Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's third quarter 2014 results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this call is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about 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 in other markets where the company is present. The words believes, may, will, estimates, 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 the 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 forward-looking statements. Participants on today's conference call are Mr. Frederico Curado, President and CEO, Mr. José Filippo, Chief Financial Officer and IRO, and Mr. Luciano Froes, Director of Investor Relations. I would now like to turn the conference over to Mr. José Filippo. Please go ahead, sir.
Thank you, and good morning to all participants. We'll start the event with the presentation, then we'll be moving to the Q&A section. If you could go and start with page three. Before the first business highlight, we would like to recall this important date, which was last August 19th, that Embraer celebrated its 45th anniversary. It's a very important moment for the company. That happened last August. With the next page four, now the business highlights. Starting with the inauguration of Embraer Engineering and Technology Center in Melbourne, Florida. This facility is initially focused on the Executive Jet business, but later will expand to all our other business segments. Continuing with the example of Embraer commitment to sustainability, we had the milestone of a 10-year anniversary of the certification of the ethanol-powered Ipanema airplane. In line with that, Embraer was listed for the fifth consecutive year on the Dow Jones Sustainability Index. During the third quarter, also, Embraer received several awards and recognition in Brazil, especially related to people management and corporate governance, a very important priority for the company. Next page five.
Moving into the business unit highlights. Starting with the commercial aviation business. We had a delivery in the third quarter of 19 E-Jets, a couple less than we planned, which we expect to be delivered in the fourth quarter. Also, we continue to sell our current generation. Two important announcements. The first one is Japan Airlines, which signed the firm order for 15 E-Jets with additional 12 options. Together with Republic Airways Holdings, sorry, signed a contract for 50 firm jets, which will operate under a United Express brand.
In relation to the E2 development, we are moving along with the important event of the first metal cut of the E-Jet E2 manufacturing in the Évora plant in Portugal. Next page 6. In relation to Executive Jet business, we delivered 15 Executive light jets in the third quarter for a total of 54 year-to-date light jets. We also received, recently, certification, both in Brazil and the U.S., of our Legacy 500, which paved the way for deliveries, which first one happened in early October, the first delivery of the Legacy 500 program. In page 7, still on biz jet highlights. An important milestone of the delivery of the Phenom 300 to NetJets, the delivery number 25, which resulted in a total of 200 deliveries of this model by the company. Currently, our total executive jet fleet surpassed 800 aircraft.
Another important recognition was the ranking of Embraer as number one in customer support and service satisfaction by the AIN magazine. With regard to our global footprint strategy, Embraer broke ground, the Legacy 500 and Legacy 450 assembly complex in Melbourne, Florida. Also, during the quarter, we continued to expand our customer support and service network into a Brazilian area. Moving to defense and security on page 8. Two announcements of a rollout program. The first one related to the first prototype of the KC-390. It happened last October, and this airplane and this program, we had planned for the first flight to schedule for the end of this year. We also have the rollout of the first Super Tucano built in our Jacksonville facility for the U.S. Air Force Light Air Support program.
In relation to the Brazilian Border Control Project, SISFRON, Savis participated in a successful exercise to verify the SISFRON implemented operational capabilities, which led us to keep on track for the development of this project. In terms of commercial activity, two important contracts. First, there was a sale of six Legacy 500 to the Brazilian Air Force, and this equipment will be used to perform flight inspection missions. Also, BRADAR was contracted by the Brazilian Navy to supply three radars. Next page, moving to the financial results. Going now to page 10. With regards to our backlog, we reported a total of BRL 22.1 billion of firm orders in the end of the third quarter. That represents the all-time high for the company. The big drivers of this number were the 28 KC-390 order from Brazilian Air Force and the commercial contracts, as mentioned earlier in the presentation.
