Good morning, and gentlemen, and welcome to the Audio Conference Call that will review Embraer's Second Quarter twenty fourteen Results. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference is being recorded and webcasted at ri.embrier.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, 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 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 might 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 Cardado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO and Mr.
Luciano Froes, Director of Investor Relations. I would like now to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Thank you. Good morning, everybody, and thanks for joining our second quarter twenty four earnings results teleconference. As usual, we'll go through the presentation and then we'll be ready to open for questions. So let's start on page three, with the highlights of the businesses and the first one, the commercial aviation business. We had a strong execution in the first the second quarter of twenty fourteen with 29 deliveries when accounting for 43 E Jets through the first half of twenty fourteen.
Regarding new E Jet operators, we added two new airlines, the Borajet from Turkish and the Royal Air Morocco in this quarter. In relation to new aircraft sales, we had some good announcements starting with Aurigny Air Services with acquisition of one-one hundred ninety five E Jet and also some good activity in the Chinese market with ICBC leasing and HNA Group, which included current generation and E2 sales as well. Moving to the next page, Page four, continuing sales announcements, highlights for four deals. The Trans States signed a deal for 100 and 0.75 E2 Azul with Sanover LOI for 30 E195 E2 with 20 options, Fujidream Airlines placed order for three E175 plus three options and Azao from Azerbaijan that ordered two additional E195. As far as demand status of the E2 family, we're happy with the current figures of five ninety orders since the launch of the program, that including two ten firm orders in this total.
Next page, Page five, Executive Jet highlights. Starting with deliveries, like the commercial segment, we also had a strong execution in the second quarter with 29 deliveries and accumulated of 49 aircraft deliveries in 2014. Some also important milestones and recognition of our products. We have the Fino family delivering its aircraft number 500. And also, the Finos were elected as best of the best by Rob Report, another important information for this category.
As far as product capability, we had the Phenom 300 receiving certification from EASA for a steep approach operation, which opens up additional flight possibilities such as Lonon City Airport. Moving to next page, defense and security highlights. We inaugurated the final assembly hangar for the KC-three 90 along with the contract signature for 28 units with Brazilian Air Force. In relation to the fighter Brazilian fighter program, Embraer signed the MOU with SAB for this project and this is tied to the agreement between SAB and the Brazilian government. In relation to our to product maturity, our Xingu model celebrated thirty years of operation with the French Air Force and the French Navy.
In relation to our control subsidiaries, ATT CK won two important contracts with Brazilian Federal Police and India government. And Viziona continued to advance in the satellite program with the conclusion of the preliminary design review phase. Moving to next page and finalizing the company highlights to mention two MOU recently signed with first one with Embraer to assess reliability of critical systems in the oil and gas industry, possibilities of having contracts in this segment. And also the announcement that Embraer and Boeing signed the MoU for implementing the sustainable biofuel R and D center in Brazil. With that, we're now moving to the financial information and results.
We move to Page nine, starting with the backlog information. Slight reduction compared with the first quarter, reflecting the strong execution in the quarter. But it's important to recall that part of the sales that was informed in the previous pages will be included in the backlog in the following quarters. Next page, Page 10. As far as deliveries, we already mentioned, but we had a total of 58 deliveries in the second quarter, 29 in Commercial Aviation and another the same amount in executive jets broken by 22 light jets and seven large jets.
We are maintaining our guidance for the year as we expect a more balanced profile between the first and the second semester. Next page, page 11, as far as revenue by segment. Reflecting the good deliveries and performance, all business segments showed growth in the second quarter compared to last year. We had by business $972,000,000 in the second quarter for Commercial Aviation, $421,000,000 in Executive Jet business and $357,000,000 in Defense and Security, almost $1,800,000,000 in the second quarter. Specifically, in the Defense Security segment, we saw a slight reduction in revenues compared to the first quarter, in line with our indication and guidance.
