Good afternoon, ladies and gentlemen, and welcome to the Audio Conference call that will review Embraer's Fourth Quarter twenty thirteen Results.
Hi, welcome everyone.
We're going to
go ahead and start with the earnings call for the agenda. And so with that, with no further ado, let's dive right into it, please.
Good afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's fourth quarter twenty thirteen results. Thank you for standing by. This conference call is being held during the Embraer Day in Brazil with the presence of investors and market analysts. At this time, the company will present its fourth quarter twenty thirteen results. Afterwards, we will conduct a question and answer session and instructions to participants will be given at that time.
As a reminder, this conference is being recorded and webcast at ri.embraer.com.br. This conference call includes forward looking statements or statements about events or circumstances. This
first part of the event will is also being webcast and we have colleagues joining us from abroad and obviously locally, but not here dialing into the call.
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 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. Federico Curado, President and CEO Mr. Jose Filipo, Chief Financial Officer and IRL and Mr.
Luciano Frauas, Director of Investor Relations. I would now like to turn the conference over to Mr. Federico Curado. Please go ahead, sir.
Good afternoon, everyone. Thank you for coming. Thank you for those attending our conference call through the web. So I'll just say a few words at the beginning about 2013 and 2014. 2013 was a very challenging year for the company.
We had a difficult start, but we always we were always confident about our ability to deliver on the results we promised. Revenue results, profitability results, meeting our investment targets and also our the progress in our programs. And it is it was a great satisfaction that the whole team was able to deliver on all of those guidance parameters. Of course, we had the reversion of a provision, which we had entered a few years ago regarding the bankruptcy process of American Airlines. And with the very positive outcome of that Chapter 11 process, we were able to make that to cancel that provision.
And that gave us an extraordinary result above what we delivered operationally speaking. So it was in the end a very positive year for the company. We were able to restore our backlog. We successfully launched the 190 and the 170 the E2s, 190, one hundred ninety five and one hundred seventy five E2, which will be, of course, a mainstream product for us towards the end of the decade. We also made progress in both defense and security and business jets, increasing our revenue and cash generation and margins.
So for 2014, we see another step towards growth, towards quality growth. We are trying to balance out rate of growth with profitability and cash generation and trying to keep a very solid balance sheet, cash a solid cash position. And in 2014, we will step up our investments, especially in the E2 as we ramp up the E2, but also in consolidation of some of our CapEx expenditures, capital expenditures such as the consolidation of the factories in Navarre and also in The United States and also the preparation for the serialization of E2 and the KC-three 90. So it's another challenging year for us. Probably, we're going to our record high investment level, dollars $650,000,000, which is a little bit above 10% of our twenty thirteen revenues.
But we have the solidity and strength to do that. And everything, of course, we are investing in will translate into future results. That's why we are doing that. So our overall strategy to diversify the company, make it stronger, make it more global, will continue our continuous pursuit for excellence, productivity, for effectiveness in our processes. All of that is present in our agenda, and we'll be able to again produce what we consider solid results towards the end of the year.
So we have devoted our guidance for revenues and margins and cash flow. This is the first time we do a more formal like guidance on cash flow, better demand that we have from many of you gentlemen and ladies. So we despite the higher level of investments, we expect to we still expect to be positive in the cash flow in the low double digits area. So with that, I'll turn to Filippo. And at the end of the session, we'll be all back to Q and A.
Thank you. Okay. Thanks, Fred. So we go through the presentation now and then we'll be open for questions. Starting with Page three, with the financial highlights for the year and the quarter.
In 2013, the company met the main guidance figures. We had the net revenues of $6,200,000,000 in 2013 and $2,300,000,000 in the fourth quarter. And this is the highest ever quarterly results for the company. As far as operating results, we had the EBIT of $713,000,000 and EBIT margin of 11.4. For EBITDA, we had the total amount of $1,000,000,000 and 16.1% margin.
This was the reported numbers. Through the presentation, we'll be able to explain in numbers the nonrecurring effect that Fred mentioned regarding American Mine. Continuing the free cash flow generation, it was positive $213,000,000 primarily driven by the strong fourth quarter results. Also an important financial highlight for the year was the liability management operation, where we were able to exchange bonds that mature in 2017, 2020 by new bonds that will mature in 2023. We had about $500,000,000 of exchange and that led us to a better profile in our debt, which I'll be able to detail later in the presentation.