Page 11, next page, in terms of aircraft deliveries. We delivered 19 commercial aircraft in the third quarter, with a total of 62 year-to-date. With respect to business unit jets, already mentioned the 15 light jet deliveries for a total of 10 large and 54 light jets year-to-date. At this point, we take the opportunity to reaffirm our guidance figures for the year. Page 12, regarding revenues. We had a total of BRL 1.2 billion in the third quarter, which can be broken by the commercial aviation of BRL 661 million. In the executive jets, BRL 213 million, and defense and security, BRL 346 million. We believe we are on track to meet our guidance figures for 2014. Next page. Still net revenues in terms of year-to-date, both in Brazilian reais and U.S. dollars.
We had the year-to-date in dollar terms of $4.2 billion in terms of revenues and BRL 9.7 billion in terms of local currency. Our outlook for the year, range between BRL 6 billion-BRL 6.5 billion. Page 14, next page, in terms of operating expenses. We continue to have a stable and controlled expense level. We had, in the third quarter, BRL 52 million of G&A and BRL 99 million of selling expenses. We believe that the total SG&A for the year will be represented as 10% of the revenue range, which is in line with what we've been saying before during the year. Page 15, regarding EBIT. We had a total of income of operations of BRL 68 million, with a margin of 5.5% in the third quarter. That reflects the lighter deliveries and the mix that we had in the quarter.
In terms of year-to-date numbers, we had a total of BRL 347 million with a margin of 8.2%. Our outlook for the year is in the range of BRL 540 million-BRL 602 million, and the EBIT margin of 9%-9.5%. Next page 16. In relation to EBITDA, following the same drivers of the EBIT, we had a total of BRL 136 million in the third quarter with an 11% margin. In terms of the cumulative number for the year, we had BRL 548 million with a 12.9% margin. We are now confirming our expectation to meet the guidance figures for 2014. Next page 17. In terms of net result, we reported a net loss of BRL 11 million in the third quarter, primarily due to the exchange rate fluctuation, which affected the company's deferred income tax.
Excluding that effect, the net income would be approximately BRL 93 million in the third quarter. We have, with the BRL 11 million loss in this quarter, the cumulative of BRL 243 million in terms of 2014 to date numbers. Next page 18. In terms of inventory, we had a total amount of BRL 2.8 billion in the end of the third quarter, in line with the last year third quarter figure, and comparable to what we expect as we prepare to the stronger delivery activity in the last quarter of the year. Next page 19. In relation to free cash flow, during the third quarter, we generated BRL 49 million of operating cash flow, and we also continued to our investment plans with the program development, the CapEx. The free cash flow was an outflow of BRL 138 million in the third quarter.
It is important to mention that this cash flow reflects an increase in our working capital requirements year-to-date, mainly due to the increase in accounts receivable. We have roughly BRL 300 million related to defense contracts that we expect to receive by the year-end. This effect, coupled with the typical strong cash generation in the fourth quarter, lead us to believe that w e'll meet our guidance figure for the year. In page 20, next page, in terms of investment. In general, we are trending below our outlook. Research should not exceed BRL 60 million for the year. Development should stay below BRL 300 million, and the CapEx should be in line with the outlook of BRL 250 million. So far, in terms of the year-to-date numbers, we have a total of BRL 243 million in terms of investment. The next page 21, the company capital structure.
We continue to show a comfortable debt profile with a 5.6 year average maturity terms with 4% portion in the short term. Reflecting our cash flow generation discussion before, we end the third quarter with a net debt position of BRL 327 million. With that, we've closed this presentation. We are ready now, open for the questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Pete Skibitski from Drexel Hamilton. Your line is now open. Please go ahead.
Good morning, guys. I guess first question I'll ask is, on the large-cabin business jets, you delivered 10 year to date. I was wondering, of the 15 or so you need to deliver in the fourth quarter to meet your guidance, could you give a sense of how many of those have already been ordered as of today, or maybe how many are really close to closing?
Sure. We forecast from 80 to 90 of the light jets and 25 to 30 of the large-cabin jets. As of today, we believe we're going to come to the lower end on the small cabin. We're probably right in the middle of the range, with maybe some potential upside within the range. On the large cabin, though, we are looking more towards the lower end with maybe a little bit risk on the lower end of the larger cabin. Having said that, we are still comfortable that between the two families, we shall achieve the revenue guidance for the segment for the year.