By that, we reaffirm our revenue guidance by segment for 2014. Next page, page 12, in terms of consolidated net revenues, we reached $3,000,000,000 in the first semester of twenty fourteen, billion. We believe we are well positioned to meet our guidance for the full year, which represents BRL6.0 billion to BRL6.5 billion for 2014. Next page, in relation to operating expenses, we reported BRL168 million SG and A expenses in the second quarter, accumulating BRL308 million for the semester. The slight increase from the first quarter is in line with our indication given in the first quarter by when we announced the earnings.
It's important to note that the year to date SG and A as a percentage of sales is approximately 10%. Operating expenses continue to be one of our main focus items in terms of management and cost control. Next page, in relation to operating income. In the second quarter, we had million dollars operating profit with a 10.6% margin. For the first semester, operating income was million dollars with a 9.3% margin.
Once again, we expect a more balanced first and second semester and we are maintaining our guidance figures for the year, which represents a range of BRL540 to BRL620 million in terms of EBIT and margin range between 99.5%. Next page, as far as EBITDA, reflecting the previous operating figures, we reached R261 million dollars in the second quarter with a 14.8% margin and R412 million dollars in the first half with a 13.7% margin. Also for EBITDA, our guidance remains unchanged for the years to the range of R780 million to R910 million dollars with a margin between 13% to 14%. Page 16, next page, as far as net income, again reflecting the good performance, we reported a net profit of million dollars in the second quarter with an 8.1% margin. For the first six months of twenty fourteen, the company reported a total of net profit of million dollars and an 8.5 net margin.
In page 17, next page, in relation to inventories, we reported a total of ARS 2,400,000,000.0 in the end of the second quarter, slightly below the figures for the same period of last year and also being monitored very close, which is key for our working capital management. In page 18, regarding free cash flow, we had an outflow of BRL150 million in the second quarter and BRL554 million accumulated year to date. One of the primary reasons for this result was the increase of approximately million in accounts receivable, mainly related to defense contracts. Of this BRL250 million, BRL150 million was already received in the very July. The balance we expect to be received in the second half of the year.
With that being said, we are maintaining our free cash flow guidance of low double digit for the year. Next page, Page 19. As far as investments, we had a total of R128 million dollars year to date broken by R21 million for research, million for development and R48 million dollars for CapEx. For development, it's good to recall that this figure is not is net of supply contribution. Although we expect higher investments in the second half of the year, we see some potential to end the year slightly below the 300 for development.
We had a guidance of two twenty. For research, we see a similar trend. And with regards of CapEx, that should be ramping up in the remaining of the year. But summing up all of this information, we are maintaining our investment outlook for 2014 of the total of $650,000,000 Next page and finalizing this presentation in relation to company capital structure, page 20. We reported a net debt figure of R114 million dollars in the end of second quarter, largely explained by the cash flow performance as discussed.
Regarding our financial debt, we still show a very comfortable profile with only 4% maturing in the next twelve months and average maturity of five point seven years in line with our business cycle. With that, we conclude the presentation. We're now ready for the questions. Thank you.
Thank you. Our first question is from Cai von Rumohr of Cowen and Company. You may begin.
Yes. Thank you very much. So following the good orders you got at Farnborough and just after, maybe you could give us some color on your comfort with your ability to kind of hold production of the RJ line until you bridge to the E2?
Thank you, Kai. This is Fred. Well, no real change from last quarter. We remain comfortable. As you may have seen the order we had from Hainan Airlines large operator of 190s 40 aircraft have been 20 existing E1s and 20 new ones, I think reinforces our theory.
It's a good example of our theory that there is demand for aircraft right now and there is demand for next generation aircraft down the road. And the commonality factor will play an important role in that extent. So we remain comfortable so far so good.
Can you give us some color in terms of how far you're sold out or how much is sold of 2015 and 2016 or where you still have slots
that you need to fill?
