distant future. That's a 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 one. We have to build up a stronger backlog in Business Aviation. So the industry is not very healthy enough. But as we have a portfolio, we should and we work for to assure at least a one:one 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 more concerned about managing the accounts receivable and making sure that we have our ongoing programs on time and on track and being properly paid. And there may be new opportunities, yes, but that's I don't think 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 KC-three 90 along with the Super Tucano. So having products in our portfolio that helps. So we may have some nice surprises in exports.
From Scotiabank. Turan
Frank, can you give us a bit of sense on the bizjet 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? And also, do you have any white tail sort of buildup at the end of the year in 2014 here on the 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. But we I mean, we are not seeing price relief as we expected. There is some used aircraft market is not getting worse, but it's not getting much better either, I mean, getting for to sell new aircraft.
So there is strong competition out there, and the demand is not that robust yet. So pricing is an issue going forward. But I don't think it's going to deteriorate further, but, Marco can elaborate a little bit more.
And Are you getting any benefit from the Leargen at all or from the Lear d five?
Hard to say. I mean, the the well, the Phenom is doing quite well as you saw. And the 500, I think, my friend to my side here, you have a beautiful case to to show, but I think we have to market the aircraft better. I had the chance to fly the aircraft yesterday personally, and it is really a breakthrough. I don't think you're getting the message across as efficiently as we could and should.
And just lastly on the Whitetail inventory. Is there any Whitetail inventory?
Maybe on the maybe a handful of other, I don't know. Think whitetail is in the Mikatose. No. Yes. Just maybe just very small amount.
On the legacy side of more Pheno, I think Pheno 100 side. Yeah. Demo demo aircraft, so nothing material, I think. But Mark again cannot maybe give you better a more precise answer.
That's perfect. Thank you.
Hey guys, it's Noah Poponak from Goldman. Fred, I just wanted to make sure I understood what you're saying about pricing in 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 were that came out of fairly difficult or aggressive competitions. And then presumably, you would be you would need to potentially change price a little bit in the final years before you're bridging to E2. So 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. So thank you for question. The question is will it get worse?
And I said it's hard to say. It got worse already. So this outlook already reflects a worsened environment. So we get worse than that. It's hard to imagine that we can get much worse than that.
But we are working we'll be working on the cost side to brace for impact, whichever is the scenario. But personally, today, I don't see getting worse. I don't. But we didn't see that coming either a year ago.
Okay. And can you talk about what margins, unit margins would look like in the first few years of E2? Because typically, a newer program can have lower margins for other reasons, but it also sounds like pricing is probably a lot better. So will margins be better, worse or the same as you transition?
All we have at this stage is planned figures, and they look good in the sense that reasonably good pricing for launch orders. And nothing tells us that our recurring costs and learning curve will be worse than what we're predicting. So pretty much the same picture we saw before. The program is going nicely, as I said, a little bit below budget. And I do attribute this harder pricing environment now to a combination of issues.
Of course, as we get closer to the E2, the U1 becomes less and less attractive. And number two, the bulk of the demand is coming from The U. S. Large orders. And number three, there are competition very much starved for cash, which gets the whole equation more complicated.
So it's a combination of issues. I think Paulo is doing a really nice job in managing volume and margins and pricing margins. And again, cost variable, we I mean, it's a relentless effort on our side. And you saw the SG and A coming down and that will continue and of course as well as the recurring the COGS side of it to the extent that we can.
Okay. And then just one other one on the cash flow statement. Inventory was a source of cash, I think, the second or third year in a row. And you talked about that being because volume is going up. But volume is pretty flat across the business.
Is there any way to do better on inventory going forward? And then can you also elaborate on why advances were a source of
cash? Okay. We switch to get less boring just me speaking. Want to add?
Yes. In terms of inventory, of inventory I think was more the picture on the end. I think in average terms we're not seeing that. It's more like in the end of the year just to make the calculation we had this year. So I don't expect 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 executive jet business. So that's why it was a source of cash because it reduced as we delivered. We compensate that advance, so we didn't generate the cash when we delivered, but 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, then we can end the call and then turn back to the audience here. Yes, one or two. I don't know how many people are
in line.
No, no, no. From the call. Two online now. There
are four questions on the call. So let's take those four and close.
Let's clean the list.
Thank you. And your next question on the phone lines comes from Alexander Balcio from HSBC. Your line is now open. Please go ahead.
Thanks guys. The line is really, 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. And the second question is, can you run down on the defense programs where you think which are the ones that should not be impacted by any budget cuts? What could be impacted? And 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, Alessandro, and I apologize for the poor connection. On FX, we the reference of our planning outlook is BRL 2.8 per dollar. And to your second question, we don't know. I mean, we what we do expect is that the KC-three 90, which is, of course, the most important program of our portfolio, enjoys priority within the government, and it's part of the pack. So but at this stage, we don't know.
We are talking to the customers. And frankly, I don't think they know exactly how this whole thing will unfold, the whole thing by meaning this fiscal adjustment that the government is trying to perform. So I think we feel good about the quality, the relative quality of our programs vis a vis the other investments of the Brazilian government. But it's at this stage, we're maintaining our pace in the program. But 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.
And of course, we will. But that's premature at this stage to make any assumption to that regard.
Okay. And just a 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 $500,000,000 that are needed to finish the project and then you enter production. Is that really the case?