Okay. Got it. Then I had a question on gross margins also. 19.5%, they were up about 30 basis points year-over-year on really comparable revenue overall and comparable revenue at commercial also, the mix was much better last. I wanted to ask, how do I reconcile that? Is it all kind of FX related, or maybe are the margin headwinds on the E175 maybe not going to be as bad as you'd initially suspected? I was wondering if you could help me understand that.
That was it. Go ahead.
Hi, Pete. That's Luciano. A little bit more color on that. Basically, when we think about the consolidated gross margin, you had a slightly lower, let's say, commercial aviation segment margin, driven again largely because of the mix of more E175s in the quarter. That was offset to some extent by higher gross margins in both the executive jets as well as the defense and security segment.
Okay. Executive, was that just kind of lower selling expenses within the segment? Actually, no, that wouldn't impact gross margins. Why were gross margins higher in executive this quarter, given the mix was so much worse?
Actually, there were a lot of Phenom 300s delivered in the quarter, 14 out of the 15 light jets. That contributed to that. That reflects this gross margin of north of 22% that I alluded to.
Okay, great. Okay, thanks, guys.
Thank you. Our next question comes from Cai von Rumohr from Cowen and Company. Your line is now open. Please go ahead.
Yes, thanks so much. I guess, you're saying you're keeping your cash flow guidance, you also indicated, I think, that CapEx plan of 250, you only did about BRL 106 million as you define it in the nine months. Your development plan of 320, you've done BRL 111. You indicated 320 is probably high. Those are pluses. How come the cash flow wouldn't be even better than that? What are the offsets to that?
The investments will be lower, but as we mentioned, we have the pressure on working capital. That's what we expect to see. We're working on reducing the accounts receivable. We had a higher number in the end of the third quarter, so we expect to see that coming down in the fourth quarter. We're working.
Right. If it comes down BRL 300 million, you basically would be down year-over-year, and you would be up. I'm still a little bit confused in terms of what the real offset is, because it looks like that should correct itself in the third quarter, unless there's something else happening.
Yeah, there is going to be the cash generation in the fourth quarter, which is stronger than the previous quarters. This will be adding.
Cai, this is Fred. Let me just add a little bit of color. As we can see, the year-to-date cumulative free cash flow, it's significantly negative. We ought to generate a very strong quarter, which we are foreseeing. I must say, we do have a risk, this BRL 300 million accounts receivable for related to defense, more specifically the Brazilian government programs. There is a risk there, which may even prevent us from achieving our guidance. The view is that this is due, so this is something which it's contractually due. It is, of course, the fiscal or the governmental budget in Brazil, it's public information. There are some constraints. I think we must, at this stage, emphasize that there is, yes, there is a downside risk to that guidance.
Thank you very much. Just one two-part follow-up. Could you maybe give us color in terms of 2016, how you're sold out in terms of the E-Jets?
It's looking good. I would not put a figure at this stage, Cai, but it's getting better. When you were sitting in 2012, looking at 2014, and 2013 looking at 2015, and now 2014 looking at 2016, we're probably in the most comfortable position of these three years.
Terrific. Last one, labor. Where are you with your labor negotiations, and what kind of a wage hike should we expect for 2015?
Okay. Let me take the opportunity to give you a broader answer. We have several factories in Brazil. We have already settled in agreement with the factory in Botucatu. That's a 7.4% increase in wages applicable from September on. The same proposal has been offered to our plants in Gavião Peixoto, where the defense people are, in Sorocaba, Taubaté, and São José dos Campos. We have not yet a position from the Gavião Peixoto, Sorocaba, and Taubaté unions, and we have a negative position from the São José dos Campos union. We have three unions in São José dos Campos, and one of them, our employees since last night They have not been allowed. The union has completely blocked the entrances of the factory. We are paralyzed in our operations in that specific site, which is our largest site in São José dos Campos.