Qualitatively, 2015 is looking good. We still have a few slots to fill, but we do not anticipate any issues for 2015. And 2016 looks certainly much better than what we had maybe a year or two years ago. And keep in mind that we do expect some activity in larger quantities in The United States for next year for deliveries in 2016, 2017 and 2018.
So
And
that's where we
then a quick one on other expenses. It was $19,000,000 in the quarter. I just jumped onto the call, but can you give us a little color in terms of what was in there and sort of what you expect in that line item for the year?
Luciano, can you
hear Yes. So, hi, Cai. This is Luciano. So yes, others was pretty stable slightly down when compared to the same quarter last year, right? So we have given indication this line should hover at around the mid teens, so around 15 or so as an expense in the quarter.
Note that the reduction in cancellation fees that we saw from previous years given the Executive Jets environment that also translated more to again this line being balanced at this level of expense. So that's what you can plan for that line.
Thank you very much.
Thank you. Our next question is from Joe Nadall of JPMorgan. You may begin.
Hi, good morning guys.
Good morning, Joe.
Hi. So first off, I was wondering if you could provide us with the segment's operating margins.
Sure. Let me just yes, in rough numbers, Commercial Aviation around for the quarter around just a little bit north of 11% Executive Aviation about 8.5% Defense and Security about 9.5% and there is some others which are small ancillary revenues. So this is pretty much the breakdown.
Okay. That's much more even balanced than you had last quarter. I was wondering in particular on the executive side, as you look quarter to quarter was the big improvement with volume? Was it price? Just if you could make the comparison and talk a little bit about the business environment.
Yes. It's I think it's a combination of volume and mix.
And more broadly speaking, what are you seeing in the market right now for business jet demand?
We have no material change, no fundamental change from what we saw last quarter. We it's markets not have not rebounded yet. Some softening in emerging markets, I must remark. Nothing that I think changes fundamentally the fundaments of potential demand. But there has been some softness in China for example and in Brazil.
Those two those markets are important markets for any OEM. But again, I think they're more temporary. That's definitely the way we see it right now. So no fundamental change. In The U.
S, U. S. Remains catching up as we mentioned last in our last conversation. So it's that's some good news. So when there is some more balancing now in emerging markets, The U.
S. Is getting stronger. So I think overall, it's pretty much the same picture.
Fred, just one more question on that. You mentioned the emerging market a little softer. You think it's temporary. Is that across your product line? Or is that at the high end or the low end specifically?
It's more I think it's more actually it's a direct consequence. Well, I probably have two different answers. In Brazil, it's part of the whole macroeconomic scenario, some uncertainty. We have elections coming up in a few months. So it's not only airplanes, it's not only high or lower segment, it's across the whole economy.
So there is caution, let's say sentiment. In China, I think the question is much more on some question about luxury items in general. So I don't think affects a specific segment affects business jets, affects yachts. And so there is a in China there is a kind of a sentiment now about luxury, which everybody whom I talk with thinks that yes there will be an impact in the short term. But the demand is the potential demand the outlook is so strong that there's simply no way that this thing will be there forever.
So how long that's going to wash out? I don't know. But those are the two main trends that we see in those two markets.
Okay. And then just one more. Your margin year to date is 9.3%. Believe EBIT margin usually is stronger in the second half as the volume goes up. So your guidance looks pretty abundantly conservative at this point.
What would you highlight as I know it's only Q2 here and anything can happen, but what would you highlight as the risks that have prevented you from raising the guidance here?
Joe, you may recall that we have mentioned several times, we have been trying very much to make have a better balance between the first and second half. I mean, I would love to have like quarters which are very close to each other as far as our revenues and results etcetera. So not much volatility. We are not there yet. So So we still see some variations from quarter to quarter.
So having said that, in 2014, we do not expect for example what we saw last year when we had the first significantly stronger second quarter I mean second half compared to the first half. So we had a more balanced year. That's why we have not revised upwards our guidance. We do expect equal or better half next the next half of course to get to our numbers. More probably more concentrated not probably certainly more concentrated in the last quarter.