Finalizing the financial highlights, we have the full year quarter the backlog which is 18.2%. This information was released in mid January, and it reflects the solid growth of this backlog. And it's the highest level of the company in the last five years. Next page, moving to corporate highlights. We were honored to receive several recognitions by important institutions both in Brazil and abroad.
I think it was important year for Embraer in that area. And also, two important governance information that we joined the World Economic Forum Partnership against corruption. And also, we were able to be listed in the Dow Jones Sustainability Index for the fourth continuing year and also in the EASI in both Espa. Next page, now entering in the business segment highlights, starting with commercial aviation business. We had the delivery of 90 E Jets in 2013, 32 in the last quarter and meeting our guidance.
Also, like Fred mentioned, in the mid June at Les Bourgiers Airshow, we launched the A2 program. And to date, we have reached 200 firm orders and additional 200 options. We also had a very good year in terms of orders, was three forty nine new ETS that was sold within the current generation and the second generation that led us to reach over 1,400 aircraft, over 65 airlines in 45 countries, well spread distribution. Continuing with the important achievements in the commercial aviation, starting with the delivery of the E Jet number 1,000. This was for Republic Airlines that will operate on behalf of American Eagle.
Also, we announced in the December important order for American line for up to 150 E Jet, 175 model, split by sixty third and 90 options. Continuing, we will welcome our first Russian operation, the Saratova line became our first operating version. The two one hundred ninety five, it's important because we consider this potential very good market going forward. And finalizing the highlights for Commercial Aviation. The recent announcement of Air Costa's order was this year after we had the first the last announcement for 50 firm orders plus 50 options of the E2 model.
Continuing highlights now in the executive jet business. We delivered 119 executive jets in 2013, meeting our guidance with 90 light jets and 29 large, 53 of them delivered in the fourth quarter. Some important achievements of the Finan family that they surpassed in both one hundred and three hundred four seventy aircraft deliveries to 29 countries. And also, we were recognized by the FENO three hundred, it was the most delivered aircraft in executive jet business in the industry in 2013. Regarding the new legacy five fifty and four fifty and five hundred program, the legacy 500 reached eleven hundred hours of flight test campaigns scheduled to enter into service in the first half of this year.
And the Lagos four fifty had its first flight in the December. It's expected to be entering to service in 2015. Continuing executive jets highlights, we had the first delivery of the China assembled legacy six fifty in early January this year. Also, we launched the new Lineage 1000E, which includes enhanced range and also interior features. Regarding recognition of Embraer for customer support, we continue to be recognized by industry reference as best of class.
We had this for the second consecutive year by recognition by AIN. And also we expanded and continue to expand our service center network adding six new facilities in 2013, which now accounts for 76 services centers globally. Moving on to Defense and Security segment. Revenues grew of 15% in 2013, reaching $200,000,000 It's a record for the segment of Embraer. Some activities of our subsidiaries, the ATEC growing activities highlighting the signing of another aircraft air traffic control contract with Brazilian Air Force.
Also Vizjona, our joint venture with Telebras that develops the Brazilian satellite program, We continue to select important suppliers for this project. And related to Bradar, in 2013, we continue to increase its activities in Bradar business with serving Brazilian Air Forces. Another cost of defense and security. Our Jacksonville operation is moving along as planned, the first delivery of Super Tucano scheduled for mid-twenty fourteen. We also concluded the delivery of the final three Super Tucanoes for the National Air Force of Ambola.
And in the modernization program, we continue to advance with the delivery of the second modernized A-one fighter jet for Brazilian Air Force and performed the first flight of the two seat prototype. Regarding the KC-three 90 program, the assembly process is underway, first flight scheduled to the end of twenty fourteen. Now moving on financial figures and results starting with the deliveries, just consolidating information. We had this delivery of 90 aircraft for commercial aviation and and 119 commercial for executive jets within our range for the year. The backlog as we released early in mid January, the total amount this year in the end of the year 2013 grew 46% compared to $20.12 to $200,000,000 reaching, like we mentioned, its highest level in five years.
Most of it comes from commercial aviation, reflecting the strong orders for both the current and the second generation of E Jets. And here you see the breakdown of this backlog of 67% for commercial aviation, 20% defense and security and also 13% for executive business. In relation to net revenues, we have total of $6,200,000,000 in 2013, slightly above last year and meeting our guidance. This figure also represents the highest since 2008 and meeting our guidance range of between 5,900,000,000.0 to $6,400,000,000 In terms of splitting the revenues by segment and region, we see the continued diversification by segment with the relative reduction in commercial aviation and growth of executive and defense, we've seen that in the left side that coming from 61% in 2012 to 53 in 2013. That's what we already indicated when we released our guidance range for 2013.