The other two sites in São José, they are operating normally. We do not know how long that's going to take to settle. It's conceivable that this will end up in the legal system, in the courts. Our proposal is final. What we really regret is that, this specific union in São José dos Campos, with this very, let's say, aggressive attitude, of really blocking people's right to go and come freely, is something we have seen happening in the same region, in General Motors plant. The outcome is very negative for both the company and the employees. We just now have to see how this thing unfolds. Technically, obviously, we have some slack as far as being able to be shut down for a few days and still deliver all of our guidance, numbers, and deliver, et cetera.
At this stage, we have to live day by day and see how this thing unfolds. Other than that factory, everything-
Thank you very much
else is operating well. Thank you.
Thank you. Our next question comes from Derek D'Souza from RBC Capital Markets. Your line is now open. Please go ahead.
Morning. Thank you for taking my question. My first question is on 2015 aerospace production. You should have a fairly good visibility on your production skyline for 2015. Can you provide any color as to how you see 2015 shaping up as it compares to 2014 with regards to business jet production as well as commercial aviation production?
Yeah. I think it's a fair question. Of course, we will provide specific directions around, is it February, Luciano? March. Early March. As an indication, we see on the commercial jets, production levels probably sustaining, with the possibility of a little bit of a higher number. I think, sustaining the same level is probably a very fair assumption at this stage. We will have a pressure on the gross margin due to pricing. Pricing has become aggressive, with, of course, the stiffening of the competition. Obviously, on the tailwind side, we have a potentially more favorable FX next year and our continuous effort to hold productivity and to keep our costs where they should be. Also, the standardization of the assembly line, where we have large quantities of airplanes, 175 airplanes for the same customer, that also shall give us some benefit as far as productivity.
On business jets, two important markets, we see some down, some reduction in activity. These are Brazil and China. On the other hand, we are seeing an increasing level of activity in Europe, believe it or not, and the U.S. That adds to the fact that we'll be ramping up the Legacy 500 next year. We are probably looking to some degree of increase in our business jet business. As we increase the top line, of course, the trend is we also improve our results because we do not need probably much more, if any, more fixed costs to do that. As far as defense, I pretty much see a stable activity, a lot of execution to be done. We have been executing very well in that business.
In this particular business, FX will play against us because, of course, a large part of our revenues is in BRL. It's probably a wash, stability is probably a fair outlook at this stage.
That's great color, Frederico. Thank you. Just another quick question on the Legacy 500 and the 450. I was at the NBAA, there was quite a bit of buzz around those two aircraft products. Has that buzz and anticipation of the product been translating into a good order backlog and healthy pricing/margins on the first initial order set?
As far as book orders, I would say, it has been reflected in the pipeline. There is a significant amount increase in activity in the pipeline. Hopefully, that will translate in a few months in actual orders and an increase in backlog. You're right. The product is really superior. We do expect that family to move us in a good direction. As far as margins, in the very first units, no. This is much more typical industrial learning curve. The only comment I would add is that this is, so far, I'm knocking on wood here, has been the best entry into a service that we have had in our airplane programs. This is not just a coincidence. We invested a significant amount of work and money in testing and rigs and et cetera to achieve that.
So far, we have one prototype continuously flying way ahead of the initial deliveries, the airplane has a very good degree of maturity. I think it's fair to say that we should have a relatively smooth learning curve ahead of us.
Okay, great. Thanks. That's all for me.
Thank you. Our next question comes from Myles Walton from Deutsche Bank. Your line is now open. Please go ahead.
Thanks. Good morning. Hey, Fred, I was hoping you could give me a little color on the Defense Sales for the year. I think the target's $1.2 billion-$1.3 billion, and you did $1.1 billion year-to-date. I guess I'm a little confused that the fourth quarter could fall off quite that much.
Myles, you're right. I think if the Executive Jet Business, we may be looking at the lower end of the revenue guidance in the Defense. We will certainly be looking at the high end. In that case, I think we have some upside risk of surpassing that. It's a fair question, a fair point.
Is there anything in particular that's driving it? Modernization work or short cycle work? I would just imagine with the real weakening, it would've actually been more of a headwind to your full year.