So last quarter will be certainly stronger than the third quarter. But at this stage, I think I probably could say that we see do not see much downwards or downside risk. We are the best assessment we have is delivering the numbers. Some upside risk maybe. We're not at all in a position to revise our guidance.
So it's conservatively good I think at this stage.
Okay. Thank you.
Thank you, Joe.
Thank you. Our next question is from Noah Poponak of Goldman Sachs. You may begin.
Hi. Good morning, everyone.
Hello, Noah.
Fred, on the company sort of keeps beating margin expectations on the P and L, but missing free cash flow expectations on the cash flow statement. I hear what you said on accounts receivable in the quarter and I understand the business is pretty lumpy from a working capital and CapEx investment perspective. But just if I take a step back big picture, free cash conversion has been pretty weak going on four years in a row now. I just wondered if you could talk about, I mean, how much you're looking at that? How much it concerns you?
How much you're trying to change it? What you can do to change it? And to the extent that you can talk about at least the big working capital and CapEx items in 2015, 2016, so that we can see how cash progresses as we move forward, that would be really helpful.
Thank you, Noah. That's a very, very good question. We certainly as I think to your question last quarter maybe it was wrong, so I don't remember or jokes. We absolutely look at cash as one of our key performance indicators. I mean, we did have this let's call it a little abnormal situation where $150,000,000 which we did expect to be received in the last quarter they were paid in the July.
So we should have broken even on the quarter. And this $250,000,000 if you compare the position of our year end 2013 to where we are now or to the second quarter, dollars $250,000,000 which I mean they should have been converted from accounts receivable to cash. And that would pretty much put us in line with our planning to deliver our expected figures of breakeven at the end of the year or slightly positive. I think single I mean low double digit is our outlook. I think it's quite an achievement.
We have to take into account, I mean we are IFRS. We are and we are developing a significant quantity of programs in parallel. So for the volume of investment that we have, it's we must look at Embraer in a more let's say longer cycle. If you're looking for a let's say a classic one:one cash conversion ratio, We are in a period that we are investing heavily in three in all three of our businesses in business jets with two new models just a few days from certification. The other one next year we had the E2 of course is a big investment and the KC-three 90 as well and several other smaller programs.
So I think it's if we are able to deliver our slightly positive free cash flow by the year end with all the investments that we have been endeavoring, I think it's a we see it as a very solid result as far as cash. We really have to be careful about this cost receivable, so we do not really get this out of control. So I think that's where our focus is as far as cash.
Okay. I mean, are 2015 and 2016 conversion likely to be better because there's a little bit of a gap between what you've been doing on in the executive jet business and the timing of E2 investments? Or are E2 investments earlier than that suggests plus you still have stuff going on in the defense segment? Or is it just too early to tell?
It's early to tell Noah a little bit early. Fundamentally we are already engaging. The engineering resources we are freeing from executives are being engaged in the E2. And so it's a very respectful ramp up as far as engineering resources. So in a very preliminary and very qualitative outlook, I don't see any fundamental change.
Of course, as we refine the numbers towards year end, we're going to have a better picture.
Okay. And then just one other question I had in the commercial jet business. I was reading some press over the past few days that's been out on the Brazilian government putting out some more details on a regional aviation development program. I actually haven't heard you guys discuss that a ton in the past. Is that something that can actually move the needle for your order book over the next six to eighteen months?
Or what are you seeing coming out of that?
Well, moving the needle, yes, I mean, if the program is I think it's a very important attempt to develop or let's say to recover what the country had many years ago. The country if you go back twenty five years ago, we had something like two fifty to 300 cities with commercial service in Brazil. The number today is less than 50% of that believe it or not. So the airports are out there. Nobody is flying to them.