This is confirmed. And 27% executive aviation, 19% for defense. In relation to regions in the right side, we see a well balanced distribution with our main markets being North America, Europe and Brazil. Page 15, the net revenues on a quarterly basis in Brazilian reals and dollars, the highlights for the strong fourth quarter, what we had in terms of dollars 2,300,000,000.0 In terms of revenues, the amount total of BRL6.2 billion in the year, EBITDA is BRL5.3 billion in the last quarter, BRL13.6 billion in the full year. Page 16, the SG and A expenses and its evolution in the last years, reflecting our cost control focus, bringing the SG and A to its lowest level in three years.
It's important that this program and that this process is something very important for the company. We've working very hard on this and we'll be able to see the results. We had the total amount of $664,000,000 in 2013, which accounts for 11% of sales reduction compared to the previous years. Next page, when we broke by broken by quarter, we showed a consistent control of figures. So we see by quarter that we have these figures stable.
Total like we mentioned BRL $664,000,000 in for the year in dollars and BRL 1,400,000,000.0 in 2013. Next page, talking about the operating results. At this point, it's good to mention that we had this positive impact of the American provision reverse, like Fred mentioned, as the company concluded its restructuring program. We had a positive impact of January But the reported numbers of $713,000,000 with a margin of 11,400,000.0 would be $566,000,000 with a margin of 9,100,000.0 Even excluding this effect, we were in line within our range that we indicated, not only in terms of amount of dollars, but also in terms of margin. In Page 19, operating results by quarter.
We see the strong performance and the operational operating leverage in the last quarter, 20.1% margin in dollars and 13.7% without the American nonrecurring effect. And also in reais, the total amount of BRL1 billion last quarter and BRL733 excluding the American effect. Page 20, in relation to EBITDA, we also showed a strong result in the fourth quarter with $1,000,000,000 of EBITDA and 16.1% margin. As in the same way, if we exclude the American nonrecurring impact, it would be of $857,000,000 in terms of EBITDA with 13.8% margin in our range of guidance. The information of EBITDA by quarter, following the same pattern that we saw in the EBIT, We had a strong fourth quarter.
Most of the results were coming from that period. This over $500,000,000 in EBITDA with almost $400 excluding the American effect in dollar terms. Net income in Page 22 results in 2013, dollars $342,000,000 with a net margin of 5.5%. Net income sorry, net income divided by quarter, we have this strong fourth quarter with margins that were definitely contribute to the blended one, over 10% margin in the last quarter. The earnings per ADR reached $1.88 in 2013.
That reflects a payout of 26%. This is consistent with our strategy, which includes the quarterly payments that we will do. Next page, Page 25. As far as inventories, we finished 2013 with $2,300,000,000 in inventory, similar levels to prior years, also reflecting important focus of the management to avoid increasing and keeping inventories under control. In Page 26, in terms of free cash flow, we ended the year with a positive figure of $213,000,000 This was, of course, as a consequence of the strong performance in the fourth quarter, primarily due to the aircraft delivery in that period.
We had if we break here, we have the total cash generation through operating activities of $967,000,000, partially compensated by the investments in PPE of $438,000,000 and intangible assets of $317,000,000 with a net of $213,000,000 in 2013. Page 27, total investments in 2013 of $534,000,000 slightly below our outlook. We had the split by $193,000,000 in CapEx, dollars $265,000,000 in development and $75,000,000 in research. This the total investments was a little bit below that in our outlook that we gave of $580,000,000 In terms of our capital structure and finalizing the presentation before we do the guidance, We had an improvement of the debt profile this year. As you can see in the left side, the debt maturity, we were able to extend the terms from five point eight years average terms in the end of twenty twelve to 6.2 in the end of twenty thirteen, mostly because of the exchange operation that we mentioned of the bonds, but also important that we reduced our short term portion of the debt from 16% last year or 2012 to 4% in 2013.
Our net cash position was $429,000,000 because of the cash generation that we mentioned in the page before. With that, we enter into the outlook 2014 with our guidance range figures then for 2014. As Fred mentioned in the beginning of this call, we are slightly increasing our net revenues range to BRL 6,000,000,000 to 6,500,000,000.0, if you compare to what we gave last year. EBIT and EBITDA margins remain stable, the range of 9% to 90.5% for EBIT and 13% to 14% for EBITDA and the range of $540,000,000 to $620,000,000 for EBIT and $780,000,000 to $910,000,000 for EBITDA as far as those absolute ranges. In terms of cash flow, we're the information in our guidance for free cash flow.