Can you is this pretty much developed as soon as something like that? And if there's a delay there, you're not going to be able to do your first delivery in 2016? Thank you.
Well, as 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 it's significant. I sincerely do not know. Probably should take this question offline about this. Is it 500?
I don't know. I sincerely don't know, and we can address that offline later. But we had the flight test campaign. Most of the tooling is already there. But we're talking about something in the range of two thousand hours, and that's a big deal.
And the second prototype, by the way, also. So we are building the second prototype. If there if there is the program is very, very tight. So we launched the program in 2008 and said we would fly this aircraft by the end of 'fourteen, and we were like forty days late. So very tight.
And quite frankly, our performance has been amazingly on time. So there is no slack in planning. So 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 twenty sixteen. So this is all part of the discussion.
Fantastic. Thanks so much.
Thank you. And your next question comes from Kevin Kaczynski Your line is now open. Please go ahead.
Hi, guys. Yes, I'm also not really getting great quality on this side, a lot of cutting out. But I guess one of the questions that we'd have, does your 2015 margin guidance assume any payroll tax or Integra export help getting eliminated or somebody I don't know if anybody addressed that yet?
No, that's actually a new question for everybody. And I think that's about $20,000,000 negative for us, that those latest changes, which, as you may or may not know, Congress has sent back to the executive branch. So assuming it's going to be approved by Congress, that's going to be a minus $20 ish million negative for us. Yes. And this is already incorporated in the guidance.
So if it's not there, we should have a better 20,000,000 It's a relatively low impact either way.
Okay. Very helpful, very helpful. And also could you maybe talk a little bit about what happened on the Tianjin Airlines order that you announced in July for your jets and why it hasn't been carrying the backlog yet?
We I mean, we are still waiting fundamentally for the final approvals of the Chinese government. We had Paulo may have more Paulo, Steve is on the one with that. Just a second.
I'm sorry, cut off.
There is nothing. I mean, it's fundamentally awaiting on the approvals. The customer is awaiting on the final approval of the Chinese government. Been There 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 Chinese officials that they should not be concerned. The order will be confirmed this year.
So but we are fundamentally waiting and, of course, pushing the delivery dates as we wait. So we're not building white tails for changing. But we are comfortable that we're confident that, that's going to happen.
Okay. That's very helpful. And then finally, can you elaborate on any potential order activity from U. S. Airline from any of The U.
S. Carriers? Is there like SkyWest has a bunch of conditional orders, but only Confirm seven related to Alaska Air. Do you see any others getting done? And what kind of activities see from Europe or Asia?
Yes. We expect to have something done. And 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. And there's also another order in Europe, which we are also optimistic that we can bag.
So Paulo has been very active. So we have at least 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. And that does conclude today's Q and A session for today's conference. I'll turn the call back over to Jose Filipo for any further remarks.
Okay. So thanks, the ones that joined through the conference. And so 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. Let's continue here. Back to the room.
I just want to make sure I understand the issues on the 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 deliver as many $650,000,000 s as you expected? Is that kind of the fundamental dynamic? Or was there something else going on as you headed into the fourth quarter?
Yes, we had that, yes. Okay. Yes. To be more clear, mean, 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. And then on the KC-three 90, with all the flux, your defense guidance for next year, are you assuming in your guidance that KC-three 90 revenue is down in 2015?
No. We are assuming in this budget that we're going to get paid for the 2015 budgets. It does not assume anything from the what is already in our accounts receivable, but it does assume that the full budget for 2015 will be paid. So yes, so there is a if there is any reprogramming, there is potential downside risk there.
So on a pre FX basis, defense revenue should rise in 2015, but you get the pressure from FX year over year?
No, flat. In terms of revenues, flat. Yes.
So if you just take the last year, which was close to 1,500,000,000.0 and you just bring the average FX that we had last year to EUR 2,800,000,000.0, that number should be about EUR 1,250,000,000.00, which is the highest band of our guidance. Why are you seeing showing a lower band of our guidance? Because this year, we're going to have probably twothree of the revenues in reais and onethree in dollars, and last year was half and half. So there's a further so as far as activity, it's pretty much flat, but fundamentally, it's the effect of FX and the mix of Brazilian content and U. S.
Brazilian denominated contracts and U. S.-funded contracts.
Understood. Last question. Brazil wage inflation in 2015, is that incrementally worse or the same?
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, very unlikely that's going to go above the devaluation of the currency. So we have probably capped, of course.
The value of 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. But this year, probably, I don't see the U. S. Dollar coming below 2.8 at all and maybe higher.
Thank you.
Let's take one more question, please, then we break for next stage.
Just remember that after this, after the presentations, will be back and will be for the whole afternoon. So we can always be available for further questions. Any further questions at this stage? Or should we I get there's one?
Just wanted to ask on the defense again. So you're not taking the $300,000,000 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-three 90 in 2015 on the D and S side?
It ought to be more clear.
This will be more clear in the presentation. Think we could have heard.
Jackson, we did tell you that. Okay.
That's great. Thank you.
Should we take a break then?
Fred, this should be just to confirm the schedule. Can you put in the agenda? The agenda for. Okay. So what we have now as a schedule, we're going have a break, fifteen minutes, and then we get it together back here to the presentation of the business units.
In ten minutes.