And there's a billions of reasons for that. But the question is the government has of course understood that regional aviation is especially for Brazil with a country with so large territory and so let's say restricted infrastructure for roads and for railroads. So flying is really the way of people and goods to be moved from place to place in Brazil. And keep in mind we have a forest which is 50% of our territory. So it's a country which naturally deserves or requires aviation service.
So by stimulating regional flying, it's kind of not we don't have to be very optimistic to see that if this thing really flies and looks like it is government is very serious about it, we should be able to sell more aircraft not only to Azul, but also to other airlines, which currently do not operate regional jets. So will that move the needle? We hope so. But we have to see how this thing is implemented. Several of these measures, several of the items went to Congress, so they're not exclusive to the executive branch.
So we have to see how fast Congress passes those pieces of legislation or whatever they have to approve. But I think it's good news on the home front for us.
Okay. All right. Thanks a lot.
Thank you.
Thank you. Our next question is from Pete Skibitski of Drexel Hamilton. You may begin.
Good morning, guys. Nice quarter.
Thank you, Pete.
Puerto Rico on the legacy 500, is that on track for first delivery? Will we see one deliver in the third quarter?
Yes. Well, first of all, we have to get the certification, which I said was by the July, which is today. I will miss it for a few days. I mean, it's everything is already delivered. Everything is already with our certification authority.
I mean, we do expect within any day to have the certification of the Lagos 500. And as far as production, not sure, but I think it sounds right about one or two deliveries in the first quarter. I think about six airplanes we are planning to produce this quarter I mean this year, this second half.
Okay. That's great. That's great. And then I wanted to ask a couple more questions. One on the FX too.
Just some of the stuff in the press leads me to believe that maybe when the contract is finally signed off on and it sounds like it's getting closer that it could potentially be maybe much larger for you guys and maybe expectations a year or so ago. So I was just wondering if you could tell us maybe what your expectations are for your cut of the FX2 program and maybe when you think the contract will be finalized?
I think that's a very, very good assessment. And we as we now know a little bit more about the program and we have of course have been interfaced with Saab very intensively in which role we should play. I think it's fair to say that today we're probably seeing a larger role than what we saw before the contract was I mean before SAB was selected. The contract is still under negotiation between SAB and the Brazilian Air Force. So they are the prime contractor.
The expectation is that the contract is signed before year end. In parallel, we are working with SAB to define exactly what their role is. When we talk about eventually producing the airplanes in Brazil in our plants in Davionpe and So to, I mean this is certainly this will bring a higher potential revenue for the company. And also Saab asked us to kind of coordinate or manage like a super first year supplier to the program kind of organizing and coordinating all efforts in Brazil. This of course increases our role as well.
On those top points, there will be a development for a new version of the airplane, which is the twin the two seater version of the airplane in which we also were positively surprised that we probably have a higher participation in that development than what we foresaw some time ago. So I think to your question, the answer is yes. We see a potential higher importance of the program for Embraer at this stage. As we go down the road until the end of the year, we're going to have some more precise understanding and figures I suppose about that.
That's great. Great news. And just one last question if I could. I think I saw during the quarter some positive developments regarding extending the INSS the payroll tax break. I'm wondering is that your understanding as well?
Is the payroll tax break going to be extended? And when do you think we'll know for sure about that?
Yes, it is. I mean this page it is not only of course not only for aerospace for I don't know tens and tens of sectors, industrial sectors in Brazil. This is really, let's say, a need for the Brazilian industry in general and also for the service sector. The current government has stated that this is for good. It does depend on some congressional confirmation, but we I mean, we believe this is going to happen even before the election.
So it's something which is important for Brazil to be more competitive. Our industry is losing competitiveness and this will certainly help the Brazilian industry and also the service sector to regain competitiveness. So it's we expect to be permanent.
Okay. And within the next two months?
Yes. I mean, it's hard to put a deadline on anything in Congress. But I mean, this is what we have been hearing and reading recently.