So according to outlook that we released, we indicate that the free cash flow should be positive in the range of in the line of low double digit. In page three of the guidance, revenues and deliveries range by business segments. In the commercial aviation, our forecast a slight increase of aircraft delivery, deliveries in the range of 92% to 97%, which reflects into the range of revenues to BRL 3,200,000,000.0 to BRL 3,400,000,000.0 for the year. In executive jets, the delivery should be stable in the range of 80 to 90 large jets and 25 to 30 large jets and the revenues of BRL 1,500,000,000.0 to 1,700,000,000.0 in 2014. In Defense and Secured segment, we are increasing the range from last year to billion to BRL1.3 billion when we compare to the release figures.
To finalize and to sum up the amount of Embraer as a whole, we are indicating the other revenues of $100,000,000 that we close to the range that we indicate for Embraer as a whole. If we take the midpoint of the range of revenues by each business, we would have 53% of the revenues coming from commercial aviation, 26 for executive aviation and 20% to defense and security. The others will be 1%. Next page, closing our guidance for 2014. In terms of investment, we are indicating the total amount of $650,000,000 for the year.
It's an increase compared to 2013, basically due to the E2 development program and the final stages of the development of the Lagos $500 and $4.50 So we had the indication of research for $80,000,000 development $320,000,000 and CapEx $250,000,000 total of $650,000,000 for 2014. Okay. With that, we finish the presentation and we'll be open for questions. Thank you.
Now we will open for questions starting with participants in the audience and followed by participants in the conference call.
Hello? Hi, Fred. Hi, guys. Congratulations on the results. Eduardo from Morgan Stanley.
I have two questions.
One is regarding the guidance. Can you tell us what is the BRL? What is the currency that you're assuming for this 2014 guidance? And the second question is more on the defense division. There has been news recently that the Brazilian government is cutting the budget for expenses.
And there was I think a big cut on the defense sector. Just wondering if this is going to affect Embraer, if it's going to affect the current projects like the Cispron, like the KC-three 90. So what is this budget cut could mean for year
two? Thank
you.
The FX assumption in our guidance is actually very close to the current level, February. And at this stage, we have not received any indication of any cuts in the budgets of our programs. So we understand the KC-three 90 and the Cisfran and the other smaller programs which we are engaged are key to the strategy of the Brazilian Defense Ministry. So I mean, we would not in principle expect any budgetary cuts, but of course that may happen. Having said that, we are still comfortable with our guidance, so on the 1,200,000,000.0 to $1,300,000,000 for the year.
Right, I've got one here.
Myles Walton, Deutsche Bank. So when you
have the 9%
to 9.5% margin, Can you give us some color as to the gross margin versus the SG and A portion? And also, as you look to 2015, what's your opinion is or outlook is for stimulus that you have in 2014 that may or may not be there in 2015?
Thank you, Myles. Welcome to Brazil. We of course, the major headwinds we have in twenty thirteen fourteen, in I'm sorry, is probably 1.5% to 2.2% reduction in gross margins on the commercial jets, which is still our main business. So we intend to compensate that with better margins in executive aviation, hopefully also in defense. Of course, the real in the specific case of defense, as we grow the participation of revenues in reais that effect may turn now to be a little bit negative, devaluation of the currency, which but it's good for the company overall.
So probably we're going to meet a little bit in gross margin and make that difference in SG and A. But the gross margin should not be way off of what we saw I mean compounded margin for the company, not much lower than what we saw in 2013. So if there is any slight decrease there, we are continuously struggling with our SG and A to keep reducing it to levels which are competitive. So as far as 2015, we are a year away from that outlook. But we I mean, we can strive to the same investment wise, I think we're probably going to see similar levels of investments.
We do have most likely better performance on the executive jets due to the ramp up of the Legis 500, which should be already in production for six months at the beginning of the year. So 2015, we expect higher deliveries of the C500, of course, and also the introduction of the four fifty. So we should have a better picture for business jets. And we don't see at this stage, certainly not any worse in the commercial jets. So we see a stable weak maybe some upside risk on commercial jets, but there's a lot of several options which are to be confirmed, especially for The U.
S, which if they are confirmed, we may have some higher some more not higher, sorry, some more deliveries in 2015. So 2015, I just think it's good. Between 200 to 300 basis points. And so that you have now a more positive view on that possible decline of margin in 2014. Is that the case?