Sorry, I don't understand you saying. Yeah. Myles, no, it's across the board. One antidote that we have for potential negative impact in the real revenues and real in the fourth quarter is the deliveries of the LAS, the Super Tucano in the United States. I think, again, it's very likely that we are in the end range or even surpass it.
Okay. One other one was that you talked about in the release, the lower development and R&D expense, and you talked about on the call, and you've made a point to say that development timelines haven't moved, though. Presumably, the net cost of your developments have actually come down. I'm curious, is that more from a supplier contribution perspective, or just the net cost of your developments have come down, and in particular, in what programs?
It's a combination of factors, Myles. I would say a little bit of conservative planning, probably from our engineering, because this has been probably the highest volume of engineering work the company has ever endeavored. I think there was maybe a little bit of conservatism there. There was a little bit of efficiency itself. There is a continuous effort from our current team to drive efficiency. Also, as you mentioned, our partners' contribution, which are more event related. I think the combination of several factors shall keep us probably below BRL 300. I'll say more, maybe between BRL 250 and BRL 300.
All right. Just one last one, just to confirm, you said that defense sales flattish into 2015 or growth and presumably you're going to overachieve your guidance this year. I guess that's flat to where you achieve, but maybe growth from where your guidance currently is. Is that the way to think about it?
That's a good question for clarification. I meant flattish as far as the guidance.
Okay. All right. Thanks so much.
Okay. Thank you, Myles. Thanks for the question.
Thank you. Our next question comes from Joe Nadol from JPMorgan. Your line is now open. Please go ahead.
Thank you. Good morning.
Morning.
First question on the BRL 300 million of defense receivables. Are those related to any milestones, like first flight on the 390, or is this now due and payable and the government is just late?
No, it's contractual. We have a.
Development.
Yeah. Accrual. It's not past due. I'm just raising this possibility, because of course, if you remember the last quarter, we did have this, I think it was BRL 150 million to BRL 200 million, which was a little bit past due, which was paid. We sense some difficulties there. Contractually speaking, and we know the efforts on the government side are to honor those payments. I think at this stage, it's correct to say that yes, there is a risk.
Is it due, is it in any way tied to first flight on the KC-390?
No, it is not.
Okay.
The way we have revenues in our contracts, just development. How do you call program now?
Percentage.
Huh?
Percentage.
Percentage of completion. That's the term. There's no specific event first flight, which we still believe is going to happen, by the way.
Okay, that's my next question. On another area, the Legacy 650, you said you expect growth next year overall in executives driven by the 500, which of course makes sense. I'm wondering if you could give a little more commentary on the 650 and how it's competing right now. There's a lot of new aircraft in the mid cabin area, and what your expectations are going into next year for deliveries of that platform.
Yeah. I think we probably will also see some improvement in the 650. It's an airplane that has a very good potential in the U.S. I think we have homework to do as far as our own marketing, our own the way to sell the product and really have it in the market, positioned in the market. It's a great product, and I think we ought to do a better job. Yes, I also expect improvements in the 650. As far as the Lineage, this is much more a niche product. We'll also be seeing low single-digit numbers, three, four, five, six, things in that range year-over-year. The 650 should perform better. This has not been a great year for the 650, and it should improve next year.
Can you give just a little more color on that, Fred? I don't want to push too much on it, but there is a lot of new competition, and there are some signs of certainly the U.S. market improving in general. I know this has been more of a European product at times in the past, but maybe a little more color on why you don't think it sold as well this year and why you do think it will get better next year.
Yes, no, very candidly, Joe, I think it's been more our own ability to market the aircraft. I think there's nothing wrong with the airplane, quite the contrary. We have had a specific, let's say, underperformance, in the U.S. This airplane is not an European scenario airplane. This airplane is perfect for the U.S. I think we have done a much better job of selling the airplane abroad than we have in the U.S. We are focusing on that as well. These things does not happen overnight. My team is really focusing also improving the 650 next year.
Okay, then just one more, if you guys wouldn't mind providing, as you've done in recent calls, the segment operating margins and gross margins.
Well, the quarter, specific quarter.
In Q3, yep.