That's great. Thanks very much.
Thank you.
Thank you. Our next question comes from Eduardo Cuso of Morgan Stanley. You may begin.
Hi, good morning guys and congratulations on the results. I have two questions from my side. First on the regional aviation plan, Fred, just getting back to that a little bit. Given the idea
of the government to launch this regional planning in Brazil already in
the beginning of next year, can we assume that if the plan really goes through early next year, we may see potential orders even for the first generation of E Jets
maybe from new customers in Brazil? Is it something
possible? And also helping your transition right from the E1 to the E2? And a second point, are you more comfortable now for the transition given that you got some orders from China, there is this regional aviation plan in Brazil. So what's your view for the transition now vis a vis like six months ago?
Okay. Thank you. We yes, so it's as you know the package some actions will be implemented earlier and some will be implemented directly like simulation of regional flights out of Congonian. So that shall improve the demand for smaller aircraft. But several of the actions will depend on Congress.
So it's a very tough question to answer. Should we expect over the next six months? I see probably unlikely. I kind of stick to Noah's time frame of twelve to eighteen months more likely yes. So yes definitely that may be a good tailwind for U1 and for the transition, which by the way we see as we advance as we advance, I mean, remain comfortable.
We are having orders of U1s. So and in 2015, we do expect some activity in The United States in larger quantities for 175s replacing 50 seaters. So 2015 looks good at this stage. 2016 looks good actually two years out. And 2016 and 2017 and 2018, we the bulk of that demand we probably will start seeing some activity in more meaningful numbers in 2015.
So, so far so good. We are I mean, are not fundamentally feeling different from what we felt last quarter. We feel good about it.
Okay. And just another point Fred regarding taxes in Brazil. There is the tax rebate on for Brazilian exports the Integra. I think the government is bringing it back. Can you comment a little bit about the potential impact from this tax rebate on exports for Embraer?
Sure. We again, as you know, we are both based in Brazil. The tax system in Brazil is very cumbersome. And we I mean, still export taxes. Everybody's post in the country export taxes.
So the Reintegra, I think was is an attempt of the government to somehow compensate for this situation, which only will be resolved if we have a profound tax reform, which God knows when that may occur. So it's a very important instrument, because it's although it's not mathematically perfect, but it's an attempt to kind of offset this cascade of taxes that we embed in our products before we export and that takes away competitiveness of Brazilian exporters. Now the way this was brought back to the active stage. I mean, the rate that they are bringing back Integra does not give us any certainty about if it will be available and in which volume, because it will depend on the budgets of the government every year. It will also depend according to the Minister of Finance declaration.
It depend on exchange rates. So it's a mechanism which is there, but we do not know whether or not it will be used in which amount year by year. So we fundamentally cannot use that in our planning. If it happens, let's say in 2015, the rent reggae is 1% fine. But at this stage, we really cannot use that as a let's say as an assured cost saving or tax reduction in our planning.
But this year you're not getting any benefit, right? There's something next year would be incrementally positive, right?
No. Yes. No, nothing, nothing really. I think some residual from last year I guess, but this no. The answer is materially no.
Okay. Thank you guys and congrats.
Thank you. Our next question is from Myles Walton of Deutsche Bank. You may begin.
Thanks. Good morning guys. I was hoping to get a couple of questions in on the KC-three 90. And the first one is whether or not you'll get any type of cash advance of material size when that contract is signed? And the second part of that is whether and to what extent the delivery excuse me, the first flight of the KC-three 90 is an important cash milestone and or profit recognition event for you?
Myles to your first the cash, yes, is always some down payment. I don't think anything I mean meaningful. I sincerely do not know. It's probably nothing which is meaningful. It's embedded in our planning anyway.
So and as far as economic recognition first flight, no. We incur I mean no meaning we are not there will be not a bump in revenues or economical impact. The first flight is just a continuation of the development. We have been accruing this development costs and therefore revenues I think almost monthly, right? Is that monthly?