Or have I misunderstood? I don't have you said I don't remember. No, go ahead.
Before the first quarter results. Yes, maybe.
We reiterated generally at the previous Investor Day in New York that it would have been roughly around two to 300. So after some final, let's say, definition, the headwind is still there, but it tends to be probably in the range of 150 to 200 basis points.
Could you give some color on what is not so bad as you expected before? It wasn't so bad. Maybe Paulo can help us here. I don't have precisely the numbers in my head. But I mean we have a decent pricing on the aircraft.
So I think there was maybe an over pessimistic expectation about what would be a 175% pricing for those companies in The United States. So pricing was held relatively firm. And of course, on the cost side, we keep working on that. Paulo will talk about that a little bit in more detail during his presentation. But the fact that the 175 with the fuel burn improvements is actually burning six incredible 6.56.4% to be precise, percent less fuel than the let's say the previous 175 is a major, major cost element for cost reduction element for the airlines.
So I think that's going to help us to keep a stronger pricing than what we forecasted initially for this project. La Paulo, if you can add some more lights please.
Okay, Praj. Thank you.
Yes. In addition to this, we have also Thank you, Paul.
Yes. Just complementing there exactly on exchange rate. We saw from the time of the end of the third quarter when we were discussing those figures the real was at around $2.22 23. And so we just spoke of
course of our assumptions here as well. Noah has been raising his hands in Quebec for a while.
Okay. Thanks. Good morning, everyone. I wondered if you could just provide a little bit more detail on where you are with development of the legacies. There's no change in the timeline here, but as you get in the very late stages on those aircraft, can you just are you feeling a little better than you were three, six months ago?
And what's left to be done? And how likely are they to now stick to the current timeline?
Thank you, Noah. Thank you for coming all the way down to Brazil. We feel really good about what we see in the legacy. As we as Filippo just mentioned, we just surpassed eleven hundred hours of flight tests. Prototypes are flying well, high dispatchability.
We do have, of course, typical challenges of this final sprint of certification, which we're still shooting for midyear. Probably we delivered something between three and six airplanes in the second semester. It's a slow ramp up, deliberately slow. We're investing significantly in maturity of all systems. As you may recall, we did have some issues in the introduction of the phenoms in the marketplace, which of course is more costly to improve the fleet in service than it is investing in maturity upfront.
So several dozens of rigs for several systems are a prototype which will be flying just for FMR, Functioning Reliability, we'll start flying. I think it has already started flying, right? Until the end of the month, it's like tomorrow. So we will have this airplane flying very, very intensively. It's functioning well in El Amid.
So the idea is to have a smooth ramp up in the second semester and really make it steeper in twenty fifteen. The four fifty, of course, we inherit all the benefits of what we do in the 500. The airplanes have very high degree of commonality. They are fundamentally the same airplane shorter fuselage. All the systems are the same.
So it will be differently from what we had in the Phenom one hundred and three hundred, which are two different aircraft. So the four fifty seems to be even smoother than the 500 with all the lessons learned in twelve months of operation with the 500. So at this stage, we feel good and Marco for sure will go into more details during his presentation. Okay. Thanks.
And then Fred, I just wanted
to ask you for your latest thoughts around the overall health of the overall small and mid cabin business jet market, not just your business. There's been a little bit of sort of hope in some of the recent data, whether it's utilization or pricing in the secondary market, but there's also extremely easy comparisons in some of that data. You're calling for sort of a flat production level, 14 versus 13. What's just your latest overall thoughts on the health of the market and when we could finally see a more substantial recovery?
No, I have a little bit of a hard time to hear you. But if I don't answer what you asked please interrupt me or correct me. We the lower end of the market is still the weakest in our point of view. We are favoring more, let's say, higher production rates on the Phenom 300 than the Phenom 100. We have a specific effort to reduce I mean sorry to increase the pricing on the Phenom 100 even if that causes us a slight reduction in production.
On the other hand, 300 is really performing well, selling well and has a strong pricing. So we have this perfect situation in the 300 where we have the market leadership and the highest price in the segment. So I think we have to do a better job in the 100 to improve its pricing power. It's a lot of airplane to what we have been selling for. And we have overall good feelings about the industry.
So it looks like those faint signals are getting more and more visible. So let's see how twenty fourteen unfolds. Not sure I answered your question, but just no, that's helpful.
I appreciate it. Thank you.
Thank you.
Good afternoon. Good afternoon, everyone. You've been investing quite heavily in services on the commercial side and particularly the spare parts pool, which I think Paolo just mentioned as a driver. Could you characterize where you are in terms of the earnings recognition on that investment? Is this very strong result this quarter?