Yeah, specific quarter. We, as far as operating margin, Luciano.
Commercial.
Yeah, help me here, is around 4% commercial.
Commercial.
Around 13% defense and a negative 5.5% for executive, due to the very low deliveries.
Okay. I'm sorry, I missed the commercial. If you wouldn't mind giving Gross as well.
Commercial. Gross. I don't have it here.
Okay. Commercial gross. Gross was 15.9%.
16%.
16%, operating margin, 4%. Executive, 22% Gross and -5.5%.
Okay.
Defense, 23% gross and 13% operating margin.
Very good. Thank you very much.
Thank you, Joe.
Thank you. Our next question comes from Eduardo Couto from Morgan Stanley. Your line is now open. Please go ahead.
Hey. Hi, good morning, guys, and congratulations on the strong results. I have a question on the currency, on the BRL. We saw a big movement in the currency in the last month or so. Can you remind us what is the lag between the movement in the currency and the impact of that in your results? In other words, when can we expect to see this BRL 250] or even weaker BRL being reflected on E-Jet's results?
Go ahead, Filippo. Go ahead.
Normally, it takes, like, two quarters to have a full impact because it has to pass by the inventories and then go into revenue. That's the timing of the effect, typically.
Growing, right? To have it from no impact to full impact.
Yeah.
Within two quarters.
Okay. Probably we're going to see that more reflected next year.
We still can capture something if it remains at that level in the last quarter, but, if it stays, because normally we reduce the inventories in the end of the year. If it was a stable quarter, several quarters, there will be something like that, but that probably going to capture a part of that in the last quarter as we deliver most of the inventory.
Okay. Just a second question regarding commercial orders. Can we expect to know more orders from the U.S. already next year, or the conversion of options into firm orders, in the U.S. already in 2015, or this is more for 2016, 2017?
I think it's correct to assume that we should see some more activity next year, which will lead us towards filling up the production line by the back end of 2016 and mainly 2017. Yes, we expect that.
Okay. Just a final point, Fred, can you give us your view regarding this Brazilian Regional Aviation Plan? I think it should be approved this month in the Congress. Any additional thoughts on that?
Yes. We are obviously very close to the issue. The issue is in Congress right now. There was a report issued yesterday by the special commission, the report changed the government Executive Branch project. They decided to postpone the vote from today to next Tuesday. We are in the hope that, in Congress, they do not distort the bill sent by Executive Branch. Now it's really down to the basic politics in Congress, and we will know by Tuesday. At this stage, it's a bit hard to predict where this thing is going.
Okay. Can we expect orders coming out of this Regional Plan, or it's still too early to assume that?
If the bill sent by the executive branch is approved as it was issued, yes, it's a cascade effect. Fundamentally, there will be support for probably 50 to 100 new communities which do not have air service today. This is low-density traffic. That will drive demand for more airplanes and for smaller airplanes typical of our size. As it is public information, we have been discussing, not only with Azul, which has already confirmed a new order, but also, with TAM and Gol in that respect. It's kind of a go, no go. If the plan is approved, I think the potential is there. By the way, we have to expect some competition there as well. There's no protection for our airplanes. Bombardier, we also have ATR, which has a large fleet in Brazil. They also will potentially benefit.
We work very hard to prevent that, but it's a potential for regional airplanes in Brazil, which still today is very much concentrated in the trunk lines, and it's a little bit uneven fleet distribution compared to the U.S. or Europe.
Okay. Thank you.
Thank you. Our next question comes from Darryl Genovesi from UBS. Your line is now open. Please go ahead.
Hi, good morning.
Hello.
Can you just put a little bit more, and I know you've done some of this already, but just put a little bit more color on the moving pieces for 2015. I guess, in particular, I think you guys have given some guidance in the past with regard to the Real for a, I think it was a 1% EBIT margin benefit for every 10% that the Real weakens. Is that guidance still good, or has that changed with the ramp-up of the Florida factory?