Yes, monthly. So it's just an event. We will not trigger anything large.
Okay. Before taking it from the
It's an important event though because with that we can really initiate the flight test campaign. So that's much for the program it's a very important event. For the cash flow of the program it's part of the planning.
The first flight, guess, was more thinking of it maybe as a risk and in the sense of you're quickly coming up on when you probably should be putting the final assembly together power on should be occurring probably in the next couple of months in prep for that final for the first flight. So I was more looking at it as a risk from any excess cost or delays, but it sounds like you're still looking at end of year?
Yes. Challenging, but the airplane is the fuselage is totally assembled now. We are starting to make the wings with the fuselage. And as you said probably yes in the next couple of months. Do we have a rollout date for yes, do have a rollout miles scheduled for October.
So it's tight, but doable.
Okay. The other one I had was Jose you mentioned the lower development and research run rates versus your plan. And then just curious is that because you're getting larger risk sharing than you anticipated? Or is it because you're underspending? And just any color on that.
Thanks.
Yes. We have on year we and that was planned. We had a higher concentration of contribution in the first half than the second half. Having said that, we're very unlikely that we're going to surpass let's say the BRL300 million number in development. So probably we're going to stay south of BRL300 million, maybe a little bit less in research as well.
And CapEx today the best figure we have is sticking to the $250,000,000 So overall, we're probably not going to reach the full $650,000,000 We're to stay a little bit below without of course jeopardizing the physical advancement of programs. It's just a question of better execution than what we planned.
Okay. Good enough. Thanks guys. Good quarter.
Thank you.
Thank you. Our next question is from Ron Epstein of Bank of America. You may begin.
Yes. Hey, good morning guys. Just maybe a couple of quick follow on questions, because I think most everything has been covered. But one thing we didn't talk about is the sales campaigns. And what should we think about for the second half of the year?
I mean we're coming off Farmborough, was congratulations really good period for you guys. But what should we think about in the second half of the year?
Raul, we good morning, first of all. We have to make sure that what we have announced some are still LOIs and some are still require some final documents and approvals or whatever. So we have to make sure that we convert all that into firms. So that's going to be that's not being recognized in our backlog. So our backlog does not reflect yet all those sales, which it's a priority for us in the second in the next several weeks.
And we have campaigns literally all over the world. No fundamental change. Opportunities in Europe, spot opportunities in Latin America, a little bit slower demand in Middle East, but it's not so much meaningful. The 175 in service in The United States is doing really well. I mean, the airplane has been extremely well accepted by the airlines flying it.
And so that makes us more optimistic for new orders, which may not happen this year, but next year we do expect some new orders in The United States. So it's a mixed bag. And overall, as I said in the previous question, are I mean, we are in a relatively comfortable situation as far as 2015 and the three years before the E2 is in service.
Okay. Great. And then maybe just one more and more detailed question. A little while back you guys announced that you're doing a JV with Zodiac for aircraft interiors. And then it's my understanding a piece of the interior on the new E2s you guys are doing a wholly owned subsidiary.
Broadly speaking, is the strategy with aircraft interiors now? Do you have any thought of actually selling aircraft interior components outside of Embraer?
Good question, Ron. We do have a JV with Zodiac. The company's name is EZ. It's in Mexico. It's a fifty-fifty joint venture and they I mean they provide interiors for the EJETs.
So that's clearly one strategy. And we also acquired a couple of years ago the control of a small company in California. It's called AST Interiors, they're more dedicated to seats. And we have been introducing those seats in some of our business jets. We are thinking about whether or not we could also use that company to make first class seats for the E Jets.
So if you ask we have those two, let's say, actions in or tactics in deployed. Our vision is today is much more that we want to have more and more vertical capability of seats and interiors at Embraer. We do not have the view to become an OEM of seats or OEM of interiors to provide to other companies. But we definitely are investing in having more verticalization of that those components in our aircraft over time.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question is from Stephen Trent of Citi. You may begin.