Was that a significant driver or only a very small one? And we look over 2014, 2015, could that be a source of margin upside that we haven't really seen yet.
I need the Lucian to help here.
Yes, Joe. To give you a bit of the sense of the revenues, we have seen continued growth in the services side. For 2013, total services revenues represented around $840,000,000 That's of course between all the business units. And the investment that you're referring to, Velo, occur as of course we're able to expand our base of customers that enter into
our pool program spare parts. So it's
an ongoing strategy on that front, which is already showing some growth, as I mentioned, in the figures of the revenue contribution.
Is that when we look at this year and next year, was 15, because there's so much cash going into it, maybe there's every second inning in baseball terms of starting to get a pickup. I'm really focused more on the margins and on sales. I know this of
course comes to sales
and margins, but this seems to be a very high margin.
Yes, it does tend to be higher in the range of the operating margin. So that continues to be the case and we do expect to see some continued growth in that participation, yes.
Okay. And then just on the executive guidance,
I understand the market is not coming back as anyone would like it to, but you do have the legacy 500 deliveries three to six I think you said coming in this year. You have your Chinese venture contributing I think more this year. So is what level of conservatism do you think you've baked into your executive jets?
Joe, that's a very fair question. We are not having the success we thought we would in China by having the factory there. So delivering this aircraft, we'll probably deliver another one or maybe two this year, which as you may recall, we our plans would be for many more than that. So that's one side. I guess, when you look at the large cabin, we are still trying to play with what's the right balance of pushing white tails down the line and having to make concession on pricing or having more balanced production, more control and try to keep prices up.
There There are situations there is at least one competitor which has a very, very aggressive pricing strategy to cash driven strategy, which really it's still creating some disturbance in the market. So we overall, we decided to favor pricing and strengthening of our capital working capital other than just push numbers out. So if the market rebounds, we have a relatively, I would say, very competitive speed in reacting to any potential upside. So we can probably turn out an increase in production rates faster than I would guess most of the OEMs. So it's not a call that we did hold growth a little bit and try to get our act together in a better way as far as cash, as far as margins.
I'm sorry. We're here in the front. Go ahead, Tarku.
Fred, my question is also about the margins. Just I don't know you're giving guidance for 2015 today. So I'm just trying to understand as you look from 2014 to 2015, is the currency and I guess maybe the stimulus package the only two major wildcard in terms of and I guess also the executive aviation market maybe if that comes back there will be upside. But I'm just trying to think about downside just to margins in 2015. Is it just the currency and the stimulus package that would be the major important factors there?
I'm not sure I fully understood your question. That's for 2015.
Yes. For 2015. So if I'm assuming sort of flat margins from 2014 to 2015, would the risk really come from those two factors? Or is there something else?
Yes. No, get it. Currency of course is something hard to forecast. Our view is that our plans are not based on many major spike up or down. So $235,000,000 is our assumption for this year.
I think the pressures are more for the real to be devaluated other than valuated. But Brazil has a very strong macroeconomic position. So I don't think Brazil would just let its currency melt down. And I think the current level, I don't we don't expect a major devaluation in the real. So if there is any change there, probably it be on the slight side of favorable than unfavorable.
As far as the stimulus package, as you may know, part of it was already removed in 2013. It's not renewed, which is the that's slight compensation for the taxes embedded in our supply chain in Brazil, which affect all exporters in Brazil. Most importantly, that was removed, but the problem is still present in our lives. On the payroll, we will not know until the end of the year, but all the indications are that this change which is this affects hundreds of thousands of companies and most of the sectors of the Brazilian economy. So the expectation is strongly that this will be maintained.
It will be something for good. But we will not know until we know it.
And I guess maybe just the quarterly progression in the margins in 2013 was a lot more Q4 weighted. I guess, I know it's usually Q4 is a big quarter, but it was a lot more so I would say in 2013. Should we expect something similar in 2014 or is it going to be a little bit more stable
next year?
Yes. Turan, of course, broadly speaking, yes, we would imagine starting off with a relatively light first quarter and then building up in the second quarter and third quarter relatively flattish to maybe slightly down. Of course, we have to see how things end compared to second quarter and then a busier fourth quarter generally speaking. That should be the layout of 2014.
Just complementing, this has to do with Joe's question about the business jets. Of course, the more backlog you have in the short term, the easier it is to plan production. So when you plant too much of white space at the end of the year, they irreversibly will fall into the last quarter. So we are that's something we don't like and that behavior of having a very, very strong fourth quarter, which is a stressful situation for management. But probably we can make some progress this year.