Hi, Darryl. As far as next year, it's still a little bit too early to try to put specific numbers on that. Of course, we have to see exactly where the revenue and cost structure will be, especially as all the three business units comprise the revenues and cost structure. Of course, the general move will help and is a tailwind, but putting specific figures for next year, we'll have to wait a little bit more to get more clarity. As Fred mentioned, in early March, we'll have a better view there.
Okay. What I'm just thinking about the percentage move on your currency exposure. My impression is that almost all that is related to Brazilian labor. When thinking about the big weakening in the Real that we've seen year-to-date relative to the labor inflation numbers that you're talking about, should we assume that those apply on roughly the same USD cost base?
On the cost, we may simplify that, but keep in mind that there's also the pricing issue, which I mentioned, specifically more on the commercial jet side. Smaller airplanes, 175, the mix is more 175 than 190, so lower-priced airplane and large transactions and stiff competition. We are sorry, but I think we really cannot advance much further at this stage.
Okay. Maybe a little bigger picture question. With regard to the Legacy 450 and 500, any updated thoughts on what you think the ultimate market is for those airplanes. I think you guys had initially thought of it as a 40-a-year kind of number. With the additional capacity that you're putting into Florida for Legacy 450, 500 production, it seems like maybe your expectations there have increased. Is that a fair assessment?
You're breaking up. The last part of the question, we missed it because you're breaking up.
Sorry, is that better?
Yeah.
No, I was saying, with regard to the ultimate Legacy 450 and 500 production rate that you think you can achieve, I think a few years ago, you were sort of characterizing it as a 40-a-year kind of opportunity, and just wondering if that expectation has increased. I guess, based on the fact that you guys are putting more mid-size capacity into Florida, it sounds like maybe your expectation had moved up there, and just wondering where you think that program ultimately goes.
Yeah. Although in the short term, we may look at numbers which are in the 40 or 50 range. We have decided to have, just in Melbourne, where these airplanes will be manufactured, just there, we're going to have already launched a infrastructure for six a month, so for 72 airplanes.
Right.
We will start producing these airplanes in Brazil. If that goes beyond 72, which may sound like a little bit of a dream today, if you look back to pre-crisis numbers, the numbers were actually higher than that. We can easily add capacity. Today, we're committed to infrastructure for 72 airplanes a year, six airplanes a month. We will, of course, as the demand takes us.
Great. Thank you.
Sure.
Thank you. Our last question comes from Pete Skibitski from Drexel Hamilton. Your line is now open. Please go ahead.
Yeah. Fred, I just wanted to ask on the Saab contract for Gripen getting signed with the FAB. I think I read it to be $5.4 billion, which seemed to be larger than I expected anyway. I was just wondering if you could tell us what Embraer's share of that would be at this point, now that it's signed, and maybe what kind of a timeframe you'd expect to get started and complete that contract?
Sure. My understanding, although we have no direct involvement in this contract between Saab and the Air Force, is that this 5.4 is probably related to escalation and stuff like that. To my knowledge, there is no change in the subject matter of the contract, 36 airplanes and all the logistics associated. We have moved from an MOU to a, let's call a very dense MOU or almost like a semi-contract with Saab. At this stage, I do not have yet numbers, I can't tell you X percent is going to be us. As far as scope of work, we will have the most significant amount of engineering work on the biplace version. We also have a significant amount of work in engineering as far as adaptations of the aircraft to the Brazilian Air Force specific requirements. We will assemble a number of airplanes in Brazil.
That number, maybe, probably is no less than 15 airplanes, or less 15 airplanes in Brazil. That's still under discussion. There is also a provision where there will be some sort of joint marketing of the airplanes between Embraer and Saab to new markets. These are complex content. As I said, we'll be able to put figures in there probably within six months. There is some work which will be started, but very, very small as far as just contacts between engineering teams. Timeframe is six months. We shall have a full final contract between Embraer and Saab. Then, of course, we'll be able to disclose to you more precise figures.
Are you expecting to generate some revenue on it in 2015? Is that a fair statement?
No. If there is some, it'll be negligible. No.
Okay. Got it. Thank you.
Thank you. This concludes today's question and answer session, and that does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.