And thank you for Excellent. The Thank you for the time gentlemen. Just one thing looking at the movement that we've seen from the BRICS countries to create this big fund for the group. Are you seeing any kind of new potential opportunities there? And then related to that question, there's also been some recent controversial comments from some governing bodies regarding the conflict in Gaza and between Gaza and Israel?
And has have you seen any impact at all in your business or in your dealings with affiliates like LBIT systems or anything like that? Or is it business as usual in the backdrop of these geopolitical waves?
Thank you, Steve. I suppose you want me to answer in English, right, not in Portuguese.
I'm going say English for the benefit of the call.
Okay. Thank you. And there's a contribution to your quasi perfect Portuguese. Well, no. No, I mean, this is a BRICS bank.
We read about it in the press. No contact. No, I mean, it's I think we know as much as you probably less than you about that. And we are certainly not counting on anything. If there is in the future funds available for either research or whatever fine, but no it's not in our radar yet as far as anything to be included in our plans.
Gaza, well, I did not complete seminary, but I did go to I have a little bit of knowledge about that region as far as biblical and pre biblical times. It's a very, very complex issue. Unfortunately, it's five thousand years of conflicts. I think business is above that. We are to your question specifically, we do not have seen we have not seen any change whatsoever in our relationship with Israeli companies or airlines or Arab airlines which fly our aircraft.
I mean, we I think Brazil is very far from the region. And we're not a real part of that historical quest.
Great. Very helpful. And just a quick follow-up to Joe Nadel's question earlier. Any chance you might be able to give us at least broadly the gross margins per segment for the quarter?
Yes. This is second. Yes. So commercial aviation around 22% and executive aviation as well a little bit higher than 22% and defense and security about 20%. So overall 21.9%.
Okay. Very helpful. I'll leave it at that. Thanks very much guys.
Thanks, Steve. Thank
you. Our next question is from Ravi Jain of HSBC. You may begin.
Hi, good morning. I just had a couple of quick follow ups. One is on your Commercial Jet segment. What is your expectation on orders from Europe, let's say, the next six to twelve months? I mean, given that, of course, growth has recovered, but still remains pretty sluggish there.
And of course, the e jet mix is different. I think it's more 190s and 95s. But do you see also a similar trend in margins like we saw the margins of E175s in The U. S. Orders lately?
And the second question was just a little bit more color if you could give us on the cost control initiatives and your outlook for the second half.
The first part of your first question when you asked demand from where I couldn't get Europe. Europe. Yes. Well, opportunities. Options.
We have a very strong European base on the E Jet. So from time to time, we have opportunities of new orders or confirmation of options. It's good in the sense that it's not bad. It's there. It's happening not in big quantities, but it's from time to time we sell the ones and twos and threes, so all over the continent.
We have as I said a very strong European base. Now as far as mix, we are moving I mean probably seeing a significant way from 01/1990, 01/1995 to 01/1975. So this year, the overall balance of the year is this is a seven.
Yes. So
this year, Javier, we should see something like two thirds of 01/1975 vis a vis one third of 01/1995, which is a significant shift from past few years. And that trend probably will stay. As far as cost controls and we are with the same stance that we have been adopting in the last several years. Filippo mentioned our efforts in SG and A. So it's I call it a war against SG and A.
And we are I think so far winning this war not letting it go up. And all the efforts of course also manufacturing productivity and quality. So no nothing significant, but this is an absolute focus of top management of the company and it remains.
Thank you. That's helpful.
Thank you.
Thank you. This concludes today's question and answer session. I would like to invite Mr. Federico Corrado to proceed with his closing statements. Please go ahead, sir.
I'd to thank everyone for the attention, for the consideration, and talk to you in the next three months. Thank you. Have a nice day.
That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.