Hopefully, have a more stable in the next few years. Thank you. Hi. This is Alexandre Bourcon from HSBC. Just
wanted to get a glimpse on or a little bit more color on where we could see surprises in 2014 in terms of the three segments. In the upside, of course, is this business jet that could surprise you today upside or commercial with a new route on American Aviation or even Asia Aviation? Thank you.
I apologize guys, but the sound is really tough here to understand. So well, I think if I get the question right about the upside, I would not consider any upside risk beyond our guidance at this stage. As I said a few minutes ago, if there is a market rebound stronger than what we expect, we can react pretty quickly. We have the ability to not only to internal mobilize our internal resource, but also our supply chain to make a fairly quick reaction to the potential upside in the market. I'm not sure that was your question.
Yes. Thank you. And just one follow-up on in Commercial Aviation in terms of the competitive scenario. Do you see as Bombardier is at least should deliver or start delivering their new aircraft and Mitsubishi and Comac also stepping into the plate here? Do you think that the competitive scenario is going to get tougher going forward or same scenarios we saw in 2013?
Thank you.
Yes. I don't think there will be any material difference between what we saw in 2013 and 2014. Mid to longer term, it always gets worse, gets worse. We cannot rule Bombardier out of the game. They are there and they are a strong company.
We continue not to believe in the business case of the C Series, But they have the CRJ line. They took about onefour of the sales for The United States. We got three quarters. They got one quarter. So that shows us instead of celebrating that we got three quarters, they are still there and we have we lost a quarter of the market to them.
We have to watch how the superjet Russian superjet performs outside the Russian environment. We have to follow their operation in Mexico to see how much a let's say they're really prepared to face a tough airline environment of high frequency, high dispatch reliability. So it's keeping in mind, course, that airplane is of the current generation. So we feel good about the 190s E1 ability to compete against the superjet and we feel really good about the E2 1902 to compete against the diesel jet. Same with the Chinese.
So we continue to see a difficulty. Obviously, the focus in China is much more now to the C919 other than the ARJ21. So we respectfully believe that they'll have some difficulty to sell that airplane abroad in large quantities the RJ-twenty one. And again that is also an airplane of the current technology, which the 190E-one is it can give a very good fight. The E2 can really be a leap ahead.
The Mitsubishi has the new engines Pratt and Whitney. On paper, the airplane is more in line with our 175 plus, not 175 Enhanced and the 175 E2. With the new delay that they announced last year, they will not come into the market until 2017. Is that correct, Paulo? So 2017.
So the big advantage that they would have, which was access to markets early access to markets is pretty much gone. So I think we still have a sound case with both the year one and certainly with each towards the end of the decade. Thank you. Yes. We have two guys.
Have we it's about time to stop. So I think should we give but also here, but should we give also the chance for the people in line to Yes. So let's take this question here. Good. And there's one there as well.
Okay.
I just want to ask one on defense revenue in the quarter. It came in a little below guidance. Was that solely due to the real devaluation or is there something else going on? And then Part B is sort of on the 2014 defense guidance. Does that reflect kind of underlying double digit growth?
Is that what they want to?
Yes. I think it has a lot to do with the real. And as I said, there is no as of today, we have no real change to the scenario of organic growth in the programs. But the real there's a difference of $0.35 $0.35 in $1 from last year to this year. So that's driven by that.
Thank you.
We have one there. Because we can always close the line and then continue the year for us.
Yes. So we'll go ahead and see if there are any questions from people that are attending
hold question just to check whether we have somebody then we can shut down shut off and then we'll go back come back to you.
Our first question comes from the line of Ron Epstein with Bank of America. Your line is open.
Hey, guys. Good afternoon, Fred. I hope you're doing well. Quick question. We haven't talked much about how should we think about the bridge between the demand for the current generation E Jets and the E2 jets, right?
Because I guess what they go into service in 2018 and here we are, I guess it's 2014. So how should we think about the bridge between the two series of jets and how you're seeing demand for that bridge?
Feel
good about it. That's wrong, right? We feel good about it. 14, the numbers are out there. 2015, we are cautiously optimistic about 2015.
2016 and 2017, we I think we have two situations. One, there are several there's a large number of options, which in our point of view have a likelihood to be confirmed, especially as Paulo calls a second wave of renewal of the RJ fleet in The United States. We believe the E1, the 175 E1 will be very well positioned to take that. But also the activity that Paulo will go into more details later that we see today, we see still a demand for the E1 types and sometimes combined order for E1 and E2s. So at this stage, we feel relatively comfortable about our ability to make that bridge without any major hurdle from now to the introduction of 190 E2.
Okay, great. And maybe just one more quick question. There's been a fair amount of, I guess, press trade press that there's a push to do more regional flying within Brazil. Avianca Brazil
No more questions from the phone line. Hello?
Ron, please proceed with your question.
Yes. So there's been some press about more regional flying in Brazil and with airlines like, I guess, Avianca Brazil and TAM pushing more into regional flying, I guess, by a mandate from the Brazilian government. Do you think that's a real opportunity? And if it is, I mean, big could it be?
Let's keep in mind that between Azul and Trip, we already have 83 E Jets in their flying in Brazil compared to zero a few years ago. So there has been a strong development already. So if this package goes through Congress and I have all the reason to believe it will go through Congress that's a desire of the Brazilian government to really foster the social development in the hinterland of Brazil. Again, I think we are well poised to benefit from that.
We do in The U. S, we do in Europe, we do in China. And I have to believe that we'll do as a minimum as well as we do abroad, we'll do in Brazil. So hard to put numbers into that. But let me just give you one figure.
About twenty five years ago, Brazil had two fifty two airports with commercial service. Today, we're down to 150. So the potential is there. There's 100 airports, which with little investment, they can receive again commercial traffic. And the densities of those passengers, they would probably go towards a smaller aircraft rather than a big narrow body aircraft.
So that's how we see it. It's an upside.
Okay, great. Thank you so much.
Yes, thank you. We have one more question from the line and then we'll come back for the final two questions here in the local audience and conclude, please. Thank you.
There will be more Q and A at the end again. So we'll be here.
Okay. And our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thank you very much and good results. Quick question on development. You said $320,000,000 in 2014. Could you give us some color on the expected profile in the next couple of years given you've said the development of the E2 would total $1,700,000,000 Thank you.
Thank you, Kai. We in 2015, we foresee at this stage pretty much stable total investments. We probably will reduce CapEx will probably be equal or less than the 2014 figures. So we may have some increase in R and D, especially with E2. But as the 500,000,000 will be certified and the $450,000,000 will be in the final sprint of certification, there will probably be an offset there.
So as a model, if we model out pretty much in line with four gs, I don't think it will run.
And then the last question, you talked about CapEx of $250,000,000 Does that include the spending done under contract for government? And what does that assume about spare parts inventories?
We in those numbers, there are no figures for the contracted CapEx, if you will, the CapEx which are embedded in development contracts such as the KC-three 90. So that's CapEx fundamentally for commercial and executive jets. I'm not sure if that answers your question.
That does. Thank you.
Another question
environment, on the
more specifically in 2014, coming off a strong year in 2013, how should we be thinking about book to bill in Commercial
Aviation? Some street there. Guys, really apologize. The sound is terrible here. So would you mind to repeat the question?
Sure. Just a question on the order environment in 2014 after a strong year in 2018. How should we think about the book to bill?
I hope Paulo and Marco Tulio and Jackson tell you that we're shooting for at least a one:one book to bill ratio. So there's a big momentum in commercial aviation. So we feel good about it. And there will be a very strong push from Marco to increase sales. So we can enter 2015 with a higher backlog coming in Executive Aviation as well.
So minimum one:one book to bill ratio that's what we consider.
This is Derek Spunk at RBC Capital Markets. Most of my questions
have been answered, but a quick one. How much additional capacity production capacity do you have on the E175 or the Phenon 300 mines?
We do not know exactly production rates, but the limitation today is not our production infrastructure is the market is sales. So historically, we delivered, I think our record year was I think like 165 E Jets. So that can tell easily how much capacity we have in house. Of course, you have to add people if we have a production rate, but the infrastructure tooling and everything else is in place. As far as the phenoms, between Melbourne and Brazil, we also have, let's say, sufficient room to accommodate increase in market demand.
Would you say your production ramp would be roughly say eight to twelve months?
The ramp up? That's probably a fair figure. Probably more on the eight months. This
concludes today's question and answer session. I would like to invite Mr. Federico Girado to proceed with his closing statements. Please go ahead, sir.
Well, just to thank everyone for attending our conference. Have a nice Carnival. Carnival is next year in Brazil and a wonderful 2014. Thank you.
That does conclude Embraer's audio conference for today. Thank you very much for your participation and have a good day.